SSE Plc SSE Half Year Results 2012

  SSE Plc (SSE) - Half Year Results 2012

RNS Number : 0523R
SSE PLC
14 November 2012




                                                                             

                                      

                                      



                          SSE plc's financial report

                   for the six months to 30 September 2012

                               14 November 2012



                                       Sep 2012 Sep 2011  Change  Sep 2010
Total Recordable Injury Rate^1            0.14     0.11    + 27%     0.10
Reportable environmental incidents         0        0        -        0
                                                          
Interim Dividend Per Share               25.2p    24.0p    + 5.0%   22.4p
Adjusted Profit Before Tax*             £397.5m  £287.4m  + 38.3%  £385.5m
Adjusted Profit After Tax*              £333.5m  £235.4m  + 41.7%  £306.6m
Reported (Loss)/Profit Before Tax       £(26.8)m £(81.3)m   n/a    £644.8m
Adjusted Earnings Per Share*             35.3p    25.1p   + 40.6%   33.2p
Investment and Capital Expenditure      £699.2m  £796.9m   -12.3%  £653.6m
Customer Minutes Lost (SHEPD)              33       30    + 3 mins    34
Customer Minutes Lost (SEPD)               33       30    + 3 mins    33
Energy Customer Accounts (GB and Ire)    9.60m    9.62m   - 0.02m   9.59m
GB customer complaints to third parties   421      407     + 3.4%    442
Power Station Availability (Gas)          98%      98%       -       96%
Power Station Availability (Coal)         86%      88%     - 2.3%    87%
Capacity for Renewable Energy^2         3,208MW  2,538MW  + 670MW  2,450MW

^

^1Per 100,000 hours worked ^2Including pumped storage



Lord Smith of Kelvin, Chairman of SSE, said:

"SSE's focus is always on full-year results, because the potential for
volatility is always much greater in a half year period, but it is obviously
encouraging that adjusted profit before tax* in the first six months has been
restored to a level around that achieved in 2010. This does not hide the
fact, however, that energy market conditions remain challenging. The prices
achieved for generating electricity have been weak, and higher gas and
non-energy costs unfortunately had to be reflected in the increase in
household energy prices which SSE implemented last month. The Energy Supply
business accounted for 8.1% of SSE's adjusted operating profit* in the period
and its profit margin was 1.5%.



"While some observers may choose to criticise SSE for making a profit and
paying a dividend, I believe that profit and dividend allow SSE to employ
people, pay tax, provide services that customers need, make investments that
keep the lights on and create jobs, while providing an income return that
shareholders like pension funds need.



"SSE's 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, continues to prove its worth. Its commitment to the
dividend remains the hallmark of a company that takes a disciplined and
long-term approach to business here in the UK and in Ireland. For this
reason, there can be every confidence that SSE will extend further its record
of annual above-inflation dividend growth, and it is targeting a full-year
increase of at least 2% more than RPI inflation, to around 84p, for 2012/13
and annual increases that are above RPI inflation in the following years."



* 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 and deferred tax.

                           DELIVERING THE DIVIDEND



STRATEGY AND FINANCE

Delivering sustained real growth in the dividend



· Interim dividend up 5.0% to 25.2p per share

· Targeting full-year dividend increase of at least RPI +2% for 2012/13

· Targeting annual dividend increases above RPI inflation in 2013/14 and
beyond

· Adjusted earnings per share* up 40.6% to 35.3p

· Adjusted profit before tax* up 38.3% from £287.4m to £397.5m (2010:
£385.5m)

· Outlook for full-year adjusted profit before tax* to be provided in Q3
IMS, as planned

· Ongoing investment in new assets through six-month capital expenditure
of £699.2m

· Adjusted net debt and hybrid capital up £298m to £7.054bn since 31
March 2012

· Medium/long-term funding, including hybrid capital, of £1.48bn secured
at good rates

· Average debt maturity of 10.9 years



NETWORKS

Keeping the lights on and supporting growth



· Operating profit* up 19.3% to £399.5m

· 66.8% contribution to SSE operating profit*

· Capital investment in electricity networks up 58.8% to £285.2m

· Electricity transmission Regulated Asset Value forecast to reach £1bn
by March 2013

· Preparations for 2013-21 Transmission Price Control period well
advanced

· Total network RAV (inc share of SGN) forecast to reach £6.3bn by March
2013



RETAIL

Earning the right to make a profit



· Operating profit* of £75.7m, following operating loss of £101.4m a year
ago

· 12.6% contribution to SSE operating profit* (Energy Supply contribution
8.1%)

· Energy Supply profit margin 1.5%

· Commitment to cap GB household prices until H2 2013 at the earliest

· Energy customer accounts (GB, Ire) up 50,000 to 9.60 million since 31
March 2012

· Average GB household gas consumption up 27.9%; electricity consumption
up 2.8%

· All Building Trust commitments delivered and new Customer Charters
planned



WHOLESALE

Securing the energy people and businesses need



· Operating profit* down by 44.5% to £123.2m

· 20.6% contribution to SSE operating profit*

· 188MW (net) of new capacity for renewable energy operational since 31
March 2012

· 93MW (net) of new capacity in disputed turbines at Greater Gabbard also
operational

· Output from gas-fired power stations down 71.0%; from coal-fired
stations up 41.5%

· Output of electricity from hydro down 35%; output of electricity from
wind up 58%

· Acquisition of thermal generation assets in Ireland completed in
October 2012

· US$52.75m (£33m) acquisition of additional equity in gas production
assets agreed

· Exceptional charge of £88.7m relating to Medway power station and CO[2]
allowances

· SSE still entirely confident its wholesale energy market activity is
fair and legitimate





Note: segmental operating profit % contributions presented before Unallocated.









STRATEGY AND FINANCE



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.



As a result of this, SSE's strategy is to deliver 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 in the UK and Ireland.



Sticking to the financial principles which underpin dividend growth

This focus on the dividend requires SSE to maintain a disciplined, consistent
and long-term approach to the management of business activities and this is
underpinned by a series of long-standing financial principles:



· strength: maintenance of a strong balance sheet, evidenced by
commitment to the current 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 goal: the delivery of annual dividend growth, greater than RPI
inflation.



Targeting sustained real dividend growth over the long term

In practice, dividends are the principal way in which corporate profits are
distributed and it is in recognition of this that SSE's key financial
objective is the delivery of annual increases in the dividend paid to
shareholders that are greater than RPI inflation, 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 that are above RPI
inflation.



In this context, inflation is defined as the average annual rate across each
of the 12 months to March.



As stated in its Financial Report in May 2012, 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.



Maintaining a balanced range of energy businesses through which to achieve
dividend growth

SSE has three reportable segments covering its Networks, Retail and Wholesale
businesses:



· 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.



This means it 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.



This balance and diversity, along with its 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, such as volatility in energy markets, 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 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. In support of this, the
average length of service of SSE's Executive Directors and Managing Directors
is 17 years.



Sustaining dividend growth through a period of transition

Energy markets in Great Britain and Ireland operate in the context of 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.



Moreover, the Large Combustion Plant Directive (LCPD) and now the Industrial
Emissions Directive aim to control emissions such as sulphur dioxide and
nitrogen oxides and mean that coal-fired power stations have to comply with
emissions limit values or cease operation. The first phase of power plant
closures under the LCPD have to take place by the end of 2015 at the latest.



Meanwhile, the amount of electricity generation capacity in Great Britain
remains well in excess of that required to meet forecasts of peak demand,
although Ofgem's first annual Electricity Capacity Statement, published in
October 2012, forecast a reduction in the amount of spare electricity capacity
on the system in the period to 2015/16.



The forthcoming Energy Bill is intended to establish a framework to reform the
electricity market in Great Britain, including the introduction of a Contract
for Difference Feed-in Tariff for electricity from low carbon sources and the
creation of auctions for the provision of electricity generation capacity.



The objectives of the Bill - a secure, low carbon and affordable electricity
system - are uncontentious and SSE supports them. There are, however, two
fundamental issues with the Bill, both commented on by the House of Commons
Energy and Climate Change Committee in its report in July 2012:



· a lack of detail on key aspects of the proposed reforms; and, despite
that lack of detail,

· a degree of complexity which could jeopardise their successful
implementation.



Both of these issues will have to be dealt with as the Bill makes its way
through the Houses of Parliament, a process that is likely to take at least
one year. They pose potentially substantive difficulties for developers of
new electricity generation capacity and jeopardise the development of an
effective supply chain. At the same time, if concerns such as those set out
by the Energy and Climate Change Committee are addressed as the legislation is
debated, the outcome may yet be a fair and workable future investment
framework for the electricity market in Great Britain.



SSE's principal concern is to ensure that the proposed Contract for Difference
Feed-in Tariff for electricity from low carbon sources is accompanied by
counterparty arrangements and a payment model that are workable and do not
have adverse financial consequences for electricity suppliers and their
customers.



In addition to the period of transition in electricity production, the Prime
Minister's confirmation in October 2012 that the UK government intends to
legislate to ensure that energy suppliers have to give their lowest tariff to
their customers means that the issue of price fairness between customer groups
in energy supply should finally be addressed by all companies. This, in turn,
would be consistent with Ofgem's October 2012 announcement of the latest
proposals from its Retail Market Review. This included proposals to limit
tariff numbers and simplify their underlying structure, new mechanisms to
enable customers to compare tariffs between suppliers and Standards of Conduct
with which to police the market.



SSE, having already radically simplified its products for new and existing
customers, is well placed competitively to comply with these initiatives and
believes that, subject to agreement on a fair and effective approach to
implementation, they have the potential to lead to improved standards for
energy customers throughout the market.



Customers' demand for energy in the UK and Ireland is 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. In October 2012, the EU Council of Minsters formally
adopted the Energy Efficiency Directive, under which Member States will be
required to set national targets for energy efficiency improvements and adopt
related measures.



There is ongoing reform in the Single Electricity Market (SEM) on the island
of Ireland and Common Arrangements for Gas are being developed by the Republic
of Ireland and Northern Ireland to replicate the principles of the SEM.



Against this background, SSE believes that its strategy of operating and
investing in a balanced range of market-based and economically-regulated
businesses across just two increasingly interconnected markets, and the
balanced range of assets within those businesses, is the one which is most
likely to secure sustained real growth in the dividend payable to
shareholders.



Setting the right long-term priorities to achieve dividend growth

In support of its strategy, SSE has identified five long-term priorities
across its balanced range of businesses which reflect, and are consistent
with, the issues arising as a result of the transition that is under way .
The long-term priorities are:



· efficiency, responsiveness and innovation in energy networks;

· breadth and depth in the provision of energy-related services to
businesses and other organisations;

· gaining and retaining the trust of a growing number of household energy
customers;

· flexible and 'greener' electricity production; and

· competitive and sustainable energy procurement.



In focusing on these long-term priorities, SSE will maintain a strong emphasis
on its six core values, the 'SSE SET' of Safety, Service, Efficiency,
Sustainability, Excellence and Teamwork. This means that safety must come
first. In the six months to 30 September 2012, its Total Recordable Injury
Rate per 100,000 hours worked was 0.14, compared with 0.11 in the same six
months in 2011.



This was, however, overshadowed by the extremely sad loss of the lives of two
employees of contractors to SSE. SSE is continuing to work with its
contractors to ensure their performance on all aspects of safety is of the
highest standard possible.



Dividend Per Share and Adjusted Earnings Per Share*



Increasing the Interim Dividend in 2012/13

SSE's first financial responsibility to its shareholders is to remunerate
their investment through the payment of dividends. The Board is recommending
an interim dividend of 25.2p per share, compared with 24.0p in the previous
year. This is:



· an increase of 5.0% compared with 2011/12;

· more than three times the first interim dividend paid by SSE in 1999;
and

· more than double the interim dividend paid in 2005.



SSE is 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 believes it will achieve its principal financial objective for 2012/13 -
an increase of at least 2% more than RPI inflation in the dividend payable to
shareholders. Thereafter, as set out in its Financial Report on 16 May 2012
and in its Notification of Close Period on 28 September 2012, its target is to
deliver annual dividend increases which are greater than RPI inflation while
maintaining dividend cover over the medium term within a range around 1.5
times.



Monitoring Adjusted Earnings Per Share*

To monitor financial performance over the medium term, SSE continues to focus
on adjusted earnings per share*, which is calculated by excluding the charge
for deferred tax, exceptional items and the impact of re-measurements arising
from IAS 39 (see also 'Increasing Adjusted Profit Before Tax*' below).



Adjusted earnings per share* 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. Moreover, as
stated in its Financial Report in May 2012, it is SSE's policy that dividend
targets over the medium term should be consistent with the dividend being
covered by its adjusted earnings per share* within a range of around 1.5
times.



In the six months to 30 September 2012, SSE's adjusted earnings per share*
were 35.3p, based on 945.4 million shares, compared with 25.1p, based on 937.0
million shares, in the previous year. As with adjusted profit before tax*
(see below), SSE's focus is on the full-year adjusted earnings per share*.



Adjusted Profit Before Tax*



Increasing Adjusted Profit Before Tax*

These financial results for the six months to 30 September 2012 are reported
under International Financial Reporting Standards, as adopted by the EU. In
line with its policy since 2005/06, SSE focuses on profit before tax before
exceptional items, re-measurements arising from IAS 39, and after the removal
of taxation on profits from jointly controlled entities and associates. As a
result, this 'adjusted profit before tax*'



· 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.



                                               Sep 12   Sep 11  Sep 10 Sep 09
                                             £m  £m      £m     £m
                                                                         
        Adjusted Profit before Tax*              397.5    287.4   385.5  410.5
Movement on derivatives (IAS 39)               (330.5)  (354.3)   629.7  118.0
Exceptional items                               (88.7)   (13.1) (388.8)      -
Tax on JCEs and Associates                       (5.1)    (1.3)    18.4 (14.1)
Reported (Loss)/Profit before Tax*              (26.8)   (81.3)   644.8  514.4
                                                                         
                                               Sep 12   Sep 11  Sep 10 Sep 09

                                                   £m       £m      £m     £m

                                                     
Adjusted Profit before Tax*                      397.5    287.4   385.5  410.5
Adjusted Current Tax Charge                     (64.0)   (52.0)  (78.9) (94.4)
Adjusted Profit after Tax*                       333.5    235.4   306.6  316.1
                                                                         
Reported Profit/(Loss) after Tax                  27.0    (6.1)   495.6  378.6
                                                                         
Number of shares for basic and adjusted EPS      945.4    937.0   923.4  920.8
(million)
                                                                         
           Adjusted EPS* - pence                  35.3     25.1    33.2   34.2
             Basic EPS - pence                     2.9    (0.7)    53.7   41.0





Factors affecting Adjusted Profit before Tax*

Adjusted profit before tax* rose by 38.3%, from £287.4m to £397.5m in the six
months to 30 September 2012 compared with the same period in 2011. As
forecast in its Notification of Close Period on 28 September, all three of
SSE's segments were profitable in the six months to 30 September 2012. In the
same period in 2011, the Retail segment recorded an operating loss* of
£101.4m, including an operating loss* of £133.7m in Energy Supply.



The increase in adjusted profit before tax* is, therefore, mainly attributable
to a return to profitability in Energy Supply and a 19.3% increase in
operating profit* in Networks.



Although Energy Supply had to sustain significantly higher costs such as gas
purchasing and government-sponsored schemes, it was able to return to
profitability largely as a result of:



· a 27.9% increase in average household consumption of gas in Great
Britain; and

· a 2.8% increase in average household consumption of electricity in
Great Britain.



The increase in consumption was in response to below average temperatures
during the six months to 30 September 2012 compared with the same period in
2011, when the temperatures were above average. According to the Met Office
April in 2012 was the coldest since 1989 and September in 2012 was
provisionally the coldest since 1994. In Ireland, consumption of energy was
similar to the previous year.



The 19.3% increase in operating profit* in Networks was achieved as a result
of:



· investment in the asset base of Electricity Transmission; and

· the level and timing of recovery of allowed income in Electricity
Distribution.



This was partly offset by the 44.5% reduction in operating profit* in
Wholesale which demonstrates that SSE is continuing to operate in difficult
market conditions, in which the weak position of the economy and low prices
for electricity produced mean much electricity generation - especially from
gas-fired stations - is barely profitable, if at all. SSE does not expect
these conditions to continue indefinitely, but while they do the delivery of
significant profit growth will remain challenging.



SSE's focus is on full-year, as opposed to half-year, adjusted profit before
tax* because of the impact that shorter-term issues can have on a six-month
period. As stated in its Notification of Close Period on 28 September 2012,
SSE expects that the adjusted profit before tax* achieved in the first six
months of this financial year is likely to account for a substantially greater
proportion of that it achieves in 2012/13 as a whole than was the case for
2011/12.



Impact of the movement on derivatives (IAS 39)

At 30 September 2012, there was a net derivative financial liability in SSE's
balance sheet arising from IAS 39 of £327.6m, before tax, compared with a net
liability of £17.6m, before tax, at 31 March 2012 and a net asset of £155.8m
at 30 September 2011. This consists of:



· a liability arising from the valuation of financial instruments used by
SSE to hedge its exposure to financial risks such as interest rates; and

· a liability relating to the valuation of 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 30 September. On
that date this year, the average contractual price was higher than the market
price (in other words, the contracts were 'out of the money'). The actual
value of the contracts will be determined as the relevant commodity is
delivered to meet customers' energy needs. For around 60% 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 underlying
performance in the period to 30 September 2012.



The movement on derivatives under IAS 39 of £330.5m 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' position on 31 March
2012 and the 'out of the money' position on 30 September 2012, when the
average contractual price was higher than the prevailing forward market
price. 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 £88.7m relate to the Wholesale segment
and arise from issues at Medway power station and in respect of CO[2]
emissions allowances:



· In 2008 SSE experienced significant unplanned interruptions to
electricity generation at its Medway power station. This resulted in a number
of associated costs which gave rise to a claim for an insurance payment, the
expected value of which SSE recognised as a debtor in its accounts for that
year. In the period to 30 September 2012, SSE agreed a payment with its
insurers which, although still substantial, is lower than the amount
originally expected.

· SSE's assets include purchased CO[2] emissions allowances, which it
recognises at cost. SSE also enters into forward contracts for the future
delivery of CO[2] allowances. Due to the continuing low market prices, SSE
has restructured its portfolio of purchased and committed allowances, which
resulted in the recognition of net exceptional charges in the period.



Delivering Adjusted Profit Before Tax* in 2012/13

SSE's first financial goal is not the maximisation of profit and profit is not
the point of SSE. Profit is an essential means to a more important end: it
supports the dividend, which is the key means through which it remunerates
shareholders; it also enables investment which, in turn, also supports the
dividend.



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;

· electricity market conditions and the ability of its operating thermal
power stations to generate electricity and the price achieved for output;

· the output of renewable energy from its hydro electric stations and
wind farms; and

· the actual and underlying level of customers' energy consumption.



In its Annual Report 2012, SSE stated that the energy sector is experiencing a
period of profound change, and referred to external trends affecting it, such
as continuing integration of UK energy prices in to the wider global market,
older generation plant closures, increasing variability due to higher
penetrations of renewable energy sources and the underlying fall in demand for
energy.



Against this background, SSE believes that it should be consistent with its
expectation at the start of each financial year, and with the position as set
out in its Notification of Close Period on 28 September 2012, which is that it
will not provide an outlook for adjusted profit before tax* before the
publication of its third quarter Interim Management Statement, not least
because its principal financial goal is dividend growth.



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 target for the year, a full-year dividend increase of at
least 2% more than RPI inflation.



Investment and Capital Expenditure



Investment and Capex Summary               Sep 12 Sep 11
                                              £m     £m
                                                     
Electricity Transmission                   167.5   84.9
Electricity Distribution                    117.7   94.7
Other Networks                               24.1   17.7
Total Networks                              309.3  197.3
Total Retail                                 35.9   11.8
Thermal Generation                           95.5   54.7
Renewable Generation                        216.1  477.8
Gas Storage                                  21.0   14.5
Gas Production                                2.8    0.3
Total Wholesale                             335.4  547.3
Other                                        18.6   40.5
Total investment and capital expenditure    699.2  796.9
50% of SGN capital/replacement expenditure   88.8  103.3



Investing for sustained real 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 the six months to 30 September 2012, SSE's capital
and investment expenditure totalled £699.2m, compared with £796.9m in the same
six months in 2011.



During the six months to 30 September there was investment of:



· £167.5m in electricity transmission, of which £109.5m was spent on the
work to replace SSE's section of the Beauly-Denny replacement line;

· £117.7m in electricity distribution, the majority of which was spent on
system upgrades;

· £35.9m in retail, the majority of which was spent on work associated
with preparations for the roll-out of smart meters;

· £95.5m in thermal generation, including refurbishment at Keadby and
Medway, and development of future projects;

· £216.1m in renewable generation, a significant part of which was
invested in completing the construction of the Clyde onshore and Greater
Gabbard offshore wind farms as well as bringing Glendoe hydro scheme back to
service; and

· £21.0m in gas storage, including investment in the new facility at
Aldbrough.



This means that, for the first time since 2008, renewable energy did not
comprise the largest element of SSE's capital and investment expenditure in a
six month period; it was exceeded by the combined investment in
economically-regulated electricity networks. In the three years to 31 March
2012, renewable energy accounted for just over 50% of SSE's capital and
investment expenditure; in the three years to March 2015, it is likely to
account for around 30% of SSE's overall total. Economically-regulated
electricity networks are likely to require the biggest proportion of capital
and investment expenditure during that period.



Delivering an expanded asset base

Since April 2010, SSE's investment and capital expenditure has totalled
£3.85bn. This has resulted in a significantly expanded asset base for SSE,
including:



· an increase of £900m in the RAV of its electricity networks;

· an increase of around 840MW in its capacity for generating electricity
from wind farms (resulting in SSE's total wind capacity producing 1.7TWh of
electricity in the six months to 30 September 2012); and

· the Aldbrough gas storage facility (SSE share - two thirds).



SSE keeps the economic evaluation of its investment programme under close
scrutiny. It uses evaluation of previous projects in making individual
investment decisions and in assessing the overall size and structure of its
investment programme. SSE believes that a greatly expanded asset base and
significant value have been and are being created from its capital and
investment expenditure programme and that the long-term nature of the assets
which it has developed and continues to develop means that value will be
sustained in to the 2030s and beyond.



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 for construction, market, technology, regulatory or legislative
reasons), enhance earnings and contribute to dividend growth; and

· governed, developed, approved and executed in an effective manner,
consistent with SSE's Major Projects Governance Framework which is, in itself,
regularly updated.



The Framework, as stated above, is designed to ensure that - from opportunity
assessment through to post-investment evaluation - projects are governed,
developed, approved and executed in an effective manner. It is also designed
to ensure that there is:



· rigorous control of the costs of major projects, so that value for
money is achieved; and

· a clear focus on the return which they should generate.



The Framework also helps to inform and optimise the stage at which SSE enters
the project development cycle, which can range from pre-planning development
to the purchase of more developed assets. This supports SSE in identifying
the point of entry where it can best maximise the value associated with a
development.



Making capital and investment expenditure decisions in 2012/13 and beyond

For 2012/13 as a whole SSE expects capital and investment expenditure to total
around £1.6bn, including expenditure to be incurred on the recently acquired
Great Island Combined Cycle Gas Turbine (CCGT) which is currently in
construction. Looking ahead, there are four main categories in SSE's
investment and capital expenditure plans to March 2015 and beyond:



· 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 the CCGT at Great Island and new 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 following
rigorous analysis and:



· 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.



The uncommitted nature of some expenditure gives SSE flexibility in the
management of its balance sheet in the years to 2015 and beyond. It continues
to believe that a disciplined investment programme with the principles, shape
and scale described above should allow it to maintain the development of a
balanced and diverse range of assets to support annual dividend increases that
are above RPI inflation while remaining consistent with the current criteria,
including the key ratios, associated with 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[2] intensity of
electricity generated;

· a hedge against prices for fossil fuels; and

· additional cashflows and profits to support continuing dividend growth.



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 economically-regulated gas distribution. In the six months to 30
September 2012, a 50% share of SGN's capital and replacement expenditure was
£88.8m, compared with £103.3m in the previous year.



Financial management and balance sheet



Key Performance Indicators                 Sep 12 Mar 12 Sep 11
                                                           
Adjusted net debt and hybrid capital (£bn)   7.05   6.76   6.37
Average debt maturity (years)                10.9   10.5   11.6
Adjusted interest cover^1 (excluding SGN)     3.9    5.9    3.7
Shares in issue at 30 September (m)         957.9  944.7  937.8
Shares in issue (weighted average) (m)      945.4  937.8  937.0

^1 including hybrid coupon



Managing net debt and maintaining cash flow

SSE's adjusted net debt and hybrid capital was £7.05bn at 30 September 2012,
compared with £6.76bn at 31 March 2012 and £6.37bn at 30 September 2011.
Fundamentally, this increase reflects the quantum and phasing of capital and
investment projects to support sustained real dividend growth.



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    Sep 12    Mar 12    Sep 11
                                                              
                                           £m        £m        £m
Adjusted Net Debt and hybrid capital (7,054.2) (6,755.8) (6,371.9)
Less: hybrid capital                   2,186.6   1,161.4   1,161.4
Adjusted Net Debt                    (4,867.6) (5,594.4) (5,210.5)
Less: Outstanding Liquid Funds          (42.4)   (119.9)   (109.8)
Add: Finance Leases                    (336.3)   (342.1)   (348.6)
Unadjusted Net Debt                  (5,246.3) (6,056.4) (5,668.9)



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, excluding hybrid securities, as at 30 September 2012
was 10.9 years, compared with 10.5 years at 31 March 2012.



SSE's debt structure remains strong, with around £5.0bn of medium/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 of:



· hybrid capital of £1.162bn in September 2010; and

· hybrid capital of £1.025bn in September 2012.



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 £894.4m.
Around £1.5bn of medium-to-long-term borrowings will mature in the period to
31 March 2014.



Ensuring SSE is well-financed

SSE believes that maintaining a strong balance sheet, evidenced by a
commitment to the current criteria for a single A credit rating, such as a
funds from operations/debt ratio of 20% and a retained cash flow/debt ratio of
13%, is a key financial principle.



In August 2012, Standard & Poor's Rating Services affirmed SSE's long-term
rating of A- while changing its rating outlook from 'stable' to 'negative'.
Moody's corporate credit rating of SSE remains A3 with a 'stable' outlook.



SSE is committed to maintaining financial diversity and diversity of funding
sources and will move quickly to take the right financing options, including
issuing new bonds and loans. In line with that it:



· completed in April 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; and

· successfully issued in September 2012 hybrid capital securities
comprising US$700m and €750m, which are perpetual and subordinate to all
senior creditors, with an all-in euro funding cost to SSE of around 5.6% per
annum.



In addition, the Scrip Dividend Scheme introduced by SSE in 2010 reduces cash
outflow and therefore supports the balance sheet, although the extent to which
it will do so is inevitably difficult to predict. A total of 30,369
shareholders elected to receive the final dividend for the year to 31 March
2012 of 56.1 pence per ordinary share in respect of 307,842,342 ordinary
shares in the form of Scrip dividend, resulting in a reduction in cash
dividend funding of £172.7m. A total of 13,213,634 new ordinary shares, fully
paid, were issued on 21 September 2012, representing an increase of 1.40% on
the issued share capital on the dividend record date of 27 July 2012. The
relevant Scrip Reference Share Price was 1,307 pence per ordinary share. The
cumulative reduction in cash dividend funding since the Scrip alternative
became available in September 2010 is now £407m.



Fundamentally, SSE believes its commitment to the long term means it must be
disciplined when managing its balance sheet, prudent in financing its
activities and rigorous and selective when making investment and acquisition
decisions. At the same time, it believes that it has sufficient financial
flexibility to pursue the best opportunities to provide the means with which
to increase dividends. Moreover, SSE is prepared to dispose of assets where
their retention is not fully consistent with or supportive of its overall
strategy, as was demonstrated with the sale during 2011/12 of its interest in
three onshore wind farms.



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.



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 the first six months of 2012/13 were
£193.6m, compared with £164.5m in the same period in 2011/12.



                                                             Sep 12    Sep 11
                                                           £m  £m
                                                                           
Adjusted net finance costs                              193.6     164.5
add/(less):                                                                 
 Movement on derivatives                                 56.9      15.4
 Share of JCE^1/Associate interest                     (75.2)    (72.9)
Reported net finance costs                                     175.3     107.0
                                                                           
Adjusted net finance costs                                     193.6     164.5
 Return on pension scheme assets                         66.1      72.7
 Interest on pension scheme liabilities                (70.8)    (74.6)
 Finance lease interest                                (18.5)    (19.2)
 Notional interest arising on discounted provisions     (3.3)     (3.6)
Adjusted finance costs for interest cover calculation          167.1     139.8

^1Jointly Controlled Entities



There was no charge for hybrid capital interest during the six months to 30
September 2012 as the coupon payment relating to the bonds issued in 2010 was
made on 1 October 2012. Charges are presented as distributions to other
equity holders and are reflected within adjusted earnings per share*.



The average interest rate for SSE, excluding JCE/Associate interest, during
the six months was 5.17%, compared with 5.19% for the previous year. Based on
adjusted interest costs, SSE's adjusted interest cover was (previous year's
comparison in brackets):



· 3.9 times, excluding interest related to SGN (3.7 times); and

· 3.5 times, including interest related to SGN (3.2 times).



Excluding shareholder loans, SGN's net debt at 30 September 2012 was £3.3bn,
and within the adjusted net finance costs of £193.6m, the element relating to
SGN's net finance costs was £47.4m (compared with £48.4m in the previous
year), after netting loan stock interest payable to SSE. Its contribution to
SSE's adjusted profit before tax* was £75.3m, compared with £66.2m for the
same period in the previous year.



Contributing to employees' pension schemes

In line with the IAS 19 treatment of pension scheme assets, liabilities and
costs, pension scheme liabilities of £712.4m are recognised in the balance
sheet at 30 September 2012, before deferred tax. This compares to a liability
of £731.9m at 31 March 2012.



During the six months to 30 September 2012, employer cash contributions
amounted to:



· £24.0m for the Scottish Hydro Electric scheme, including deficit repair
contributions of £14.8m; and

· £39.2m for the Southern Electric scheme, including deficit repair
contributions of £27.4m.



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.



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. The results of the 2012
survey are expected shortly.



Setting out SSE's tax position

To assist the understanding of SSE's tax position, the adjusted current tax
charge is presented as follows:



                                                           Sep 12      Sep 11
                                                        £m  £m
                                                                           
Adjusted current tax charge                                   64.0        52.0
Add/(less)                                                                  
 Share of JCE/Associate tax                           (5.1)       (1.3)
 Deferred tax                                          12.1         9.4
 Tax on exceptional items/certain                   (124.8)     (135.3)
re-measurements
Reported tax credit                                         (53.8)      (75.2)
                                                                           



The effective adjusted current tax rate, based on adjusted profit before tax*,
was 16.1%, compared with 18.1% in the same period last year, on the same
basis. The impact of SSE's higher capital expenditure programme and the series
of UK Corporation Tax rate reductions announced in the 2010 and subsequent
Budgets have had, and will continue to have, a positive impact on the
effective current tax rate.



The deferred tax balance has been remeasured to reflect the latest of the
series of annual reductions in the UK Corporation Tax rate that were announced
in the 2010 Budget, and the deferred tax balances for future years will be
remeasured as each subsequent rate reduction is enacted.



Priorities and Outlook for 2012/13 and beyond



Dealing with economic and energy market uncertainty

As previously stated, SSE's 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 third quarter Interim Management Statement, not least
because its principal financial objective is dividend growth, and that remains
the case for 2012/13.



Moreover, 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. In addition, there is
particular uncertainty about the electricity generation market in Great
Britain.



SSE believes that its strategy - the efficient operation of, and investment
in, a balanced range of economically-regulated and market based energy
businesses in the UK and Ireland - is resilient in and appropriate for this
uncertain environment.



Setting the right operational priorities

SSE believes that the efficient operation of its businesses in the UK and
Ireland means in practice:



· carrying out all work in a safe and responsible manner, with a lower
Total Recordable Injury Rate;

· maintaining particularly strong cost control throughout all business
activities;

· demonstrating efficiency, responsiveness and innovation in the
management of electricity and gas networks;

· improving the standards of service delivered to customers of its Retail
businesses and continuing the drive to build trust in it as an energy
supplier;

· optimising the management of its portfolio of energy assets and
contracts and of its energy procurement;

· ensuring power generating plant maintains a high level of performance
and availability to generate electricity in response to customers' needs and
market conditions;

· integrating the newly acquired electricity generation assets and gas
supply business on the island of Ireland; and

· working with the UK government and Ofgem to secure a stable and
competitive framework for electricity generation and energy supply in Great
Britain.



Setting the right investment priorities

SSE believes that the efficient investment in its businesses in the UK and
Ireland means in practice:



· continuing progress in its programme of capital investment in
electricity and (through Scotia Gas Networks) gas networks, including
electricity transmission; and

· maintaining progress in the maintenance, construction and development
of assets which support the achievement of flexible and 'greener' electricity
generation.





Forecasting a full-year dividend increase of at least RPI plus 2%

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 from 2013/14 onwards that are
greater than RPI inflation.



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                   
                                    
Ex-dividend date                     23 January 2013
Record date                          25 January 2013
Interim Management Statement         By 8 February 2013
Final date for Scrip elections       22 February 2013
Payment date                         22 March 2013
Financial results for 2012/13        22 May 2013
AGM and Interim Management Statement 25 July 2013



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 (GMT)

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 0800 279 4841

US 1877 249 9037

When asked please provide conference number 6963644.



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                    Sep 12 Sep 11
                                                                 
ELECTRICITY TRANSMISSION                                          
Operating profit* - £m                                   48.7   37.8
Regulated Asset Value (RAV) - £m                          930    590
Capital expenditure - £m                                167.5   84.9
Connection offers provided in required period              59     32
                                                                 
ELECTRICITY DISTRIBUTION                                          
Operating profit* - £m                                  213.4  163.5
Regulated Asset Value (RAV) - £m                        2,890  2,745
Capital expenditure - £m                                117.7   94.7
Customer minutes lost (SHEPD)                              33     30
Customer minutes lost (SEPD)                               33     30
                                                                 
SCOTIA GAS NETWORKS                                               
Operating profit* (SSE's share) - £m                    122.7  114.6
Regulated Asset Value (SSE's share) - £m                2,320  2,200
Capital and replacement expenditure (SSE's share)- £m    88.8  103.3
Uncontrolled gas escapes attended within one hour %      99.0   99.1
SGN gas mains replaced - km                               561    521
                                                                 
OTHER NETWORKS                                                    
Operating profit* - £m                                   14.7   19.1
Capital expenditure - £m                                 24.1   17.7
Lighting Services maintenance contracts (GB and Ire)       48     54
Lighting Services PFI contracts with Local Authorities     12     12
Utility Solutions electricity networks in operation       127     99
Utility Solutions new gas connections                   7,500  6,940
                                                                 

Owning, operating and investing in Networks

Electricity and gas transmission and distribution companies are natural
monopolies, serving defined geographical areas. The performance of SSE's
economically-regulated electricity networks businesses is reported within
Networks, as is the performance of Scotia Gas Networks (SGN), in which SSE has
a 50% stake. In addition, the market-based activities of Lighting Services,
Utility Solutions and Telecoms are also network-based and are, therefore,
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 estimates that the total Regulatory Asset Value (RAV) of its
economically-regulated 'natural monopoly' businesses is now £6.1bn, comprising
around:



· £930m for electricity transmission;

· £2,890m for electricity distribution; and

· £2,320m for gas distribution (i.e. 50% of the business' total RAV of
£4.64bn).



In May 2012 it was confirmed by the European Commission that the arrangements
in place in relation to the vertical integration and operation of the
transmission system belonging to SHE Transmission meets the requirements of
Article 9(9) of Directive 2009/72/EC and 'clearly guarantee more effective
independence of the transmission system operators' than the provisions of
Chapter V of the Directive.



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.



Financial performance in Networks

In the six months to 30 September 2012, operating profit* in Networks
increased by 19.3%, from £335.0m to £399.5m, contributing 66.8% of SSE's total
operating profit*. This comprised (comparisons with the previous year):



· £48.7m in electricity transmission, compared with £37.8m;

· £213.4m in electricity distribution, compared with £163.5m;

· £122.7m representing SSE's share of the operating profit* for SGN,
compared with £114.6m; and

· £14.7m in other network businesses, compared with £19.1m.



London 2012

In the summer of 2012, Southern Electric Power Distribution and Southern Gas
Networks worked successfully with the London Organising Committee of the
Olympic and Paralympic Games to ensure venues and designated road networks in
their areas were free from disruption.



Electricity Transmission



Performance in Scottish Hydro Electric Transmission (SHE Transmission)

In SHE Transmission, operating profit* increased by 28.8% from £37.8m to
£48.7m. This reflected the continuing increase in its investment in its asset
base and associated increase in allowed revenue.



Investing in Scotland's electricity transmission network

SHE Transmission 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,
SHE Transmission has to ensure there is sufficient network capacity for those
within it seeking to generate electricity from renewable and other sources.



During the six months to 30 September 2012, a total of £167.5m was invested by
SHE Transmission in its networks, up from £84.9m in the same period in 2011,
taking its total Regulated Asset Value from £770m on 31 March 2012 to £930m.



Upgrading Scotland's electricity transmission network

The base of SHE Transmission's plans for 2013 to 2021 is a £1.1bn capital
investment programme in 2009/10 prices, or £1.4bn at annual inflation of
3.18%, in line with Ofgem's assumptions. There is flexibility to increase this
very significantly, if required, to upgrade the transmission network during
2013-21. To proceed to construction, projects require authorisation by Ofgem
and any necessary consents for development from Scottish Ministers. Projects
completed or under construction include (investment numbers are on a nominal
basis): 



· Knocknagael Substation: all construction and commissioning works
relating to the substation and associated overhead lines and underground
cables have been completed at a cost of £40m, which was just under the Ofgem
authorisation. This has increased by 125MW the amount of electricity that can
be exported from the north of Scotland, and is the first completed
transmission project to undergo SSE's Major Projects Governance Framework.

· Beauly-Dounreay: Work on upgrading and reinforcing the transmission
network between Beauly and Dounreay is continuing, including the installation
of a second set of conductors to create a double circuit line and development
of new and upgraded substations. This programme should be completed in 2013
at an estimated cost of £78m, in line with Ofgem's authorised budget.

· 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 over £90m for this development.

· Beauly-Denny: Full construction work on the replacement of SSE's part
of the line, from Beauly to Wharry Burn, for which Ofgem has authorised
investment of £600m, is now well under way, with a total of £255m invested so
far. The replacement line is 200km in length and requires the development of
five substations. Construction should be completed in 2014, with remedial
works carrying on in to 2015.

· Beauly-Mossford: The first stage of this project, to construct a new
substation at Corriemoille, is well under way. This already has Ofgem
authorisation for £14m. Consent for a replacement 132kV transmission line
between Beauly and Mossford. has been received from Scottish Ministers. The
estimated cost of both parts of the project is approximately £60m and work
should be completed by 2015.



A total of £131m was invested in these five projects in the six months to 30
September 2012 and their development is expected to help take SHE Transmission
RAV from £930m as at 30 September 2012 to over £1bn by March 2013 and to
around £1.6bn by March 2015. In 2012/13 as a whole, SHE Transmission expects
to incur capital expenditure of around £325m.



Achieving a 'fast track' to Price Control agreement

In April 2012, following consultation, Ofgem published Final Proposals for
RIIO T1 (Revenue = Incentives + Innovation + Outputs) for SHE Transmission for
the eight year transmission Price Control period from April 2013. The Final
Proposals contain:



· an allowed cost of equity of 7.0%;

· a new index for determining companies' debt costs weighted by SHE
Transmission's debt issuance;

· 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.



The publication of the Final Proposals in April 2012 has allowed SHE
Transmission a year to prepare for the implementation of the new Price Control
and in September 2012 it published an update document for stakeholders on the
progress it is making and to invite views on a number of issues. Meanwhile,
Final Proposals for National Grid Electricity Transmission will be published
in December 2012.



Keeping the lights on and supporting growth in the long term

SHE Transmission's plans for 2013 to 2021 include approved capital expenditure
of £1.4bn. There is flexibility to increase this very significantly, to
upgrade the transmission network during 2013-21 in response to the needs of
electricity generators. Projects currently being developed, and which could
be constructed during the period, include:



· Kintyre-Hunterston: SHE Transmission has received consent to build a
new 220/132kV substation in Crossaig on the Kintyre peninsula and replace the
existing 132kV overhead line between Carradale and Crossaig with a higher
capacity double circuit overhead line and install two subsea cable circuits
from this new substation round the north coast of Arran to Hunterston. An
investment case will be submitted to Ofgem shortly and it is anticipated that
the reinforcement will be completed around 2016.

· Caithness to  Moray: SHE  Transmission is  now planning  to develop  a 
subsea electricity cable between Caithness, where work is continuing to secure
consents 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 further generation developments in the north of Scotland as and
when the need to do so arises.  Alongside the development of the project,  SHE 
Transmission is reviewing recent supply chain information and will provide  an 
update on progress by the end of the year.

· Orkney to Caithness: SHE Transmission is planning to develop and install
a new 132kV subsea cable between Orkney and Dounreay to increase transmission
system capacity to support renewable energy projects in and around Orkney.
Site investigations, survey and design work are continuing, with a view to
submitting the relevant planning applications in 2013.

· East Coast 400kV: SHE Transmission is planning to upgrade the existing
east coast transmission line which runs from Blackhillock to Blairingone from
an operating voltage of 275kV to 400kV, with associated substation
developments. This will enable new capacity for generating electricity to
link to the main transmission system and centres of demand. The project is a
key reinforcement in the Scottish Government's National Planning Framework for
Scotland.

· East Coast HVDC link: SHE Transmission is proposing to upgrade the
existing infrastructure in the Peterhead area to facilitate the proposed
development of a 2GW East Coast HVDC subsea link between the north of Scotland
and centres of electricity demand. SHE Transmission is working with National
Grid Electricity Transmission and SP Transmission on these proposals. A
number of technical and environmental assessments and consultations have been
carried out and consultation processes relating to the proposed infrastructure
are currently under way.

· Western Isles: SHE Transmission has undertaken a considerable amount
of work in relation to the proposed Western Isles HVDC link and Lewis
infrastructure. It has advised stakeholders that the total cost of the link
is now estimated to be no less than £700m and will be not be completed before
2016, and potentially later. It will provide a further update on the Western
Isles projects by the end of the calendar year.

· Shetland: SHE Transmission is in the process of securing consents for
converter stations and the proposed subsea/onshore underground 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. SHE
Transmission is undertaking a review of the basis of the economic appraisal
for the investment, in the light of potential cost increases. A further
update on progress will be provided by the end of the year.



The key driver for all of these projects is the need to accommodate renewable
energy developments in the north of Scotland. SHE Transmission expects to
invest an average of around £350m a year in each of the next few years.
Throughout that period it will be, in essence, a construction business. In
this context, the enforcement of SSE's Major Projects Governance Framework is
absolutely critical.



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 and a
process to achieve this has been initiated. 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

SHE Transmission 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 preparations for the 2013-21 Price Control;

· 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, including maintaining and
developing effective stakeholder relationships; and

· ensure it has the people, skills, resources and supply chain
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 the six
months to 30 September 2012 was as follows (comparisons with previous years):



· operating profit* increased by 30.5% to £213.4m;

· electricity distributed rose by 0.1TWh to 18.7TWh;

· the average number of minutes of lost supply per customer was 33 in the
north (30) and 33 in the south (30); and

· the number of supply interruptions per 100 customers was 33 in the
north (30) and 31 in the south (36).



The increase in operating profit* principally reflects additional allowed
revenue under the existing Distribution Price Control, the timing of recovery
of allowed income and continued emphasis on the control of costs.



Volume of electricity distributed

The total volume of electricity distributed by the two companies during the
six months to 30 September 2012 was 18.7TWh, compared with 18.6TWh 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).



Investing in electricity networks and securing growth in their RAV

The mid-way point of the electricity Distribution Price Control for 2010-15
was reached on 30 September 2012. 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.



Capital expenditure in electricity distribution networks was £117.7m in the
six months to 30 September 2012, taking the total for the 2010-15 Price
Control to £590m so far. At the same time, success in electricity
distribution requires companies to be efficient, responsive and innovative so
that they maximise the outputs from, and minimise disruption experienced as a
result of, agreed expenditure on projects. For example, the use of
directional drilling techniques to install new electricity cables between
Bracknell and Camberley, part of a £30m network upgrade in the area, has
helped to reduce disruption to road users.



Other innovative approaches deployed include the use of trolleys suspended 35
metres above the ground to allow the refurbishment of an overhead line between
Mannington and Christchurch and the use of a cable plough to allow the removal
of overhead lines and pylons from an ecologically and archaeologically
sensitive lowland heath near Wareham.



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.



Preparing for the impact of winter on the electricity networks

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. As part
of its continuing investment in the electricity networks, SSE is making a
number of localised improvements, including a £1m upgrade to the electricity
supply around Dunoon, which was particularly badly affected by storms in
January 2012, and a £2m upgrade to the electricity supply in The Worthies area
of Winchester, where there have also been issues arising as a result of bad
weather.



Making electricity networks smart

The next decade promises major technological change for electricity
distribution networks as a result of developments such as 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. Two major 'smart' projects, with
total funding of £64m, are being led by SSE's electricity distribution
businesses:



· On Shetland, Northern Isles New Energy Solutions (NINES) features the
use of heat and electricity storage to manage intelligently the impact of
movements in demand on electricity generation, which could allow more
renewable energy to be connected to the network. It also features new active
network management solutions. This means NINES is not just a 'smart'
programme but a comprehensive and sustainable solution to the energy
challenges on Shetland.

· In Berkshire, New Thames Valley Vision (NTVV), in and around Bracknell,
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 modelling.



Working with stakeholders on the new electricity distribution Price Control

RIIO-ED1 will be the first electricity distribution Price Control review to
reflect the new regulatory framework first adopted in RIIO-T1. It will run
from 2015 to 2023. In line with wider trends in electricity networks, it is
likely to put much greater emphasis on incentives to secure innovation. In
September 2012 Ofgem published its strategy consultation for RIIO-ED1, and SSE
will submit its response in advance of the deadline of later this month.



As with RIIO-T1, distribution companies will be required to develop
comprehensive business plans, setting out their planned outputs for the
eight-year period and how they propose to deliver them. SSE will work
extensively with stakeholders to ensure that such plans meet the requirements
of all users of its distribution networks and in September 2012 published
Innovating for a greener, more efficient future to invite views on the on the
key issues that should be addressed in its plans for electricity distribution
between 2015 and 2023.



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;

· make progress on the deployment of innovative investment in smart
grids; and

· engage with stakeholders in preparation for RIIO-ED1.



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 some corporate and
management services. In SGN in the six months to 30 September 2012:



· SSE's share of operating profit* was £122.7m, compared with £114.6m;

· gas transported rose by 4.8TWh to 49.2TWh; and

· 99.0% of uncontrolled gas escapes were attended within one hour of
notification, compared with 99.1%, and exceeding the target of 97%.



The increase in operating profit* for SGN is primarily due to three things:



· the continuing impact of the price changes agreed as part of the
five-year Gas Distribution Price Control to March 2013;

· the timing of allowed revenue; and

· underlying operational efficiencies achieved during the year.



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.




Investing in gas networks and securing growth in their RAV

The five-year Gas Distribution Price Control, which began in April 2008, has
provided 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 £4.75bn.



During the six months to 30 September 2012, SGN invested £88.8m in capital
expenditure and mains and services replacement projects, compared with £103.3m
in the same period in 2011:



· 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 the six months, SGN replaced 561km
of its metallic gas mains with modern polyethylene pipes.

· Capital projects included the development of a new UK-leading biogas
plant at Poundbury in Dorset.

· 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 an
Assisted Connections scheme, under which 7,862 properties were connected to
its networks during the six months. A further 2,200 properties are expected
to be connected by the end of March 2013.



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.



Making gas networks more sustainable

Following its participation in the first commercial biomass upgrading system
in England, near Poundbury, which has put it in a leading position in the UK's
development of biomethane delivery, SGN is now developing this technology so
that larger volumes of biomethane at sites can be commissioned into the
network. It is in discussions with potential partners on a further 10
proposals for biomethane network entry points from anaerobic digestion
projects to be delivered in the next 18 months 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. No gas
distribution companies were 'fast-tracked' by Ofgem. Following the submission
of SGN's business plan for 2013-21, Ofgem published its Initial Proposals for
the Price Control in July 2012. It sought views on its proposed required
outputs, incentive framework and cost and revenue allowances, amongst other
things, and intends to publish Final Proposals in December 2012.



SGN is continuing to engage with Ofgem in advance of the Final Proposals being
published, with a particular focus on ensuring the level of total capital and
operational expenditure (or 'totex') is enough to allow SGN to maintain safe
and reliable networks and secure a fair return for doing so.



Gas Distribution priorities in 2012/13 and beyond

During 2012/13, SGN's priorities are to:



· continue 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 (2013-21); and

· support and invest in 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 economically-regulated
energy networks, and they operate in tough and competitive markets. Their
contribution to SSE's operating profit* fell, from £19.1m in the six months to
30 September 2011 to £14.7m, in the same period in 2012, reflecting difficult
trading conditions.



Maintaining leadership in lighting services provision

SSE remains the UK's and Ireland's leading street-lighting contractor. It
has:



· 23 contracts with local authorities in England, Wales and Scotland to
maintain over 630,000 lighting units;

· 25 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 610,000 lighting units.



Lighting Services has a number of strategic projects under way throughout the
UK and Ireland which are influencing the market to drive innovation in street
lighting. It has met with representatives to help develop UK government
thinking in respect of PFI reforms, and has developed future proof 'fit and
forget' models aimed at reducing unit maintenance regimes, improving both
efficiency and cost effectiveness. The team is working with a number of
clients installing Mayflower, an SSE owned total Lighting Control Management
System, in the UK, whilst continuing to develop the business in Ireland, where
Lighting Services operates as the largest street lighting operator in the
Republic.



The success of Lighting Services depends in part on effective management of
contractual relationships with local authorities at a time of restraint in
public expenditure. More generally, 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. For example, in June 2012, SSE secured a contract to provide
electricity, gas, water and heat services to the Heart of East Greenwich
development in South East London.



· Electricity Networks: SSE now owns and operates 127 embedded energised
electricity networks outside the areas served by its economically-regulated
subsidiaries Scottish Hydro Electric Power Distribution and Southern Electric
Power Distribution. New sites in operation include the Athletes' Village for
the 2014 Commonwealth Games. A further 56 are under construction and contracts
have been signed for the development of an additional 6, taking the total to
189 - up from 170 at the end of 2011/12. Several significant electricity
contracts have been signed, including the 2,200 plot development at Mill Hill
East in London and the 1,200 plot development at Barry Waterfront in Wales,
both of which also included gas and water contracts, and the adoption of the
10MVA Lingley Mere Business Park, including the headquarters of United
Utilities in Warrington.

· 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 since the start of the current
financial year it has connected a further 7,500 premises, passing 100,000
total connections in October 2012. Contracts have been signed for a further
60,000 connections to be completed. New gas networks within multi-utility
contracts (as mentioned above) are complemented by gas-only developments
within SSE's electricity distribution areas such as the 740 home Well Road
development in Aberdeen.

· 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 18 such appointments and provides, or has
secured contracts to provide, water and sewerage services to over 27,500
properties in England and Wales, more than any other new appointment company.
This number includes almost 2,500 SSEW customers already connected.

· 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 now seven heat networks in operation and eight further
schemes where SSE is the preferred bidder. The Wyndford scheme, in partnership
with the Cube Housing Association in Glasgow, will add 1,500 new customers,
taking the total to almost 3,000 connected customers by the end of the year.



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 provides SSE's internal
managed voice and data services. The origins of this business lie in the
installation, over a decade ago, of fibre on SSE's electricity network, and
the telecoms network now comprises 11,825km of fibre optic cabling, leased lit
fire and microwave radio.



In September 2012, SSE Telecom was awarded a 10-year, £30m contract to provide
6,500km of fibre network to over 30 UK sites connected to the 'Janet' network
infrastructure used by the UK's research and education community. The
contract is SSE Telecom's largest network management partnership and
underlines its position as a significant player in this competitive market.
The business itself is now being led by a telecoms specialist who was
appointed earlier this year.



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.



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

The continuing success of SSE's economically-regulated and market-based
Networks will be founded on efficiency, responsiveness and innovation in
operations, such as restoring power supplies following interruptions, and
investments, such as upgrading the transmission network in the north of
Scotland.









RETAIL



Retail Key Performance Indicators                      Sep 12  Sep 11
                                                                  
ENERGY SUPPLY                                                      
Operating profit/(loss)* - £m                            48.7 (133.7)
Electricity customer accounts (GB domestic) - m          4.97    5.11
Gas customer accounts (GB domestic) - m                  3.43    3.53
Energy customers (GB business sites) - m              0.41    0.42
All-Island Energy Market customers (Ire) - m             0.79    0.56
Total energy customer accounts (GB, Ire) - m             9.60    9.62
Electricity supplied household average (GB) - kWh       1,773   1,724
Gas supplied household average (GB) - therms              142     111
Household/small business aged debt (GB, Ire) - £m       100.6   101.4
Customer complaints to third parties (GB)*                421     407
* Energy Ombudsman, Consumer Focus and Consumer Direct             
                                                                   
ENERGY-RELATED SERVICES                                            
Operating profit* - £m                                   27.0    32.3
Home Services customer accounts (GB) - m                 0.41    0.42
Meters read - m                                           7.3     7.5



Supplying energy and related services across the Great Britain and Ireland
markets

SSE's Retail segment comprises two business areas: Energy Supply and
Energy-Related Services.



SSE is the second biggest energy retailer in the competitive market in Great
Britain and the third largest supplier in the competitive markets in Ireland.
At 30 September 2012, it supplied electricity and gas to 9.6 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.



SSE also provides other energy-related products and services to customers,
covering three principal areas: home services; metering; and mechanical and
electrical contracting.



Financial Performance in Retail

Operating profit* in Retail in the six months to 30 September 2012 was £75.7m,
compared with an operating loss* of £101.4m in the same period in 2011 and
£67.8m in 2010. This amounted to 12.6% of SSE's total operating profit* and
this comprised (comparisons with the previous year):



· £48.7m in Energy Supply, compared with an operating loss* of £133.7m;
and

· £27.0m in Energy-Related Services, compared with £32.3m.



As stated in its Financial Report on 16 May 2012, SSE expects that its annual
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 the financial year 2011/12, it was 3.5% and in the first six
months of 2012/13 it was 1.5%.



Energy Supply



Financial 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[2] 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.



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.



The return to operating profit* in Energy Supply was mainly the result of an
increase in household consumption of energy in response to below average
temperatures during the six months to 30 September 2012, compared with the
same period in 2011, when the temperatures were above average. Energy Supply
comprised 8.1% of SSE's total operating profit* in the six months to 30
September 2012.



In the six months to 30 September 2012, SSE estimates its household customers
in Great Britain used, on average:



· 142 therms of gas, compared with 111 therms in the previous year; and

· 1,773kWh of electricity, compared with 1,724kWh in the previous year.



Consumption of electricity by household customers in Ireland during the six
month period was broadly similar to the previous year.



There was also a reduction in overheads in Energy Supply associated with the
fact that no doorstep sales operations were undertaken in 2012, while they
were conducted for over two months during the same period in 2011.



Supplying energy to customers in GB and Ireland

In the six months to 30 September 2012, SSE's energy customer accounts in
Great Britain and Ireland rose from 9.55 million to 9.60 million. Customer
accounts at 30 September 2012 comprised:



· 5.350 million electricity accounts in GB;

· 3.464 million gas accounts in GB; and

· 786,000 electricity and gas accounts in Northern Ireland and the
Republic of Ireland.



Within the overall total, 2.1 million customer accounts in Great Britain are
for loyalty products such as M&S Energy, available to customers through Marks
& Spencer's stores and website.



The increase in total customer account numbers includes the acquisition in
June 2012 of 130,000 gas customer accounts in Northern Ireland from Phoenix
Energy Holdings Ltd for £19.1m, excluding working capital-related
adjustments. Including these, customer account numbers in Ireland rose by
166,000.



In contrast, there was a reduction of around 115,000 in customer account
numbers in Great Britain. This decline in customer account numbers in Great
Britain reflects the highly competitive market conditions and was no doubt
also influenced in part by SSE's decision to announce an increase in household
prices in August 2012. Moreover, SSE's commitment to ensure that all of its
customers can access all of its tariffs and that it does not 'under charge'
one particular group of customers for short-term sales purposes appears to be
in contrast to some other suppliers who have, therefore, been gaining
customers through offering hugely discounted prices for certain types of
customer.



SSE's position on this issue is shared by many of the new entrants to the
market. Until 17 October 2012, the issue had not received enough political
and regulatory intervention to enable SSE to maintain its position on it. The
Prime Minister's confirmation that the UK government intends to legislate to
ensure that energy companies have to give their lowest tariff to their
customers means, however, that this issue should finally be addressed.



This, in turn, would be consistent with Ofgem's 19 October 2012 announcement
of the latest proposals from its Retail Market Review. This included proposals
to limit tariff numbers and simplify their underlying structure, new
mechanisms to enable customers to compare tariffs between suppliers and
enforceable Standards of Conduct with which to police the market. SSE, having
already rapidly simplified its products for new and existing customers, is
well placed competitively to comply with these initiatives.



Retail energy bills in Great Britain and in Ireland

SSE increased its prices for household gas and electricity supply in Great
Britain by 9% (average) on 15 October 2012. This followed its cut in the unit
price of gas of 4.5% in March 2012. It previously increased gas prices in
September 2011 and before that in December 2010 and previously increased
electricity prices in September 2011 and before that in August 2008.



Three things were putting upward pressure on household energy prices:



· the higher average price in the wholesale energy markets to secure gas
for the coming winter (the wholesale cost of energy represents around one half
of a typical dual fuel bill);

· the rising cost of using the energy networks to distribute electricity
and gas to customers' homes, which are determined by Ofgem and represent
around 25% of a typical bill; and

· the rising cost of mandatory environmental and social initiatives that
suppliers are required to fund and pass on to customers, like the Carbon
Emissions Reduction Target (CERT) and the Warm Homes Discount, which now
represent around 10% of a typical bill.



Nevertheless, SSE is capping household energy prices in Great Britain at the
15 October 2012 level until at least the second half of 2013, the only leading
supplier to do so.



Looking ahead to 2013/14, government-sponsored schemes will continue to put
upward pressure on costs in Energy Supply in Great Britain. The delay in the
start date for the Energy Company Obligation means that timescales for it are
compressed in comparison with the UK government's original plan. This is
expected to inflate the cost of a programme that was already based on a highly
optimistic set of cost assumptions. The costs of the Feed-in Tariffs programme
for promoting micro-renewables are rising very significantly and are on the
point of overtaking the amount spent on the fuel poverty-related Warm Home
Discount, which itself is set to increase next year, on its planned upward
trajectory. Other non-energy costs are also set to move upwards with
indicative notifications of transmission and distribution charges indicating
that further substantial increases are in prospect next year. Taken together
these point to additional costs of around £60 per dual fuel customer.



SSE also increased household energy prices in the Republic of Ireland on 15
October by 4.7% for electricity and 8.5% for gas, reflecting increased energy
and distribution costs. In Northern Ireland, it was able to cut its standard
household electricity prices by 14.1% from 1 October 2012. Prices in Northern
Ireland are set by the Northern Ireland Utility Regulator in an annual tariff
review and the recent price reduction in Northern Ireland brought it into line
with Great Britain prices after a four-year period of higher prices.



How people pay their energy bills

A total of 60.4% of SSE's domestic electricity and gas accounts across Great
Britain and Ireland are paid by direct debit or standing order. A further
13.5% 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

At 30 September 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 £100.6m, compared with £101.4m in
September 2011. A bad debt-related charge of £24.8m was recognised in the
period. This compares with a charge of £27m in the period to September
2011.



The general economic climate continues to give rise to significant debt
management challenges. 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 proactive approach is in the best interests of SSE and the customers
concerned and the benefit can be seen in the fact that debt which is less than
three months old was 7% lower on 30 September 2012 than the year before and
debt overdue by four-to-six months was 1% lower.



Helping vulnerable customers this winter and beyond

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. In September 2012, the UK government proposed new ways
to measure fuel poverty following the independent review of the issue by
Professor John Hills published in March 2012. It is proposing a new
definition which includes dual indicators of fuel poverty that separate the
extent of the issue (the number of people affected) from its depth (how badly
people are affected).



SSE sees merit in this approach, provided it is accompanied by practical
improvements. In addition to the successful deployment of measures under
energy efficiency schemes like CERT and CESP (see 'Helping customers to use
less energy in the future' below) 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 an estimated
218,000 customers, with a total of around £28.3m being provided in 2012/13;

· providing tailor-made payment arrangements, helping customers who may
be experiencing hardship and having difficulty in paying their energy bills;
and

· contacting potentially vulnerable customers this winter, helping them
with practical advice and support.



In addition, SSE will not disconnect the gas or electricity supply of any
customer in Great Britain between 1 December 2012 and 28 February 2013; in
Ireland, there will also be a no-disconnections policy for part of the winter.



As in Great Britain, greater energy efficiency is seen as the most sustainable
solution to issues relating to energy affordability in Ireland.



Customers' use of energy is continuing to decline on an underlying basis

From 15 October, SSE's average annual standard dual fuel bill, for a customer
who pays by monthly direct debit in Great Britain, will be £1,274. This is
based on the industry average annual household energy consumption adopted by
Ofgem in November 2010 - 16,500kWh of gas and 3,300kWh of electricity. 



Actual household energy consumption in the six months to 30 September 2012 was
higher than in the same six months in 2011 (see 'Financial Performance in
Energy Supply' above). On a weather-corrected basis, however, average
household consumption of gas and electricity by SSE's customers continued to
decline, and on this basis was 3.0% and 0.5% lower respectively in the six
month period in 2012 than in the same period in 2011.



The underlying fall in consumption seen since 2005/06 means that the average
annual dual fuel bill is approximately £400 lower than it would have been had
energy consumption levels been maintained. This illustrates the distinction
between the price of a unit of energy and the amount customers pay for heating
and powering their homes. Between 2009/10 and 2011/12 the average bill paid by
household energy customers of SSE in Great Britain fell in both nominal and
real terms. 



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 developments, which SSE
welcomes.



Helping customers use less energy in the future

As a leading energy supplier, SSE has obligations under the Carbon Emissions
Reduction Target (CERT) 2008-12. Revised in 2009, 2010 and 2011, CERT
requires energy suppliers to deliver energy efficiency measures to households
throughout Great Britain that deliver savings in CO[2] emissions.



Of the total obligation, 40% must be met in a Priority Group of households,
within which there is also a Super Priority group of households which are low
income and qualify for certain benefits. There are also requirements in
respect of promoting professionally installed insulation measures (the
Insulation Obligation).



Delivery of CERT is affected by the capacity of installers to deliver measures
and the extent to which customers wish to take up measures. The process for
verifying Super Priority Group (SPG) customers, decided upon by Ofgem, is also
onerous. As SSE said in its Financial Report in May 2012, the delivery of
CERT and, in particular, the requirement to ensure that a proportion of the
CO[2] savings are achieved in the SPG, has proved to be very challenging.
This, in turn, has given rise to an increase in the cost of delivering the
measures. SSE has presented evidence to Ofgem indicating that the current
verification requirements associated with SPG have led to a serious under
recording of the true extent of SSE's delivery to date.



Nevertheless, subject to verification by Ofgem, SSE estimates that it has:



· achieved its overall CERT obligations for the period to 31 December
2012;

· achieved its Priority Group and Super Priority Group obligations for
the same period; and

· done all the pre-work that is necessary to ensure it achieves its
Insulation Obligation by 31 December 2012.



In practice, this meant funding the installation of cavity wall insulation in
54,300 homes and loft insulation in 102,000 homes (excluding DIY insulation)
in the six months to 30 September 2012.



SSE's delivery of measures under the separate Community Energy Savings
Programme (CESP) is slightly lower than the industry average. The CESP has
been marked by a number of difficulties, including securing funds from scheme
partners. There has also been a lack of clarity and substantial complexity
around the scoring of CESP schemes, with some guidance and methodologies only
finalised by Ofgem in 2012.



While delivering CESP is challenging, SSE now has 66 CESP agreements in place
for locations throughout England, Scotland and Wales and expects to have
contracts in place by 31 December 2012 for full scheme delivery. For example,
in May 2012, SSE reached agreement with Preston Council to fit A rated
windows, external wall insulation and a communal heating system to 437
properties in the town centre area of Preston.



Preparing for the Green Deal and ECO

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 greater than the
cost of the installation attached to the customer's 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. ECO will also subsidise Green Deal insulation
measures such as solid wall insulation on the 'hardest-to-treat' properties
that do not meet the 'Golden Rule'



In this new framework, SSE will fulfil four functions:



· delivering the customer facing and IT systems obligations with respect
to the Green Deal which it has to fulfil as an energy supplier. These include
payment collection and remittance;

· delivering the ECO placed upon it as an energy supplier;

· providing products and services to customers under the Green Deal, with
solid wall, cavity and loft insulation expected to be the principal measures;
and

· providing measures under the ECO through existing businesses such as
Home Services, Utility Solutions and Contracting or through third parties.



Department of Energy and Climate Change-led preparations for the launch of the
Green Deal and ECO have posed significant challenges for energy companies,
illustrated by the fact that ECO did not launch on 1 October 2012 as planned.
Nevertheless, SSE has committed, and is continuing to commit, significant
resources to fulfil its Green Deal and ECO obligations and to pursue the
business development opportunities that their introduction may provide.



Policymakers are aware of the growing effect of energy efficiency obligations
on customer bills. Another issue with obligations such as ECO is that they
are generally only placed on companies supplying more than 250,000 domestic
customers. As the cost of schemes such as ECO is significant, this represents
an additional burden to be borne by larger suppliers when competing with
smaller ones that appears discriminatory and SSE is continuing to engage with
DECC, Ofgem and other stakeholders to ensure that, as these schemes develop,
there is no adverse impact on retail market competition.



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.



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 energy complaints league table, published by Consumer Focus in July
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; and

· the UK Customer Satisfaction Index, in which SSE was the highest-ranked
energy supplier in Great Britain.



During the six months to 30 September 2012, there were 421 SSE-related
complaints to the following third party organisations: the Ombudsman Services:
Energy, Consumer Focus and Consumer Direct. This was an increase from the 407
complaints in the same period in 2011 but lower than the 442 complaints in the
same period in 2010.



Continuing to build trust in energy supply

Following its October 2011 document, Building Trust: SSE's proposals to  build 
customers' trust in  energy supply in  Great Britain, SSE  published a  second 
document, Still Building Trust, in April 2012.



It confirmed that measures to restore simplicity through reducing the number
of tariffs, enhancing transparency, promoting wholesale electricity market
liquidity, and ensuring fairness for all customers by giving them the
opportunity to access all tariffs had been completed. 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.



SSE also confirmed that measures to improve customer service, including
retrospective introduction of a Sales Guarantee, had made significant progress
and SSE is implementing the commitments made in Still Building Trust,
including its trading commitment for smaller suppliers and publication of its
Energy Market Outlook.



In addition, 200 people have been recruited at SSE's Customer Service Centre
in Havant, in new roles created to deliver the pledge to offer all customers
an Annual Energy Review (AER). The review allows customers to discuss with SSE
various aspects of their account, including checking that they are on the
right tariff for their needs and lifestyle, are receiving benefits they might
be entitled to and that they are using their energy efficiently.



Transparency is central to building trust in energy supply. In line with
that, SSE is also implementing its 'open book' approach to customer service
data, through the production of an externally-assured online display enabling
customers to monitor performance across a wide range of key indicators.



Building on its record as the leading supplier for customer service, SSE will,
before the end of this financial year, be publishing a new customer charter in
Great Britain.



Developing energy products and services

As part of its Building Trust initiative, SSE has introduced a
dramatically-simplified range of energy tariffs which meet the needs of the
vast majority of customers featuring:



· three core products - one standard, one capped and one fixed;

· 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 mainly
motivated by finding the best price; and choice for the customer who is more
concerned about features and products.



To achieve this simplification, SSE has 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.



SSE believes that its approach to energy products and services is consistent
with Ofgem's ongoing review of the retail energy market and with the UK
government's commitment to legislate so that energy companies provide the
lowest tariff to their customers.



Selling energy in the right way

Customer service starts at the point of sale. In December 2011 SSE decided 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. SSE remains
the only energy supplier to have offered such a guarantee.



Since it was launched, SSE has contacted customers about the guarantee and so
far settled over 1,000 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 it is being extended to all
energy products.



SSE aims to gain customers through telephone, online, direct mail and venue
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 launching pilot
networks of appointment-only and salary-based 'smart energy advisers',
starting in Wales and Scotland and trained to an externally-accredited
standard. These advisers are community-based and provide energy efficiency
advice as well as information about SSE's products.



SSE no longer deploys commission-based door-to-door sales people in Great
Britain. The case against SSE relating to the use of direct sales aids in
February 2009 was settled in May 2012. SSE was fined £1.25m after being found
guilty on two counts (out of seven). 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.



Making services available digitally

Around one quarter of SSE's transactions with Energy Supply customers now take
place using digital channels, making them an increasingly popular means of
communication with the company used by customers. In Great Britain and
Ireland it now has 2.15 million digitally billed accounts, up from 1.83
million a year ago. 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 pace of technology adoption is now exceptionally fast and customers expect
a simple user experience. Enabling customers to carry out more transactions
using digital channels if they so choose is now one of SSE's top customer
service priorities. Substantial investment is now being made in this area
based on a customer proposition that is simple, value-adding and relevant and
a business programme that is practical, disciplined and focused on delivery.



SSE is working to ensure that all of the main customer service requirements
are available online, and will broaden its digital touchpoint options so that
the majority of customer transactions can take place via digital channels,
reflecting customers' preferences for these channels evident in other
industries.

In Ireland, SSE is the leading energy provider for making services available
digitally to its domestic customers. The popularity of paperless billing is
already well-established with two thirds of all domestic SSE customers in
Ireland choosing this billing method (excluding its recently acquired natural
gas customers in Northern Ireland), while around 75% of customer
correspondence in the Republic of Ireland and Northern Ireland is through
digital channels.

Recent SSE innovations in digital communications and e-services mean that more
and more Irish energy customers are choosing to manage their accounts online.
Almost half of customer interactions, such as submitting meter reads, making
secure payments, and updating personal account details, are via SSE's online
self service channel.

SSE is also the leading innovator of any Irish energy provider in mobile ready
communications supported on the widest selection of Smartphone devices. It
offers its domestic customers the broadest range of energy account management
functionality through this mobile service as well as via its associated mobile
App.

Preparing for the roll-out of smart meters

Energy supply in Great Britain is expected to be transformed by the
installation of around 53 million smart energy meters in around 30 million
homes and businesses. This is due to take place between 2014 and 2019. They
will enable the quantity and value of electricity and gas used by the customer
to be continuously monitored and allow information about energy use and cost
to be available to the customer and exchanged with the supplier, through
two-way electronic communications.



SSE sees its role in the smart meter roll-out as a service provider, operating
within the framework set by the UK government for issues like technical
standards, data access and security. In line with this, and its measured and
realistic approach to the roll-out, SSE's priority is to make substantive
progress on the necessary IT systems to support the wider roll-out, without
making commitments that may prove to be mis-placed as the roll-out plan gets
under way.



In line with this, it has created a smart-ready platform to support the start
of installation of the next generation of smart meters later this year and a
Meter Data Management System will also be deployed before the end of this
financial year.



In Ireland, installation of smart meters will be the responsibility of network
companies.



Energy Supply priorities in 2012/13 and beyond

During 2012/13, and beyond, SSE's priorities in Energy Supply are to:



· deliver fair prices, simple products and excellent service to
customers;

· continue to build customers' trust in energy supply;

· deliver energy efficiency programmes;

· maintain progress in providing additional services through digital
channels; and

· make substantive preparations for the roll-out of smart meters and
related developments.



Energy-related Services



Providing energy-related products and services

In addition to electricity and gas, SSE also provides energy-related products
and services to customers, covering three principal areas:



· retailing of 'home services' including telephone line rental,
broadband, gas and electrical wiring maintenance contracts and the
installation of new and replacement gas boilers, central heating systems,
electrical rewiring, solar PV and other renewable technologies;

· 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.



Operating profit* from Energy-related Services in the six months to September
2012 was £27.0m, compared with £32.3m in the same six months last year,
reflecting difficult market conditions for the business activities involved.



Home Services

SSE provided home services to 412,000 accounts at 30 September 2012. SSE
believes that extending the availability of its home services, especially in
the context of the launch of the Green Deal, will be necessary to integrate
these products and services more closely with its wider proposition for
electricity and gas customers and it intends to do this over the next three
years. It is also intended to extend SSE's home services offering in Ireland.



Maintaining a national Metering business

SSE's Metering business provides services to most electricity suppliers with
customers in central southern England and the north of Scotland. It
undertakes meter reading operations and meter operator work in all other parts
of Great Britain. It supplies, installs and maintains domestic meters and
carries out metering work in the commercial, industrial and generation
sectors. It also offers data collection services to the domestic and SME
sectors.



In the six months to 30 September 2012, SSE collected (previous year in
brackets):



· 4.4 million electricity readings (4.5 million); and

· 2.9 million gas readings (3.0 million).



Longer-term, SSE's Great Britain-wide metering team will be able to support
the transition to smart meters which will take place in the coming decade and
will help SSE deploy other energy-related services and products during that
time (see 'Preparing for the roll-out of smart meters' above).



With the integration of the Phoenix Supply natural gas business in to SSE, the
company has further broadened its activities and for the first time now
provides metering services in Ireland. SSE now undertakes meter reading
operations and meter operator work for all its 130,000 natural gas customers
in Northern Ireland, equivalent to 13% of the total gas and electricity
metering services in that market.

A leading mechanical and electrical contracting business

SSE Contracting has two main areas of activity: industrial, commercial and
domestic mechanical and electrical contracting; and electrical and
instrumentation engineering. It is one of the largest mechanical and
electrical contracting businesses in the UK.



SSE Contracting continued to make solid progress during the six months to 30
September 2012. Its order book ended the period significantly higher than a
year ago. The order book features a number of important new contracts with
customers as diverse as Esso Petroleum, BT plc, Hampshire County Council and
the Welsh Rugby Union.



Energy-related Services during 2012/13 and beyond

Home Services, Metering and Contracting have specific priorities for 2012/13
and beyond, but across all of them there is a need to:



· maintain the right portfolio of products and services;

· deliver high standards of customer service;

· anticipate the changing requirements of customers; and

· integrate more effectively the provision of services that customers
need.



Conclusion

SSE is mindful of the fact that its core products - electricity and gas - are
something which people need to buy rather than choose to buy and that it has a
responsibility to help make energy retail markets work effectively for
customers. Through its commitment to simplicity, transparency, fairness and
service in all of its Retail businesses, it is working to achieve this.





WHOLESALE



Wholesale Key Performance Indicators                         Sept 12   Sept 11
                                                                           
Energy Portfolio Management (EPM) and Electricity Generation                
EPM and Generation operating profit* - £m                       99.8     189.1
EPM and Generation capital expenditure and investment - £m     311.6     532.5
                                                                           
EPM                                                                         
Total wholesale electricity auctioned (N2EX) - TWh             43.55      5.12
Total wholesale electricity traded with small suppliers -      0.032  -
TWh
                                                                           
GENERATION                                                                  
Gas- and oil-fired generation capacity - MW                    4,470     4,470
Coal-fired generation capacity (inc biomass co-firing) - MW    4,370     4,370
Renewable generation capacity (inc pumped storage) - MW        3,208     2,538
Total electricity generation capacity - MW                    12,048    11,378
                                                                           
Gas power station availability - %                                98        98
Coal power station availability - %                               86        88
Hydro storage - %                                                 40        63
Onshore wind farm availability %                                  98        97
                                                                           
Gas- and oil-fired (inc CHP) output- TWh                         4.0      13.9
Coal-fired (inc biomass co-firing) output- TWh                   7.5       5.3
Total output from thermal power stations - TWh                 11.5      19.2
Conventional hydro output - GWh                                1,042     1,602
Wind energy output - GWh                                       1,698     1,077
Dedicated biomass output - GWh                                    65       105
Total output of renewable energy - GWh                         2,805     2,784
                                                                           
Total output from pumped storage - GWh                           133       166
                                                                           
Note 1: Capacity is wholly-owned and share of joint ventures                
Note 2: Output is electricity from power stations in which                 
SSE has an ownership interest (output based on SSE's
contractual share)

Note 3: Capacity and output exclude Irish assets acquired in
October 2012 from

Endesa Generacion SA

Note 4: Capacity excludes disputed wind turbines at Greater
Gabbard (93MW net)
                                                                           
GAS PRODUCTION                                                              
Gas production operating profit* - £m                           16.5      17.3
Gas production - m therms                                       80.5      85.7
Gas production capital investment - £m                           2.8       0.3
                                                                           
GAS STORAGE                                                                 
Gas storage operating profit* - £m                               6.9      15.4
Gas storage customer nominations met - %                         100       100
Gas storage net capacity - mcm                                   468       440
Gas storage capital investment - £m                             21.0      14.5



Sourcing and producing energy

SSE's Wholesale segment comprises three different business areas: Energy
Portfolio Management (EPM) and Electricity Generation; Gas Production; and Gas
Storage.



EPM is responsible for the scheduling of generation plant through capacity
contracts with the asset owners, the procurement of fuel for the plants and
the optimisation and trading of electricity, gas and other commodities.
Meanwhile, Electricity Generation is responsible for asset management,
maintenance and making available plant for use by EPM.



Neither activity is reported as a discrete profit centre or activity but their
shared objective is to provide the lowest cost input to the Energy Supply
business for the provision of energy to customers, consistent with the EU
Regulation on Energy Market Integrity and Transparency (REMIT).



SSE is one of numerous participants in the wholesale gas market and it has
seen the Secretary of State for Energy and Climate Change's Parliamentary
statement and recent media reports and speculation about possible activity in
the market (especially relating to the day ahead price) by one or more of
those participants.



SSE is entirely confident that its Energy Porfolio Management team operates in
a fair and legitimate way, and SSE maintains a framework and culture of
compliance through training, systems, controls and governance. All
individuals involved undergo regular training and competence assessments to
reinforce this culture and framework, with the objective of ensuring high
standards of market conduct and behaviour, and there are no inappropriate
personal economic incentives for them.



SSE reviews and monitors continuously its participation in wholesale energy
markets, and continues to do so, and will naturally share all required and
relevant information with the FSA and Ofgem in a constructive and open way.
SSE will support strongly any efforts by the FSA and Ofgem to deal robustly
with any activity by any market participant which is proved to be wrong and to
have resulted in any detriment, including to customers.



Financial performance in Wholesale

During the six months to 30 September 2012 operating profit* in Wholesale
decreased by 44.5%, from £221.8m to £123.2m, contributing 20.6% of SSE's total
operating profit*. This comprised (comparisons with the same period previous
year):



· £99.8m in EPM and Electricity Generation, compared with £189.1m.
Although profitable, the period up to 30 September 2012 was challenging, with
continued low spark spreads for gas-fired generation and lower underlying
output from renewables sources due to calmer and drier weather when compared
with the same period last year. However this has been offset by 670MW of new
renewable generation capacity coming on line since September 2011, in
particular the commissioning of the Greater Gabbard offshore and Clyde onshore
wind farms. This has resulted in actual renewable output increasing despite
much lower hydro output;

· £16.5m in Gas Production, compared with £17.3m. Gas production assets
continued to perform well during the period, producing 80.5 million therms
compared with 85.7 million therms in the same period last year. Profit in the
first half of the year was supported by higher gas prices but offset by lower
volumes of gas extracted due to scheduled maintenance works at the assets; and

· £6.9m in Gas Storage, compared with £15.4m. Lower market volatility
meant a reduction in the spread between summer and winter gas prices, although
this was partly offset by additional storage capacity coming on line at
Aldbrough.



Energy Portfolio Management and Electricity Generation



Financial performance in Energy Portfolio Management and Electricity
Generation

The EPM and Electricity Generation businesses earn revenue through:



· energy contract management;

· sourcing energy through participation in wholesale markets for
electricity, gas, coal, oil, biomass and CO[2] emission permits;

· management of existing power generating assets and making available
those assets for use;

· producing renewable energy;

· securing Renewable Obligation Certificates (ROCs) and Levy Exemption
Certificates (LECs); and

· providing balancing and ancillary services to the electricity market
under the Balancing and Settlement Code.



In the period to 30 September 2012 operating profit* in EPM and Electricity
Generation decreased by 47.2%, from £189.1m to £99.8m, contributing 16.7% of
SSE's total operating profit*.



Working for customers

The wholesale price of energy can fluctuate greatly due to factors including
the economy, the weather, customers' demand, infrastructure availability, and
world events. EPM and Electricity Generation seek to minimise the impact of
these variables by maintaining a diverse and well-balanced portfolio of
contracts and assets, both long and short term. In doing so, SSE provides:



· greater ability to manage wholesale energy price volatility, thereby
protecting customers from it and ensuring price stability;

· lower risk from wholesale energy through reduced exposure to price
volatility in any single commodity; and

· more scope to deliver the investment needed in Generation because the
risks associated with large-scale and long-term investments are balanced by
the demand from electricity and gas customers.



Increasing wholesale market transparency

In addition to minimising the impact of wholesale price volatility for
customers, SSE has responded to stakeholders' desire for greater transparency
and increased liquidity in the short-term wholesale market for electricity.



Since October 2011 SSE has steadily phased in the auction of all of its
electricity supply, and purchases all of its electricity demand, in the day
ahead market.



By 30 September 2012 SSE consistently placed 100% of its electricity
generation and demand into Nasdaq OMX Group Inc. and Nord Pool Spot AS's N2EX
daily auction and has traded 43.55TWh in the day ahead auction market in this
financial year.

This move continues to drive the market forward and increasingly all of the
major vertically integrated players in the UK are following in the footsteps
of SSE. The auction is now trading approximately 50% of the national demand
and is well established as providing the UK market reference price.



In taking this action SSE has delivered a new level of market transparency,
significantly improving liquidity, increasing the depth and credibility of the
market, and assisting in the creation of a robust and tangible pricing index.



Furthermore, in April 2012, in line with its Building Trust agenda, SSE
announced an enhanced series of trading commitments for smaller suppliers of
electricity to help them secure contracts for wholesale electricity of the
right size and shape to enable them to manage their risk profile. In the
period to 30 September 2012, SSE concluded 14 contracts as a result of this
initiative which resulted in trades of 0.032TWh for smaller suppliers.



Managing an energy portfolio

In recent years, SSE has typically required around 10 million therms of gas
per day to supply its customers and to fuel its power stations, and around
150GWh of electricity per day to supply its customers. Energy Portfolio
Management has three primary routes to competitively and sustainably acquire
the energy it needs to meet demand:



· assets: upstream gas exploration and production, coal production,
renewables, forests and agriculture;

· contracts: gas producer contracts, Liquefied Natural Gas (LNG)
capacity, power purchase agreements, solid fuel contracts; and

· wholesale trading: where energy contracts are transparently traded on
international exchanges.



Managing risk associated with energy procurement across these channels is a
key challenge as it is heavily influenced to varying degrees by a multitude of
national and international factors including: demand growth/decline, the
global economy, fuel supply disruptions, international affairs, nuclear
availability, CCGT demand, shale gas, and LNG.



By optimising its diverse portfolio, SSE ensures that its customers are
protected from the considerable uncertainty that exists in global markets,
while helping to ensure adequate returns to support its commitment to
sustained real dividend growth.



Meeting longer-term energy requirements

In order to meet its customers' needs and deliver a stable and predictable
supply of energy SSE proactively seeks to maintain a number of longer-term
contracts in:



· a diverse range of fuel types;

· storage and supply capacity; and

· power purchase contracts.



Following another strong period of renewables growth SSE now has 3,208MW of
renewable energy capacity across the UK and Ireland. In the six months to 30
September 2012, EPM was responsible for the deployment of the resulting
2,805GWh of output from this renewable portfolio; around 180 million therms of
gas would be needed to generate a similar amount of electricity. With no fuel
purchasing requirement, this generation type is increasingly providing a
strong long term hedge against the volatility in fossil fuel markets. This
increase in electricity production also ensures SSE continues to meet its
customers' demand as other contracts near their end such as its contract with
Rocksavage Power Station, due to end in March 2013.



In addition to its renewable portfolio and existing and future investments in
exploration and production assets SSE has a number of existing long-term
contracts agreed in recent years including:



· a 10-year contract with Statoil for the annual supply of 500mcm (185
Mth) of natural gas which commenced in October 2012; and

· a 10-year gas supply agreement of 790 million cubic metres (mcm) (292
Mth) per annum with Shell Energy Europe ('Shell'), commencing in 2015.



Further to existing arrangements SSE continues to seek proactively new
capacity and supply contracts, including LNG, to add to its portfolio. The
combination of these long term contracts helps SSE minimise the liquidity and
volatility risks of international commodity markets, bring greater price
stability for customers than would otherwise be the case and support its
commitment to the dividend.



Generating and buying electricity

As at 30 September 2012, SSE's generation capacity, including its share of
joint ventures and associates, was around 12GW, comprising:



· 11,547MW in Great Britain;

· 80MW in Northern Ireland; and

· 421MW in the Republic of Ireland.



Following the completed acquisition of the assets of Endesa Ireland in October
2012, SSE now also owns 1,068MW of gas and oil fired plant in the Republic of
Ireland, taking its total in Great Britain and Ireland to over 13,100MW.



During the period up to 30 September 2012, in Great Britain, SSE (previous
year's numbers in brackets):





· generated 11.5TWh, based on contracted output of electricity from all
thermal power stations in which it has an ownership interest (19.2TWh); and

· generated 2.2TWh based on contracted output from renewable sources of
energy in which it has an ownership interest, including pumped storage
(2.3TWh).



During the same period, also in Great Britain, it:



· supplied 9.5TWh of electricity to its industrial and commercial
customers; and

· supplied 11.3TWh to its small business and household customers.



This means that, during the first six months, SSE, in Great Britain:



· generated the equivalent of 66% of the electricity needed to supply all
of its customers; and

· generated the equivalent of 121% of the electricity needed to supply
its household and small business customers.



In Ireland, the development of a new combined cycle gas turbine at Great
Island, alongside the remaining operational plant means SSE will be positioned
to meet around two thirds of its customers' demand there, based on current
customer numbers, currently estimated at around 7TWh, with the balance
purchased through the Single Electricity Market.



Dealing with the key trends in EPM and Electricity Generation

The energy sector is undergoing a period of profound change. The main public
policy driver is European and GB-led decarbonisation policy alongside fuel
supply security and competiveness (including the important dimension of
affordability). Delivering these policy objectives is taking place against a
back drop of:



· slow economic growth implying lower electricity demand;

· rising energy prices on foot of higher input costs and the cost of
achieving mandatory government-sponsored schemes;

· uncertainties surrounding electricity market reform and a regulatory
framework trending towards increased central planning;

· increasing system variability due to higher penetrations of variable
energy sources;

· market integration between Great Britain and Ireland; and

· forecasts of tightening generation capacity in Great Britain as older
plant closes, including coal, nuclear and gas plant.



In addressing these interdependent challenges SSE recognises the need for a
diverse, sustainable and complementary generation and fuel portfolio. It is,
therefore, focused on maintaining a range of options that will meet policy
goals, while being consistent with its financial principles and supportive of
its goal of sustained real dividend growth. Retaining options is important
but must also be balanced by a focus on areas where SSE holds a competitive
advantage.



Sticking to principles for management of SSE's Generation portfolio

SSE has defined its long-term priorities in Generation as being operational
flexibility and a 'greening' of production. These priorities are underpinned
by six core principles that direct the operation of, and investment in, its
Generation portfolio:



· availability: to respond to customer demand and market conditions;

· capacity: to meet the electricity needs of domestic and small business
customers;

· compliance: with all safety standards and environmental requirements;

· diversity: to avoid over-dependency on particular fuels or
technologies;

· flexibility: to ensure that changes in demand for electricity can be
addressed; and

· sustainability: to deliver an overall 50% cut in the CO[2] intensity of
electricity produced.



In implementing these principles SSE is focused on doing the right things now,
while selecting the right projects for the future. This means capital and
management resources are employed in areas and at stages where SSE best
retains competitive advantage, supports business growth, maximises shareholder
value and ensures continued dividend growth.



The practical application of its generation principles means SSE's portfolio
comprised at 30 September 2012:



· 4,470MW of gas- and oil-fired capacity;

· 4,370MW of coal-fired capacity (with biomass co-firing capability); and

· 3,208MW of renewable (hydro including pumped storage, wind and
dedicated biomass) capacity.



With this portfolio SSE has the greatest diversity in fuels for generating
electricity among UK generators, which enables it to:



· avoid dependency on a single technology or commodity;

· have a balanced portfolio with significant optionality in the
management of its power stations; and

· manage effectively the risks inevitably associated with primary fuel
procurement.



Management of primary fuel procurement risks is also assisted by the fact that
SSE is the largest generator of electricity from renewable sources across the
UK and Ireland.



Maintaining a diverse Generation portfolio

Decarbonisation policy is driving the way energy is converted to electricity;
however, there is no 'one size fits all' solution to the achievement of this
objective. Rather SSE is maintaining and investing in its diverse and
sustainable portfolio of generat

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