SSE Regulatory News (SSE)

SSE plcInterim results for the six months to 30 September 2017

8 November 2017

This report sets out the interim results for SSE plc for the six months to 30 September 2017. It includes updates on operations and investments in its Wholesale, Networks and Retail (including Enterprise) businesses. As performance over a six month period can be variable, SSE focuses on results for the financial year as a whole, and manages its businesses accordingly. 

SSE is also issuing a statement on its household energy supply and services business in Great Britain, and this Interim Results Statement should be read in conjunction with that.

Overview of the 6 months to 30 September 2017

As expected and in line with SSE's Notification of Closed Period statement published on 27 September 2017, SSE's financial headlines for the six months to 30 September 2017 are as follows: (comparisons are with the same period in 2016 unless otherwise stated):

· Interim dividend up 3.6% to 28.4p;

· Adjusted earnings per share down 8.8 % to 31.2p;

· Adjusted operating profit down 8.0% to £586.2m;

· Adjusted profit before tax down 13.9% to £409.6m;

· Investment and capital expenditure was slightly lower at £779.5m;

· Adjusted net debt and hybrid capital increased by 9.0% to £9.2bn in the six months to 30 September 2017;

· On market share buy backs totalling £270.5m were made in the six months to 30 September 2017, following £131.5m of share buy backs in the previous financial year;

· Reported operating profit down 30.9% to £549.4m;

· Reported profit before tax down 40.4% to £402.2m; and

· Reported earnings per share down 43.9% to 29.8p.

The above results for the six months to 30 September 2017 are consistent with SSE's previously-stated expectation that adjusted earnings per share for 2017/18 and other financial results would be lower than 2016/17. This is mainly due to the phasing of capital expenditure on significant Transmission projects and the resulting impact on regulatory revenue, along with a reduced share of SGN earnings due to the part disposal in October 2016. 

Outlook

For the 2017/18 financial year as a whole, SSE is:

· Expecting to report full year earnings per share at a level which is at least in line with the current consensus of sector analysts' forecasts of 116p (based on SSE compiled estimates from 18 analysts as at 1 November 2017);

· Targeting an annual increase in the full-year dividend that is at least equal to RPI inflation;

· Working to keep dividend cover within the expected range of around 1.2- 1.4 times, although it is likely to be towards the bottom of this range, as stated in SSE's Notification of Pre Close Statement on 30 March 2017, and again in its full year 2016/17 Results; and

· Expecting to invest around £1.7bn in building, owning and operating assets, with around two thirds of this in electricity networks and renewable sources of energy.

Looking further ahead, SSE is currently:

· Targeting delivery of annual dividend increases that at least keep pace with RPI inflation (see also today's further announcement regarding SSE's GB household retail business - extract below);

· Working towards achievement of dividend cover within a range of around 1.2 times to 1.4 times;

· Focusing on progress in its capital and investment expenditure totalling around £6bn across the four years to 2020, mainly in electricity networks and renewable energy;

· Targeting an increased RAV of its economically-regulated networks businesses to close to £9bn, up from £8bn at September 2017;

· Targeting an increased amount of renewable capacity, including pumped storage, of 4.3GW, up from 3.7GW at September 2017, which should then be capable of generating around 12TWh of electricity in a typical year*; and

· Working to deliver enhanced customer experience of retail energy markets through the installation of smart meters and the provision of digital services.

As previously communicated, the level of dividend cover is subject to the ongoing factors that influence earnings in SSE's market-based businesses, and is also subject to material change in sector regulation.

Note: The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Condensed Interim Statements

*Assumes SSE's share of Clyde windfarm remains at 65%

Extract from RNS announcement (8 November 2017)- proposed transaction regarding SSE's GB household retail business

SSE's commitment to remunerating shareholders

The Board of SSE is and will remain committed to remunerating shareholders' investment through the payment of dividends. It is continuing to target an increase in the full-year dividend for 2017/18 of at least RPI inflation, with an annual increase of at least RPI inflation also being targeted for 2018/19. 

Thereafter, SSE's dividend and dividend policy will reflect the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook. Excluding household energy supply and services in GB, and based on its financial results for the three years to March 2017, around 80% of SSE's operating profit related to economically-regulated networks and government-mandated renewable sources of energy; and much of that is also index-linked. Following the demerger, therefore, SSE expects that its target for annual increases in the dividend per share will be at least RPI inflation.

More detail on this will be set out by the time the shareholder circular in respect of the Transaction is published. The Transaction will have no material impact on SSE's ability to meet its debt service obligations.

The dividend policy of MergeCo will be a matter for its board but it is expected that the quality of its business and the opportunity to secure efficiencies should enable an attractive and fair return on investment in MergeCo, following the Transaction. 

SSE's financial performance in six months to 30 September 17 at-a-glance

Sep 16 figures restated to include the Clyde windfarm fair value uplift of £59.1m as an exceptional item. See Note 4.2 (iii) within the Condensed Interim Statements

Earning a profit from SSE's businesses

SSE has a balanced range of energy-related businesses and all three reportable business segments contributed adjusted operating profit in the six months to 30 September 2017, as set out above. Comparisons in these tables are with the six months to September in the previous two years, but it should be noted that movements may also reflect the cumulative impact of issues arising, or decisions taken, in earlier financial years. SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium-term.

Adjusted operating profits in SSE's business segments during the six months to 30 September 2017 are as follows (comparisons below are with the same six months in 2016 unless otherwise stated):

WHOLESALE

Energy Portfolio Management and Electricity Generation:  adjusted operating profit increased to £160.7m compared to £123.2m. This reflects improved financial performance and higher output from both renewable and gas-fired generation, partially offset by the end of the ancillary services contract for Fiddler's Ferry power station.

Gas Production: adjusted and reported operating profit increased to £4.5m, compared to £2.1m, mainly due to a higher achieved average gas price which benefited earnings in the six months to 30 September 2017, partly offset by lower production volumes and the write-off of costs associated with an exploration well.

Gas Storage: an adjusted and reported operating loss of £5.3m was recorded, compared to an adjusted operating loss of £4.3m, as challenging market conditions continue.

Reported Wholesale operating profit: decreased from £325.6m (restated) to £169.1m as a result of operating derivative gains of £162.1m in 2016/17 compared to £21.4m in 2017/18. The prior year operating profit also includes an accounting fair value uplift of £59.1m in relation to the Clyde wind farm.

NETWORKS

As previously highlighted, SSE anticipates that its Networks' operating profit in 2017/18, including SGN, will be around £150m lower than in 2016/17, on an absolute basis. This reflects the impact of the SGN partial equity disposal in October 2016 and phasing of returns in the regulatory Price Control mechanisms in Transmission and Distribution resulting in expected full year reductions in operating profit of: around £70m for SGN; £60m for Transmission; and £20m for Distribution. During the six months to 30 September 2017, total adjusted operating profit in Networks was £355.1m, compared to £455.9m in the same period last year. 

Adjusted operating profits and the principal movements in Networks business segments during the six months to 30 September 2017 are as follows; comparisons are with the six months to 30 September 2016 unless otherwise stated:

Electricity Transmission: as expected, adjusted and reported operating profit decreased to £97.9m from £135.6m, mainly due to the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue as well as the impact of the sharing of previous years' total expenditure (totex) underspends with customers. 

Electricity Distribution: adjusted and reported operating profit was slightly down at £176.0m compared to £181.0m, reflecting that while revenues have increased in line with the growing RAV, these have been partially offset in the current year by the expected net reduction in other factors which contribute to the overall Price Control calculation, including those in the table below:

There are several factors which contribute to RIIO Price Control earnings which can be found on the Ofgem website in the Transmission and Distribution Licence, Price Control Financial Handbook and Price Control Financial Model.

Gas Distribution: SSE's share of SGN's adjusted operating profit fell to £81.2m from £139.3m mainly due to SSE's partial equity disposal (16.7%) in October 2016, as well as the phasing of regulatory revenue and the sharing of out-performance with customers, which is part of the RIIO Price Control. The impact on operating profit of the part disposal in the full financial year 2017/18 is estimated at £55m and is almost fully reflected in the six months to 30 September 2017, given the timing of the disposal.

Reported Networks operating profit: decreased to £309.1m compared to £409.7m primarily for the same reasons given above. In addition, SGN had an exceptional gain in prior year of £23.0m due to the impact of a change in corporation tax rate.

RETAIL

Energy Supply: adjusted and reported operating profit across Energy Supply as a whole remained broadly flat at £46.7m compared to £47.1m. Within this, GB household energy supply was again loss making in the first half, in line with demand seasonality. Results were impacted by reduced customer numbers and the Pre-Payment Meter (PPM) price cap, offset by a continued focus on efficiency and costs.

Energy-related services: adjusted and reported operating profit showed an encouraging start, to the financial year increasing to £11.4m, compared to £8.6m, as the customer facing telecoms business sees the benefits of previous customer acquisitions, alongside efficiency improvements.

Enterprise:  also showed improved performance with adjusted and reported operating profit increasing to £12.2m from £4.8m, mainly due to improved business performance and a reduced cost base providing a leaner platform for growth.

Reported Retail operating profit: was the same as adjusted operating profit in the six months to 30 September for both 2017 and 2016.

Corporate Unallocated: Adjusted and reported operating profit increased to £0.9m from a loss of £0.2m.

Investing to create long-term value

SSE continues to fulfil its core purpose of providing the energy people need in a reliable and sustainable way, with clearly defined and long-term strategic and financial frameworks which are built around the efficient operation of, and disciplined investment in, a balanced range of businesses across the energy sectors of Great Britain and Ireland.

In the six months to 30 September 2017, SSE's adjusted investment and capital expenditure totalled £779.5m. Economically regulated electricity networks accounted for 47.4% of this spend and renewable energy in support of government obligations and targets accounted for 22.4%. Investment and capital expenditure included:

· further progress of the Caithness-Moray electricity transmission link, the largest capital project ever undertaken by SSE, and investing in customer service and innovation in Electricity Distribution. This investment further increased the RAV in Electricity Transmission and Distribution, and the total RAV of SSE's networks businesses is well placed to reach around £9bn by 2020; and

· the delivery of 405MW of new onshore wind farm capacity commissioned during the six months to 30 September with a further 591MW of on and off-shore wind farm capacity in construction. These capital investment projects are expected to take SSE's total renewable energy capacity to 4.3GW (including pumped storage) by March 2020 (up from 3.7GW at September 2017); enabling SSE to generate around 12TWh of electricity from renewable sources in a typical year*.

*Assumes SSE's share of Clyde windfarm remains at 65%

Investment and capital expenditure remains on course to be around £6bn across the four years from April 2016 to March 2020; in 2017/18 it is expected to be around £1.7bn and in 2018/19 it is currently expected to be around a similar level. Around two thirds of this investment and capital expenditure is expected to be in electricity networks and renewable sources of energy.

Final investment decisions in building new assets will be determined by the need to secure returns that are clearly greater than the cost of capital, enhance earnings and support delivery of the dividend.

 Richard Gillingwater, Chairman of SSE, said:

"The operating environment continues to present a number of complex challenges to manage, with significant political and regulatory intervention an ongoing feature of the energy sector. SSE is focused, resilient and adaptable and those qualities continue to stand the company in good stead in responding to such interventions and other key changes. The Board has been and remains committed to taking the decisions necessary to secure the right outcomes for customers and for investors. In line with this, our priorities for the rest of this financial year are clear. For customers, it's energy provision that meets their current and future needs; for investors, its annual growth in the dividend that keeps pace with inflation."

Further Information

Webcast facility

You can join the webcast by visiting www.sse.com and following the link on the homepage or investor pages.

Conference call 9am UK time

Online information

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

Disclaimer

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

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

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

Definitions

These financial results for the six months to 30 September 2017 are reported under IFRS, as adopted by the EU.

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

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

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

Chief Executive's Statement

SSE has made an encouraging start to the financial year. Whilst factors such as the weather mean there is always a note of caution around results for six-month periods, SSE is on course to deliver a 19th successive increase to the annual dividend payable to shareholders, that is at least equal to RPI inflation. In a changing, increasingly competitive and, at times, politically volatile energy market, SSE remains a resilient and diverse business, which gives it an ability to identify opportunities for investment and growth and adapt as the market changes. These first half results reiterate SSE's commitment to creating value for shareholders, and meeting the needs of our customers and other stakeholders over the long-term.

Safety is our number one priority

The safety of the people who work on behalf of SSE is our number one priority. SSE's Total Recordable Injury Rate for employees and employees of other companies working on SSE sites was 0.19 per 100,000 hours worked in a rolling 12-month period to 30 September 2017, compared with 0.25 over the same period in 2016. There are positive aspects to this performance, but there are additional challenges over the autumn and winter period and SSE remains committed to its guiding principle that if it's not safe we don't do it.

Achieving our financial objective

SSE seeks to provide long-term value for its customers, shareholders and the wider society of which it is part. In the first six months of this financial year, SSE has continued to focus performance on its strategic framework:

· Efficient operations that prioritise the safety of employees and contractors, and meet the needs of energy customers;

· Disciplined investment and capital expenditure in projects and assets which enhance earnings over the long-term, as part of a programme to invest around £6bn across the four years to 2020; and

· Retaining, operating, and investing in, a balanced range of energy businesses to prevent SSE being over-exposed to any single part of the sector in Great Britain and Ireland.

The financial objective of SSE's existing strategic framework is to increase annually the dividend payable to shareholders, by at least RPI inflation, and ensuring that dividend cover for the year is within the expected range of around 1.2 to 1.4 times. 

SSE's dividend commitment to our shareholders, focus on efficiently meeting the expectations of energy customers and investing in assets that enhance earnings and bring balance to the group of businesses remains unchanged. This is because SSE's strategic framework and financial objective enable it to have both a long-term approach to its business activities and the ability to continue to find opportunities for growth in, and adapt to, an increasingly competitive and changing market.

A changing operating environment brings challenges and opportunities

At present, the energy markets in GB and Ireland have two dominant trends: firstly, they are undergoing significant change, due to competition, decentralisation of energy, changing customer expectations and the increased penetration - and falling costs - of intermittent low-carbon generation and storage. Secondly, these markets are also affected by the political and regulatory landscape, which can at times be uncertain as the energy system evolves. This is illustrated by the UK government's publication of draft legislation to 'cap' household energy bills.

The political context is unclear and energy issues are complex, as Professor Dieter Helm's review of the cost of energy demonstrates. In different ways, these trends affect each of SSE's businesses. Overall, it means that SSE must adapt to these changes with a view to mitigating the risks and identifying the opportunities for growth.

Adapting to a changing energy system

The energy system is changing rapidly due to a number of factors, not least the increased penetration and falling costs of low-carbon technologies. Quite how the market will change, and what opportunities and risks will arise for SSE is not certain, but SSE is taking the following steps:

· Preparing its operations for a period of system change. For example, SSE's Electricity Distribution business has taken significant steps to prepare for a more decentralised energy system including: leading the sector in trialling Active Network Management on the Scottish remote islands (Orkney has been home to the UK's first 'smart grid' since 2009); running trials to consider the impact, and growth opportunities, of low-emission vehicles on the existing network; and, being part of the ENA's Open Networks Project working with Ofgem, grid operators and government to consider the most efficient way to transition to Distribution System Operators to facilitate a more flexible energy system. It has published a document on this, Supporting a smarter electricity system, on ssen.co.uk.

· Actively seeking to create opportunities in a changing market. SSE's Wholesale business, for example, is partnering with Siemens and Mitsubishi UK to develop wind turbines that are larger, cost-effective, more efficient and capable of supporting offshore wind projects in deeper waters, such as the Beatrice offshore wind farm. At a time of significant change in offshore wind, SSE is focused on the delivery of potential projects at Seagreen and Dogger Bank, and is committed to preparing effectively for future competitive auctions for capacity to build offshore wind farms; it is also actively maintaining potential opportunities in onshore wind.

· Structuring the business to better identify opportunities from change. The Enterprise business has been under new leadership since January 2017 and provides energy and related services to meet the needs of industrial, commercial and public sector customers. This business is well placed to identify new opportunities in telecoms, heat networks and decentralised energy, and its progress in these markets adds balance and diversity to the SSE Group.

Operating in a politicised sector

As a privatised utility, SSE's external operating environment is also at times challenging due to uncertainties in the political, regulatory and public policy landscape. The energy sector, in particular the cost of energy, will always be inherently politicised due to the costs borne by households and businesses and the level of regulatory and governmental powers in the sector. These costs are under scrutiny in all parts of the sector.

For this reason, SSE seeks to be a constructive partner to government, political parties and the regulators. It always seeks to engage and does so openly and in the spirit of collaboration to understand, inform, interpret and respond to future policy changes. In a politicised sector SSE is:

· Engaging openly with Ofgem and BEIS' Smart Systems Plan. This programme is intended to alter the functioning of the system to create a flexible and responsive energy system. Engagement in the programme through consultation, dialogue and industry collaboration can ensure that SSE is able to identify opportunities as the energy system becomes smarter and more flexible. The involvement of SSEN, our electricity networks business, in the Open Networks Project is central to this.

· Adopting a constructive approach to discussions with all political parties. As a privatised utility - and one listed on the London Stock Exchange - SSE readily acknowledges it has obligations and responsibilities to its customers, stakeholders and the society it is part of. It therefore seeks to be constructive and collaborative in dialogue with policy makers. For example, SSE will seek to maintain discussions with the UK Labour Party about its proposals to reconsider the ownership structure of the UK's energy networks, were it to form a future government. The privatisation of the GB energy networks has not only reduced customer network costs, it has also encouraged significant investment, and as a result, customers benefit from a more resilient network with reductions in the prevalence and duration of power outages. In its discussions SSE acknowledges its obligations and that is why it recognises that issues such as tax transparency, high quality customer service, effective stakeholder engagement in decision making and a commitment to invest in the future of our energy system have to be at the heart of its business.

· Monitoring closely how the Brexit process could impact SSE's core markets. The implications for the energy sector of the UK's negotiations to leave the European Union remain unclear. There are financial implications to manage, such as currency hedging for large capital projects, and when the UK leaves the EU there may be a divergence in the regulatory and compliance regime that SSE must understand and respond to. However, the UK's exit from the EU does not present an immediate risk to how SSE serves its customers or the progress of its £6bn investment programme from 2016-20. SSE has a dedicated internal resource committed to analysing the opportunities and risks from Brexit. It also engages with the UK and Irish governments and in doing so advocates for stability in the operating environment and a commitment to the central pillars of RIIO and the Electricity Market Reform in GB - namely a stable regulatory regime for energy networks; a stable UK carbon price; and a continued commitment to cost-effective renewable energy. Each of these frameworks is within the gift of the UK Government and regulators.

In this changing - and at times challenging - operating context there may be significant opportunities for SSE, principally in investing in new and existing assets that provide low-carbon energy and the network infrastructure to support it. Understanding and engaging in these debates will be central to SSE's work. In all this, SSE has demonstrated an ability to respond to market change and realise opportunities and will continue to take the operational, financial and investment decisions required to adapt as aspects of the sector evolve.

Maintaining a culture built on values

Public trust in large business needs to be restored and that is why SSE works hard to meet the governance, sustainability and societal expectations that customers and stakeholders place upon it. People in SSE work to a clear set of values and there is acknowledgement of the obligations SSE has.

Governance

Following the appointment of Martin Pibworth as Wholesale Director of SSE plc on 1 August 2017, the Board now comprises the Chairman, six non-Executive Directors and three Executive Directors. SSE has considered the twelve key actions and delivery mechanisms for governance reform as set out in the Department for Business, Energy and Industrial Strategy Response to the Green Paper. The Board welcomes the opportunity for further consultation on the detail when the Financial Reporting Council consults on amendments to the UK Corporate Governance Code.

Being a responsible company

SSE provides people with an essential service and therefore recognises that it has a responsibility to reach for higher business standards as a result. It is publishing a more detailed update of its sustainability performance in its Half Year Sustainability Statement, alongside this Interim Results Statement. 

Carbon reporting and climate resilience

In response to important questions raised to us by our stakeholders, SSE published its Post Paris report in July 2017, analysing the Company's long-term resilience to different pathways designed to avoid dangerous climate change. In August 2017 SSE issued its inaugural Green Bond, the largest UK green bond to date, in order to support its strategy to respond to the climate change imperative. In late October 2017, SSE's performance in the annual CDP carbon disclosure survey was rated 'B'.

Fair Tax Mark

In October 2017, SSE was awarded the Fair Tax Mark for the fourth year in a row, cementing its long-term commitment to play fair by tax. SSE remains the only FTSE 100 company to have been accredited by the Fair Tax Mark. To meet this criteria, SSE is transparent about its tax affairs in a way that goes well beyond the current requirements of UK company law. SSE has ruled out the use of tax havens, commits to country-by-country reporting and seeks to make clear, transparent statements on its tax strategy. SSE has also published its second Talking Tax booklet aimed at giving a short, clear and easy to read guide to what taxes it pays and where it pays them.

Gender pay gap reporting

SSE has become the first FTSE 100 company to publish its gender pay gap in line with the government's new Gender Pay Gap Reporting requirements, well in advance of the 4 April 2018 deadline. This is the second year in a row that SSE has published these figures, having voluntarily reported its gender pay gap statistics last year before it became mandatory.

Inclusion and diversity

In September 2017, SSE published its first Valuing Difference report and launched its Inclusion Strategy for 2017-20, building on the 'IN, ON, UP' elements of its strategy to date. SSE is committed to long-term change and will nurture the principles of inclusion at every level of its operation to ensure that the organisation succeeds in the future.

These steps, alongside the detail published in the Half Year Sustainability Statement, demonstrate SSE's ongoing commitment to manage closely the external impacts of its core business activities.

Focusing on strategic priorities in 2017/18

SSE has made an encouraging start to the financial year and is on course to meet its first financial objective for 2017/18 of annual dividend growth that at least keeps pace with RPI inflation. The operating environment brings challenges, opportunities and change, including through potential government and Parliamentary intervention; however, SSE remains a business that has balance and resilience so is not overly reliant on one part of the sector. It has also demonstrated an ability to adapt to new opportunities and identify options for growth.

In the remainder of this financial year and beyond, SSE will:

· Continue to focus on efficiency in its operations, ensuring safety across its activities and meeting the needs of energy customers;

· Progress its programme of capital and investment expenditure in new or existing assets, primarily focused on regulated energy networks and government-mandated renewables, to enhance future earnings; and

· Maintain constructive engagement with regulators and legislators to further the shared interests they have with SSE and energy customers.

Group financial overview

The following tables provide a summary of Group Financial Performance. The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Condensed Interim Statements.

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

Reconciliations of adjusted performance measures to the reported measure of the Group can be found in the Alternative Performance Measure section of this document.

Restated to include the Clyde fair value uplift of £59.1m as an exceptional item. See Note 4.2 (iii) within the Condensed Interim Statements

Additional information on employee pension schemes can be found in Note17 to the Condensed Interim Statements.

Group financial review

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

Earnings, dividends and dividend cover

Focusing on adjusted earnings per share

To monitor its financial performance over the medium term, SSE reports consistently on its adjusted earnings per share (EPS) measure. This measure is calculated by excluding the charge for deferred tax, interest costs on net pension liabilities, exceptional items and the impact of certain re-measurements.

SSE's adjusted EPS measure has been calculated consistently and provides an important and meaningful measure of underlying financial performance. In adjusting for exceptional items and certain re-measurements, adjusted EPS reflects SSE's internal performance management, avoids the volatility associated with mark-to-market IAS 39 re-measurements and means that items deemed to be exceptional due to their nature and scale do not distort the presentation of SSE's underlying results. For more detail on these and other adjusted items, please refer to the Adjusted Performance Measures section of this report.

As expected and previously communicated, in the six months to 30 September 2017, SSE's adjusted earnings per share decreased by 8.8%, to 31.2 p, mainly due to the phasing of capital expenditure on significant Transmission projects and the resulting impact on regulatory revenue, along with a reduced share of SGN earnings due to the part disposal in October 2016. 

Reported earnings per share decreased 43.8% to 29.8p as a result of the exceptional items and certain re-measurements noted below in the prior year. 

Keeping the dividend at a level that is sustainable

SSE believes that its dividend should be covered by adjusted earnings per share at a level that is sustainable over time; and it believes that sustainability is based on the quality of the operations and assets from which earnings are derived and the longer-term financial outlook.

As a result of its recent and continuing investment, the majority of SSE's asset base and operating profit now relates to economically-regulated, and largely index-linked, Networks and government-mandated renewable sources of energy. Subject to the range of factors that apply in its market-based businesses (see below), and to material political or regulatory change, SSE is working towards achievement of dividend cover within a range of around 1.2 times to around 1.4 times. As also previously communicated, SSE expects dividend cover to be towards the bottom of that range in 2017/18.

The Board is recommending an interim dividend of 28.4p per share, to which a Scrip alternative is offered, compared with 27.4p in the previous year, an increase of 3.6%.

Delivering adjusted profit before tax

SSE's objective is not to maximise profit in any one year but to earn a sustainable level of profit over the medium term. While SSE's Wholesale, Networks and Retail (including Enterprise) segments were profitable in the six months to 30 September 2017, adjusted profit before tax decreased by 13.9% from £475.8m to £409.6m.

Over 2017/18 as a whole, and beyond, SSE's actual level of adjusted profit before tax will be determined largely by the range of factors set out in previous years that continue to apply in its market-based businesses, in which energy portfolio management is a major influence, including:

· the impact of wholesale prices for energy;

· electricity market conditions, the ability of its thermal power stations to be available and to generate electricity efficiently;

· the output of renewable energy from its hydro-electric stations and wind farms and the price achieved for this output;

· the output from its gas production assets and the price achieved for this output;

· the impact of any material changes in public policy and the regulatory framework; and

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

Movements on derivatives and exceptional items

The accounting treatment of exceptional items and movements on derivatives explain much of the difference between SSE's reported and adjusted accounting measures.

Summarising the impact of movements on derivatives

SSE enters into forward contracts to buy and sell power, gas and other commodities to meet the future demands of its Energy Supply business and to optimise the value of its Generation and other Wholesale assets. Some of these contracts are determined to be derivative financial instruments under IAS 39 and as such are required to be recorded at their fair value. SSE shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments. It will recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominantly be within the subsequent 12 to 36 months. Conversely, commodity contracts that are not determined to be derivative financial instruments under IAS 39 are accounted for as 'own use' contracts, the cost of which is recognised on delivery of the underlying commodity.

In the period to 30 September 2017, there was a £21.4m gain on operating derivatives under IAS39 due to an improvement in the fair value of forward commodity purchase contracts and the unwinding of contracts in 2017/18. The fair value of such contracts is derived by comparing the contractual delivery price to the prevailing market forward price at the balance sheet date. The position at 30 September 2017, primarily consisting of electricity and gas, was a liability of £141.9m compared to a liability on similar contracts of £163.3m at 31 March 2017.

Offsetting the gains recognised in the operating derivatives were losses on the fair value of interest and currency derivatives of £24.0m in the period. SSE also reports these fair value re-measurements separately as these do not represent underlying business performance during the financial year. The effect of the contracts will be recorded in adjusted profit measures when the transactions are settled.

Exceptional item: reversal of previous Dogger Bank impairment

On 1 September 2017, the Group confirmed the formation of a 50:50 joint venture with Statoil to progress three of the four consented c. 1.2GW offshore wind projects in the Dogger Bank area. As a result of the formation of the JV and the renewed commitment to the project, the Group has reversed a previous impairment charge of £7.9m. The reversal of impairment, while not exceptional by size, has been recognised as an exceptional credit as it was originally charged within the 2013/14 impairment of SSE's offshore wind portfolio, which was treated as exceptional at the time.

Reported profit before tax and earnings per share

Reported profit before tax declined by 40.4% to £402.2m, largely due to the reduction in Networks earnings explained above; the remaining decrease in reported earnings is also due to the exceptional fair value gains on operating derivatives and an accounting fair value uplift on the Clyde windfarm in the prior year.

The impact of this also means that reported earnings per share decreased 43.9% to 29.8p.

Investment and capital expenditure

Central to SSE's strategic framework is efficient and disciplined investment in building a balanced range of economically regulated, government-mandated and market-based energy assets that it also generally owns and operates. This means that investment should be: in line with SSE's commitment to strong financial management; focused on securing returns that are clearly greater than the cost of capital and which support adjusted earnings per share; and consistent with the maintenance of a balanced range of assets within SSE's businesses.

Investing efficiently in energy assets that the UK and Ireland need in 2017/18

SSE invests in a balanced range of businesses and invests only in assets for which returns are, as stated above, expected to be clearly greater than the cost of capital. All projects complement SSE's existing portfolio of assets and are governed and executed in an efficient manner and in line with SSE's commitment to strong financial management.

In the six months to 30 September 2017, SSE's investment and capital expenditure totalled £779.5m. This included:

· A major investment programme in electricity networks with good progress being made on both the construction of the Caithness-Moray electricity transmission link and the Stronelairg wind farm connection. These Transmission investments continue alongside the upgrading of the electricity distribution network; which in the six months to September 2017 included spend in the Bicester, Iver-Yiewsley, Cowes-Wootton Common and Ironbridge areas. This strategic investment will both meet the changing needs of customers and further increase the total Regulated Asset Value (RAV) of SSE's networks businesses;

· Further investment in renewable energy in GB and Ireland with the delivery of 405MW of onshore windfarms including Clyde Extension (173MW) and the Galway Wind Park (SSE share 120MW). A further 591MW of on and offshore wind farm capacity is currently in construction, including the offshore Beatrice windfarm (SSE share 235 MW). This renewable generation supports the delivery of government climate change targets and is being delivered through either the Renewables Obligation or Contracts for Difference in GB and Northern Ireland or the Renewable Energy Feed in Tariff 2 in Ireland These capital investment projects are expected to take SSE's total renewable energy capacity to 4.3GW (including pumped storage) by March 2020 (up from 3.7GW at September 2017); helping SSE to generate around 12TWh of electricity from renewable sources in a typical year.*

*Assumes SSE's share of Clyde windfarm remains at 65%

In addition, SSE is fulfilling a regulatory obligation to install smart meters for its Energy Supply customers. At 30 September 2017, SSE had around 625,000 smart meters on supply in customers' homes. Post installation, SSE's meters will transfer to a contracted Meter Asset Provider and SSE's investment and capital expenditure therefore excludes the capital cost of installation and meter assets.

SSE is maintaining investment momentum with capital and investment expenditure of around £1.7bn still expected for 2017/18, with similar levels currently expected for 2018/19, and around £6bn as a whole over the four years to 2020. Around £5bn of that is already committed, predominantly in building, owning and operating economically regulated electricity networks and government-mandated renewable energy projects. The revenue derived from those assets is generally index-linked.

SSE's principal joint ventures and associates

SSE's financial results include contributions from equity interests in joint ventures ("JVs") and associates. The details of the most significant of these are included in the table below.

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

Financial management and balance sheet

Keeping SSE well-financed

As a long-term business, SSE believes that it should maintain a strong balance sheet and has a long history of financial strength and discipline illustrated by its commitment to robust ratios for retained cash flow and funds from operations/debt. SSE believes that a strong balance sheet enables it to secure funding from debt investors at competitive and efficient rates and take decisions that are focused on the long term. In August 2017, Moody's Investors Service re-affirmed SSE's senior credit rating of A3, stable outlook. In the same month, Standard & Poor's affirmed SSE's A-rating and moved to a stable outlook. While they are not fundamental to it, these ratings help illustrate the quality and resilience of SSE. 

Issuing SSE's inaugural Green Bond

SSE has a long-standing commitment to maintaining financial discipline and diversity of funding sources and to moving quickly to select financial options that are consistent with this, including issuing new bonds and loans. In line with this, in September 2017, SSE successfully issued its inaugural Green Bond, an eight year €600m bond with a coupon of 0.875% and an all in cost of 0.98%. The Bond was almost 3 times oversubscribed and had significant interest from Green only funds. It also represents the lowest coupon ever achieved by SSE.

This issuance will help SSE to take a leading role in supporting the transition towards a low carbon future, through its plans to continue to invest in renewable energy, and reaffirm its position as a leader in renewable sources of energy.

Focusing on effective financial management

In June 2017, SSE exercised the second, and last, one-year extension option on the £1.3bn revolving credit facility meaning that this now matures in July 2022. The £200m bilateral facility has a similar extension option and this was exercised in October 2017 meaning that it now matures in November 2022. The £200m EIB facility that was signed in March 2017 has a one year availability period and it is intended to draw this facility in the second half of the year when it will become a 10 year term loan.

The proceeds from the £1.0bn of Hybrid debt issued in March 2017, at an all-in rate of 3.02% per annum, were used on 2 October 2017 to redeem the Hybrids issued in 2012, at an all-in rate of 5.6%, which had their first call date on that date. This will result in annualised cash savings of around £26m from 2018/19. The combined hybrid coupon and hybrid interest payments in 2017/18 are expected to be £128m, falling to around £77m in 2018/19 as the full benefit of the replacement hybrid's lower coupon rate is realised. The new £1.0bn Hybrids have a fixed redemption date and are therefore debt accounted and included within Loans and Other Borrowings, while the existing £2.2bn (£1.2bn following October 17 redemption) of Hybrids are perpetual instruments and are therefore accounted for as part of equity.

A table noting the expected amounts, timing and accounting treatment of coupon payments is shown below.

SSE has confirmed that the criteria applied by the Rating Agencies, Moody's and Standard and Poor's, will result in broadly the same value of hybrid equity treatment as that of previous years.

Maintaining a prudent treasury policy

SSE's treasury policy is designed to be prudent and flexible. In line with that, cash from operations is first used to finance maintenance capital expenditure and then dividend payments, with further growth in capital expenditure and investment generally financed by a combination of cash from operations, bank borrowings and bond issuance.

As a matter of policy, a minimum of 50% of SSE's debt is subject to fixed rates of interest. Within this policy framework, SSE borrows as required on different interest bases, with financial instruments being used to achieve the desired out-turn interest rate profile. At 30 September 2017, 92% of SSE's borrowings were at fixed rates.

Borrowings are mainly made in Sterling and Euros to reflect the underlying currency denomination of assets and cashflows within SSE. All other foreign currency borrowings are swapped back into either Sterling or Euros. SSE has kept its recently issued €600m Green Bond in Euros and has swapped €400m of the 2% June 2020 bond to Sterling increasing the all in cost of that portion of the €600m bond to 2.99%. This allows SSE to maintain the correct overall level of Euro debt to match SSE's Euro assets in the Republic of Ireland under a net investment hedge. 

Transactional foreign exchange risk arises in respect of procurement contracts; fuel and carbon purchasing; commodity hedging and energy portfolio management operations; and long-term service agreements for plant.

SSE's policy is to hedge any material transactional foreign exchange risks through the use of forward currency purchases and/or financial instruments. Translational foreign exchange risk arises in respect of overseas investments, hedging in respect of such exposures is determined as appropriate to the circumstances on a case-by-case basis. Overall, while SSE has kept its treasury policy under review following the result of the EU Referendum, it has so far identified no need for change.

Managing net debt and maintaining cash flow

SSE's adjusted net debt and hybrid capital was £9.2bn as at 30 September 2017, compared with £8.5bn at 31 March 2017 and £9.0bn on 30 September 2016 and is forecast to be around £9.3bn at March 2018. 

The overall level of net debt and hybrid capital reflects SSE's ongoing investment programme; however, it also includes an accounting decrease of around £100m as a result of fair value adjustments. The fair value adjustment relates to marked-to-market movements on cross currency swaps and floating rate swaps that are classed as fair value hedges under IFRS. As a result of Sterling strength against the Dollar and higher interest rates during the six months to September 2017 these have become less 'in the money' to SSE therefore decreasing the net debt position. This accounting movement in debt is offset by an equivalent movement in derivative financial liabilities held on SSE's balance sheet.

Adjusted net debt and hybrids at 30 September 2017 also includes £100m of the £500m proceeds identified for the share buy back from the sale of a 16.7% stake in SGN. As at 1 November 2017, SSE had directed just over £400m towards the buy back, including stamp duty and commission, re-purchasing around 27.4m shares. It still expects the process to be completed by the end of December 2017.

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

As noted above SSE's existing £2.2bn of hybrid bonds are accounted for as equity within the Financial Statements but, as in previous years, have been included within SSE's 'Adjusted net debt and hybrid capital' to aid comparability. SSE's new £1.0bn of hybrid debt issued during 2016/17 is treated as debt. A reconciliation of adjusted net debt and hybrid capital to reported net debt is provided in the table headed Adjusted Net Debt and Hybrid Capital in the Alternative Performance Measures section of this statement.

The level of reported net debt also reflects SSE's ongoing capital expenditure programme along with the impact of movements in foreign exchange rates.

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

SSE's objective is to maintain a reasonable range of debt maturities. Its average debt maturity, excluding hybrid securities, at 30 September 2017 was 8.2 years, compared with 8.8 years at 30 September 2016.

SSE's debt structure remains strong, and on 30 September 2017, it had around £9.2bn of medium/long term borrowings in the form of issued bonds, European Investment Bank debt, hybrid securities and other loans.

The balance of SSE's adjusted net debt is financed with short-term bank debt. At 30 September 2017, SSE's adjusted net debt includes cash and cash equivalents totalling £1.2bn and around £1.1bn of medium-term borrowings maturing in the six months to March 2018. This included £1.0bn of hybrid equity, which had a first call date on 2 October 2017 and was redeemed using the proceeds of the most recent hybrid issuance.

Refinancing over the Mid Term

The Hybrid equity issued in March 2017 and the Green Bond issued in September 2017 mean that SSE has fully covered its refinancing risk for the 2017/18 financial year, with the next significant refinancing now due in October 2018 when SSE will redeem its £500m/5% coupon bond. Following on from that, the next significant refinancing does not occur until 2020/21 when SSE will redeem its €600m/2% coupon bond in June 2020. The next Hybrid equity first call date is in September 2020, in respect of the £750m/3.875% coupon equity accounted Hybrid. 

Operating a Scrip Dividend Scheme

The Scrip Dividend Scheme, approved by SSE's shareholders most recently in 2015, gives shareholders the option to receive new, fully paid ordinary shares in the Company in place of their cash dividend payments. It therefore reduces cash outflow and so supports the balance sheet. 

The scrip dividend take-up in August 2017 (relating to the final dividend for the year to 31 March 2017) was 50%, compared to the average 25% over the last 8 years , resulting in a reduction in cash dividend funding of £324.5m, with 23.5 million new ordinary shares, fully paid, being issued. SSE will continue to review its use of the scrip dividend as a useful source of funding.

Managing net finance costs

SSE believes adjusted net finance costs provide the most useful measure of performance and a reconciliation of adjusted and reported net finance costs is provided in the Adjusted Performance Measures section of this report. SSE's adjusted net finance costs in six months to 30 September 2017 were £176.6m, compared to £161.4m in the same six months in 2016, reflecting the fact that while SSE's average interest rate has decreased along with SSE's share of SGN interest costs, the quantum of debt has increased. Reported net finance costs were £147.2m, compared to £120.6m, again reflecting the increase in debt, at a lower average coupon.

The coupon payments relating to the existing £2.2bn hybrid equity are presented as distributions to other equity holders and are reflected within adjusted earnings per share when paid. The coupon payments on the new £1.0bn hybrid debt issuance are treated as finance costs under IFRS.

Tax

SSE considers being a responsible taxpayer a core element of being a responsible member of society. SSE seeks to pay the right amount of tax on its profits, in the right place, at the right time, and continues to be the only FTSE 100 company to have been awarded the Fair Tax Mark. While SSE has an obligation to its customers and shareholders to efficiently manage its total tax liability, it does not seek to use the tax system in a way it does not consider it was meant to operate, or use "tax havens" to reduce its tax liabilities.

SSE understands it also has an obligation to the society in which it operates, and from which it benefits - for example, tax receipts are vital for the public services SSE relies upon. Therefore, SSE's tax policy is to operate within both the letter and spirit of the law at all times.

For reasons already stated above, SSE's focus is on adjusted profit before tax, and in line with that, SSE believes that the adjusted current tax charge on that profit is the tax measure that best reflects underlying performance. SSE's adjusted current tax rate for 2017/18, based on adjusted profit before tax, is forecast to be 9.3%, as compared with 10.2% in 2016/17 on the same basis.

In October 2017, SSE published Talking Tax 2017, summarising its approach to tax matters (see sse.com).

Group Financial Overview - Conclusion and Priorities

SSE's financial priorities for 2017/18 as a whole include:

· Delivering an annual increase in the dividend that at least keep pace with RPI inflation;

· Maintaining dividend cover in a range from around 1.2 times to around 1.4 times, albeit towards the bottom end of this range;

· Continuing a disciplined approach to investment in building, owning and operating a balanced range of energy related assets and delivering assets within the established investment programme, especially in economically-regulated Networks and government-mandated renewable sources of energy; and

· Maintaining a strong balance sheet, with robust ratios for retained cash flow and funds from operations/debt.

WHOLESALE

Wholesale Key Performance Indicators

Sustainably sourcing and producing energy

SSE's Wholesale segment consists of three business areas: Energy Portfolio Management (EPM) and Electricity Generation; Gas Storage; and Gas Production. It makes a sustainable contribution to the fulfilment of SSE's core purpose and achievement of its financial goals through excellence in the provision of energy, capacity, flexibility and related services for customers in wholesale energy markets in Great Britain and Ireland.

The markets in which SSE's Wholesale businesses operate continue to be impacted by a number of key long-term trends and developments, including an uncertain macroeconomic environment; shifts in commodity prices; government intervention; regulatory change; and the ongoing transition to a low carbon economy. SSE's Wholesale business therefore has to continually review its portfolio of assets, contracts and investment opportunities in the context of a changing market, spreading risk in order to deliver returns in varied and challenging conditions.

SSE believes that putting a meaningful price on carbon emissions is a critical part of the UK's energy policy and is one of the most important policy tools the government has to help industry continue to deliver reliable and lower carbon electricity cost-effectively. The extension of the UK's Carbon Price Floor beyond April 2021 is dependent on government decisions in the next Budget and has interactions with UK's future participation in the EU Emissions Trading Scheme.

Financial performance in Wholesale

During the six months to 30 September 2017, total adjusted operating profit in Wholesale was £159.9m compared to £121.0m in the same period last year.

Adjusted operating profits and the principal movements in Wholesale's business segments during the six months to 30 September 2017 are as follows; comparisons are with the six months to 30 September 2016 unless otherwise stated:

Energy Portfolio Management and Electricity Generation:  adjusted operating profit increased to £160.7m compared to £123.2m. This reflects improved financial performance and higher output from both renewable and gas-fired generation, partially offset by the end of the ancillary services contract for Fiddler's Ferry power station.

Gas Production: adjusted and reported operating profit increased to £4.5m, compared to £2.1m, mainly due to a higher average achieved gas price which benefitted earnings in the six months to 30 September 2017, partly offset by lower production volumes and the write-off of costs associated with an exploration well.

Gas Storage: an adjusted and reported operating loss of £5.3m was recorded, compared to an adjusted operating loss of £4.3m, as challenging market conditions continue.

Reported Wholesale operating profit: decreased from £325.6m (restated) to £169.1m as a result of operating derivative gains of £162.1m in 2016/17 compared to £21.4m in 2017/18. The prior year operating profit also includes an accounting fair value uplift of £59.1m in relation to the Clyde windfarm.

Energy Portfolio Management (EPM)

The wholesale price of energy can fluctuate significantly due to a number of factors including the economy, the weather, customer demand, infrastructure availability, and political and world events. EPM seeks to manage the impact of these variables by maintaining a diverse and well-balanced portfolio of contracts and trading positions. EPM provides a route-to-market for SSE's Generation assets and helps Energy Supply manage its commodity risk.

EPM is responsible for ensuring SSE has the energy supplies it requires to meet the needs of customers; procuring the fuel required by the generation plants that SSE owns or has a contractual interest in; selling the power output from this plant; where appropriate, securing value and managing volatility in volume and price through the risk-managed trading of energy-related commodities; and providing energy solutions and services to customers.

As the electricity system changes to integrate intermittent, inflexible and distributed forms of generation alongside conventional plant, EPM's ability to realise the value of flexibility within SSE's portfolio is increasingly important.

Electricity Generation (Renewables)

Delivering renewable sources of energy

Output of electricity from renewable sources, including pumped storage increased in the first half of 2017/18, compared to the same period in the previous year (3.5TWh compared to 3.1TWh). Onshore wind generation increased partly due to new windfarms coming on line and partly due to wind speeds returning to average levels. Offshore wind was down slightly as certain assets underwent maintenance over the summer period. Hydro generation was down due to lower storage levels at the start of the year, although the flexibility in generation means that much of the hydro generation can be run to meet peak demands and offer generation to the electricity balancing mechanism. 

Overall net renewable energy capacity including conventional hydro and pumped storage, increased from 3,275MW to 3,698MW in the 12 months to 30 September 2017. The progress of SSE's onshore and offshore wind farm developments in that time is summarised below:

Opportunities in onshore wind

SSE is continuing to advance its planning application for the Doraville development in Northern Ireland. In March 2017, it confirmed a new design layout which includes a reduction in turbine numbers and a change in turbine specification to optimise generation to 119MW.

Future development options for onshore wind projects are being explored in light of the UK's current policy and regulatory framework. The Irish Government issued a consultation in September 2017 on the design of a new renewable electricity support scheme.

In October 2017, the UK Government announced it intends to allow wind projects on the remote islands of Scotland to compete in the next Contracts for Difference auction alongside other less established technologies, subject to State Aid clearance from the European Commission. SSE, with its joint venture partner, Viking Energy Shetland LLP, who represent the interests of the Shetland community in large scale wind farm development in Shetland, will look to progress their consented Viking Wind Farm (up to 457MW - SSE share 50%).

Opportunities in offshore wind

SSE continues to focus its offshore work and resources on the Beatrice offshore wind farm (588MW - SSE share 40%) in the outer Moray Firth (see table above). The £2.6bn project reached financial close in May 2016 and is progressing in accordance with the terms of the investment contract awarded to it by the UK government in 2014. SSE's joint venture partners on the project are Copenhagen Infrastructure Partners (CIP) (35%) and SDIC Power (25%). Both onshore and offshore construction are now well under way and the project is expected to be fully operational in 2019, contributing around 1,000GWh annually (SSE's share).

SSE has an interest in two further offshore wind farm developments. The first is Dogger Bank (up to 3.6GW), a 50:50 joint venture formed with Statoil, following the exit of innogy from the former Forewind consortium. Under the new partnership, SSE and Statoil will work to progress three projects in the Dogger Bank zone: Creyke Beck A, Creyke Beck B and Teesside A. This includes continuing to assess the outcome of the most recent auction for Contracts for Difference.

The second development is Seagreen (Phase One up to 1050MW), a 50:50 partnership with Fluor Limited. Seagreen's consent was subject to a judicial review in the Court of Session which found in favour of the petitioner, RSPB, in July 2016. This decision was appealed in February 2017 by Scottish Ministers. In May 2017, the Inner House of the Court of Session overturned the ruling and reinstated the consents. The RSPB subsequently applied directly to the UK Supreme Court for leave to appeal against the Inner House's decision. SSE awaits the Supreme Court's decision.

In October 2017, the UK Government announced that £557m will be available for future Contracts for Difference auctions for less established technologies, including offshore wind. The next auction will take place in Spring 2019.

Hydro

SSE's hydro portfolio continued to perform well in the half year, contributing flexible output to the UK electricity system via the wholesale and balancing markets as well as providing ancillary services. Pumped hydro and conventional hydro can function in effect as large-scale batteries, storing excess electricity until it is required to meet demand. In particular, the hydro stations at Sloy, Errochty, Glendoe and Fasnakyle, which have a combined capacity of over 400MW, can contribute a fast and flexible response to the electricity system.

Electricity Generation (Thermal)

Providing reliable capacity

The UK Government, together with Ofgem and National Grid (as the System Operator), introduced the Capacity Market in 2014 to encourage new investment and to ensure the UK has enough electricity generation capacity to meet peak demand.

In January 2017, the UK Government procured 54.4GW in a supplementary auction for delivery in 2017/18. SSE pre-qualified 5,898MW of capacity, and, of this, 4,451MW successfully secured agreements worth £31m.

SSE has also previously secured capacity market agreements worth:

· £85m for delivery in 2018/19;

· £57m for delivery in 2019/20; and

· £73m for delivery in 2020/21.

Capacity market income is received monthly with contract years running from October to September. To secure the revenue arising from the Capacity Market, capacity providers must produce electricity or reduce demand when the system requires it; failure to do so will result in penalties being levied.

In July 2017, the UK Government announced it would procure 50.1GW in the T-4 auction for delivery in 2021/22. The T-1 auction for delivery in 2018/19 will procure 6GW. SSE has submitted pre-qualification applications for both upcoming auctions planned to start on 6 February 2018 and 30 Jan 2018, respectively.

Managing developments regarding thermal power stations

SSE's thermal assets produced over 10TWh in the half year to 30 September 2017, compared to 8TWh in the same period last year, the majority of which came from gas-fired generation.

SSE has an ownership interest in five gas-fired power stations that participate in the GB electricity market:

· Medway (735MW wholly owned) has capacity obligations from 2017 through to 2021.

· Keadby (755MW wholly owned) has capacity obligations from 2017 through to 2021.

· Peterhead (1,180MW wholly owned) has no capacity obligations to date.

· Seabank (1,164MW) and Marchwood (840MW) SSE has a 50% stake in each of these gas-fired power stations, which have both taken on capacity obligations from 2017 through to 2021.

A sixth gas-fired power station, Great Island (464MW), participates in the Single Electricity Market in Ireland.

SSE supports the UK Government policy to encourage investment in new gas-fired generation. It will continue to take a disciplined approach to developing options for new stations, including the Keadby 2 CCGT in Lincolnshire.

SSE announced in February 2017 that it was undertaking a review of future options for Peterhead Power Station in Aberdeenshire. The station's location means it has been required to pay significantly higher Transmission Entry Capacity (TEC) costs than other power stations on the electricity system. In September 2017, Ofgem approved SSE's CUSC modification proposal, CMP 268, which is due to become effective from 1st April 2018 and which should result in lower TEC costs for the station. If CMP 268 is in practice adopted, SSE intends to continue to operate Peterhead Power Station at 1,180MW after 1 April 2018.

SSE operates one wholly owned coal-fired power station, at Fiddler's Ferry (Cheshire, 1,995MW), which has capacity obligations for three of its four units from 2017 through to 2019. Preparation for the safe demolition of Ferrybridge 'C' is under way.

Investing for the future through 'multifuel'

SSE's generation strategy is built upon managing risk through owning a diverse range of assets and fuels from which to meet the needs of energy customers. Multifuel is an important part of that strategy.

Multifuel Energy Ltd (MEL) (the SSE and Wheelabrator Technologies Inc. 50:50 joint venture) operates a 68MW multifuel generation facility known as Ferrybridge Multifuel 1 (FM1) in Knottingley, West Yorkshire. FM1 has now processed over 1.3 million tonnes of fuel and the station has taken on capacity obligations from 2017 through to 2021.

Construction is well under way at SSE's Ferrybridge Multifuel 2 (FM2) project after the final investment decision was taken in June 2016. The project is being built next to the FM1 facility. The completed plant will be able to generate around 70MW of electricity and is expected to be in operation from 2019. In September 2017, SSE completed the disposal of 50% of the share capital of the company to Wheelabrator Technologies of the initial multi fuel facility.

Gas Production

Producing from UK Continental Shelf assets

SSE's gas production portfolio comprises stakes in mature assets in Easington and Bacton Catchment Areas in the Southern North Sea as well as equity in new fields in the Greater Laggan Area which are located to the West of Shetland. Total output in the six months to 30 September 2017 was 254.9million therms (4.21 mmboe) of gas and 0.38 mmboe of liquids, compared with 314.5 million therms of gas (5.11 mmboe) and 0.47 mmboe of liquids for the same period in 2016. This decline in production was primarily due to the natural decline of the fields and the summer maintenance programme.

In the Greater Laggan Area, gas production started in 2016 from the Laggan and Tormore fields with production rates peaking at up to 90,000 boe a day. The nearby Edradour and Glenlivet fields started production ahead of schedule in August 2017, albeit the Glenlivet field is still commissioning and is expected to reach full production before the calendar year end. The production for full year 2017/18 is expected to be weighted to the second half, with the delivery of certain projects and the full commissioning of the Glenlivet field scheduled for completion before the calendar year end.

As previously reported in SSE's Full Year Results 2016/17, as at 31 March 2017, the economically recoverable, Proven plus Probable (2P) Reserves in SSE's gas production portfolio of assets were assessed as being 2.5bn therms. This technical review is carried out annually by SSE's independent reserves auditors with movements in the technical assessment of 2P reserves a well-known occurrence in the Gas Production business and further reassessments are expected in relation to these relatively new fields.

These are important long term gas production assets which are expected to make a key contribution to EBITDA. SSE's annual volumes of gas and liquids produced are expected to average around 500million therms (8.1mmboe) of gas per year in the three years to March 2020. Thereafter, on current reserve estimates, production is forecast to decline to minimal levels by 2025.

Gas Storage

Both of SSE's storage sites have continued to operate to meet the needs of their customers in the first half of 2017/18, following the return to service of the Atwick (Hornsea) site earlier in the year:

Alongside the under-pinning requirement to ensure the highest standards of safety and asset management are maintained, SSE continues to respond to the difficult trading conditions with its overall aim to provide valuable flexibility and hedging services to its customers and hence the wider UK gas market, while managing its cost base and being well positioned to take advantage of future market developments.

Responding to market conditions for Gas Storage

The economic environment for gas storage in the UK continued to be extremely challenging in the first half of 2017/18. SSE's response to these conditions has combined strict financial discipline regarding managing expenditure with innovative development of new products to meet the evolving needs of customers.

SSE remains committed to working with UK government departments and the Regulator to ensure that the critical role of UK storage in relation to security of supply and stability of gas price is maintained, despite the current threats to the viability of the already low storage levels operating in the UK when compared to Europe, particularly with the recent closure of UK gas storage assets.

Wholesale - Conclusion and Priorities

In addition to their first priority of safety, SSE's Wholesale businesses aim to create sustainable long-term value through the responsible production, storage and provision of energy and related services for energy customers; ongoing rigour in optimising its portfolio of existing assets and contracts; and developing new options for building, owning and operating assets and delivering those in construction.

 Wholesale priorities for 2017/18 and beyond

SSE's Wholesale businesses' priorities in 2017/18 and beyond are to:

· maintain and operate efficiently and reliably its generation portfolio across the UK and Ireland;

· deliver new assets in construction and develop new opportunities to build, own and operate assets in the future;

· secure a stable and predictable supply of energy to meet SSE's requirements;

· secure value, where appropriate, through the risk-managed trading of energy-related commodities;

· ensure efficient delivery of gas from the offshore gas fields in which SSE has a shared ownership; and

· safely, efficiently and reliably operate and maintain SSE's gas storage facilities, and ensure they are available for use by its customers.

NETWORKS

Networks Key Performance Indicators

Owning, operating and investing in Networks

SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas distribution. Its five economically-regulated energy network companies consist of a 100% ownership of Scottish Hydro Electric Transmission (SHE Transmission), Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) and a 33.3% stake in both Scotland Gas Networks and Southern Gas Networks (SGN). Its electricity networks businesses are collectively known as Scottish and Southern Electricity Networks (SSEN).

SSE's interests in economically-regulated energy networks support the maintenance of a balanced range of assets, operational efficiency and disciplined investment. The RAV (Regulatory Asset Value) of SSE's five existing Networks companies is now on course to reach close to £9bn by 2020.

Through Price Controls, Ofgem sets the framework through which network companies can earn index-linked revenue through charges levied on users to cover costs and earn a return on regulated assets. While the RIIO Price Control framework is complex, it provides for revenue to be strongly linked to the delivery of customer-focused commitments, against which performance is measured and can be rewarded or penalised.

These economically-regulated, lower-risk businesses provide relative predictability and stability for SSE and balance its activities in the market-based parts of the energy sector. While the overall shape of the networks continues to evolve - as the recent expansion of electricity transmission, the transition to a Distribution System Operator (DSO) and the sale of part of a stake in SGN demonstrate - they are core to SSE's strategy in the short, medium and long-term and contribute significantly to its commitment to the payment of dividends to shareholders. 

Responding to Ofgem's open letter on RIIO-2

In July 2017, Ofgem published an open letter on the regulatory framework for the next Price Control periods, which for SSE will run from April 2021 for its electricity transmission and gas distribution businesses; and from April 2023 for its two electricity distribution businesses.

The current RIIO framework is designed to ensure that the revenue that network owners can earn is closely linked to performance and is realising significant and material benefits to GB energy customers and stakeholders, from increasing levels of network reliability and service, to the transformational role networks are playing in the transition to a low carbon economy. 

The RIIO framework provides a powerful incentive mechanism to encourage efficiency measures, whereby high performing companies are permitted to earn returns greater than the cost of capital, providing a fair return on investment for shareholders who have provided the necessary funding to allow network companies to invest in the key national infrastructure and to support the transition to a low carbon economy. The current eight-year price control period provides stability for long term planning, supply chain development and investment in communities, which is crucial given the long term nature of network investment planning. 

The RIIO framework and regulatory process has a strong track record of setting price controls that deliver for customers and stakeholders alike. SSEN does not believe the current regulatory framework requires material change and is broadly supportive of the RIIO model and the incentives based regulation that measures performance in respect of the outputs delivered for customers. 

Putting stakeholders at the heart of decision making

SSEN continues to place its customers and stakeholders at the forefront of its decision making. Its independent Stakeholder Advisory Panel is now firmly established and working alongside its Board, providing key external input to help scrutinise business performance and effectiveness in meeting SSEN's commitments under the RIIO-T1 and RIIO-ED1 Price Controls. The Panel consists of a Chair and six members, recruited to reflect a broad range of external interests, skills, knowledge and experience.

Financial performance in Networks

As previously highlighted, SSE anticipates that its Networks' operating profit in 2017/18, including SGN, will be around £150m lower than in 2016/17, on an absolute basis. This reflects the impact of the SGN partial equity disposal and phasing of returns in the Price Control mechanisms in Transmission and Distribution resulting in expected full year reductions in operating profit of around £70m for SGN; £60m for Transmission; and £20m for Distribution. During the six months to 30 September 2017, total adjusted operating profit in Networks was £355.1m, compared to £455.9m in the same period last year. 

Adjusted operating profits and the principal movements in Networks business segments during the six months to 30 September 2017 are as follows (comparisons are with the six months to 30 September 2016 unless otherwise stated):

Electricity Transmission: as expected, adjusted and reported operating profit decreased to £97.9m from £135.6m, mainly due to the phasing of capital expenditure on significant projects and the resulting impact on regulatory revenue as well as the impact of the sharing of previous years' total expenditure (totex) underspends with customers. 

Electricity Distribution: adjusted and reported operating profit was slightly down at £176.0m compared to £181.0m, reflecting the fact that while revenues have increased in line with the growing RAV, these have been partially offset in the current year by the expected net reduction in other factors which contribute to the overall Price Control calculation, including those in the table below:

There are several factors which contribute to RIIO Price Control earnings which can be found on the Ofgem website in the Transmission and Distribution Licence, Price Control Financial Handbook and Price Control Financial Model.

Gas Distribution: SSE's share of SGN's adjusted operating profit fell to £81.2m from £139.3m mainly due to SSE's partial equity disposal (16.7%) in October 2016, as well as the phasing of regulatory revenue and the sharing of out-performance with customers, which is part of the RIIO Price Control. The impact on operating profit of the part disposal in the full financial year 2017/18 is estimated at £55m and is almost fully reflected in the six months to 30 September 2017, given the timing of the disposal.

Reported Networks operating profit: decreased to £309.1m compared to £409.7m primarily for the reasons given above. In addition, SGN had an exceptional gain in prior year of £23.0m due to the change in corporation tax rate.

Electricity Transmission

Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Transmission plc under licence, is responsible for maintaining and investing in the electricity transmission network in the North of Scotland.

Maintaining a track record of delivering a major programme of investment

Since the start of the RIIO T1 price control in April 2013, SSEN's capital investment in its transmission network has totalled over £2bn, and continues to play a pivotal role in providing the key national infrastructure to facilitate the UK's transition to a low carbon economy. With its committed pipeline of investment, SSEN expects to increase its RAV to around £3.6bn by the end of the RIIO T1 price control in March 2021.

Excellent progress continues to be made with the delivery of SSEN's flagship Caithness-Moray transmission link, which remains on schedule and within the allowed spend. With an agreed allowance of £1,118m (2013/14 prices), the project is the largest single investment undertaken by any part of the SSE group to date.

The majority of key onshore enabling works related to the project have now been completed; including the successful energisation of the Thurso South section in July 2017. The installation of the subsea cable is now well under way and is on track to be completed during the first six months of 2018. The Caithness-Moray reinforcement remains on course to be commissioned and energised by the end of 2018.

Reviewing transmission performance

SSEN has undertaken a review of its transmission business performance under the RIIO-ET1 transmission price control settlement, in particular the expenditure and outputs in relation to the Strategic Wider Works mechanism. The review was conducted in line with SSEN's responsibilities as a network owner to operate reasonably, prudently and efficiently.

As a result of this review, SSEN has identified £65.1m of forecast regulatory allowances which will either no longer be required or claimed. This consists of £58.3m of allowances associated with the Caithness-Moray project, currently in construction (mentioned above), and an additional £6.8m of expenditure to date related to landowner wayleave compensation which will now not be recovered from customers.

SSEN has discussed its proposal with the regulator and expects Ofgem to consult on a resultant adjustment in its RIIO-ET1 TOTEX allowance through the Price Control financial model. This outcome, once implemented, is expected to reduce projected revenues from SSEN's transmission business by £9.1m during FY2020/21. The adjustment will also mean that the RAV of SSEN's transmission business will be £26m lower than previously projected levels.

The outcome of this proposed adjustment does not impact on the delivery of regulatory outputs for the Caithness-Moray project and, providing SSEN delivers these outputs on time, an ex-post efficiency review is not expected. This is in line with Ofgem's previously stated policy on the handling of Strategic Wider Works projects.

Enabling the transition to a low carbon economy

SSEN's strategic priority for the RIIO-T1 period has been enabling the transition to a low carbon economy through building the transmission infrastructure necessary to connect and transport renewable energy in the north of Scotland.

Since the beginning of the current Price Control period in April 2013, the installed renewable electricity generation capacity connected to SSEN's transmission network in the north of Scotland has grown significantly, from 3.3GW to over 5GW today, contributing significantly to Government renewable and climate change targets as the UK continues to transition to a low carbon economy.

Despite recent changes in the policy framework underpinning investment in low carbon electricity generation, in particular the closure of the Renewables Obligation (RO) in March 2017, renewable electricity generation capacity supported by SSEN's transmission network is forecast to grow to over 6GW by the end of the current Price Control period.

In the second half of 2017/18, the main generation assets due to connect to SSEN's transmission network are Stronelairg wind farm (228MW); and Aberdeen Offshore Windfarm (92MW).

Fulfilling responsibilities for potential island links

SSEN remains fully committed to bringing forward proposals for new transmission links to the Scottish Islands, and in October 2017, the UK Government, as part of its Clean Growth Strategy announcement, announced that it intends to include island onshore wind in the next Contracts for Difference auction in Spring 2019. 

SSEN welcomes this development for its island onshore wind customers and continues to engage with developers, Ofgem, Government and other stakeholders to take forward proposals to provide transmission connections to the Scottish Island groups in a timely manner, as soon as developer commitment and regulatory approval is confirmed.

Adapting to policy and regulatory change

SSEN continues to engage constructively with Ofgem in relation to the development of the regime for Extending Competition in onshore Transmission (ECIT). Whilst it remains unclear when the legislation to take forward ECIT might be implemented, in its recent consultation on the Needs Case for National Grid's Hinkley Seabank project, published on 30 August 2017, Ofgem reaffirmed its commitment to introduce competition for the delivery of new, separable and high value transmission assets. 

The introduction of competition poses some potential risks to future growth and revenue, but also presents opportunities. With a strong track record for connecting renewables on time and within budget, SSEN believes the experience it has gained both in-house and with its supply, chain means that it is well placed to participate in competitive delivery arrangements as the delivery partner of choice once the regime is implemented.

Operating a rapidly growing network

SSEN's first priority is to provide a safe and reliable supply of electricity to the communities its transmission network serves. SSEN has established a dedicated and experienced team within its transmission business to deliver operational excellence, including improved asset management and timely preparation for the introduction of new types of plant and technology.

During the current period of rapid growth in transmission development, including commissioning of substantial new assets and the connection of large volumes of renewable generation capacity, SSEN has maintained an impressive reliability of over 99.9%, with faults reducing by over a third on a five year average. In the first six months of 2017/18 there have been no transmission faults affecting SSEN's demand customers, with SSEN currently on track to achieve 100% for the Energy Not Supplied incentive.

As part of its increasing focus on operational excellence, SSEN is taking forward a number of refurbishment programmes to renew its existing assets. This includes a refurbishment programme for the Fort Augustus - Fort William overhead line which began in August 2017 and is expected to complete in summer 2020. The work will involve replacing the existing conductors with new, innovative technology, which will be twice as strong as the existing conductors, 70% lighter and able to carry twice the amount of power, improving efficiency and reliability for our customers as well as providing additional capacity to support new forms of electricity generation.

Planning for the next Price Control

With the current price control now passed its mid-point, SSEN has started to gather evidence to support the development of its next business plan for the price control period from April 2021 onwards.

As part of this process, SSEN is undertaking various reviews of its transmission area in the North of Scotland to understand future energy scenarios and help deliver a resilient, pro-active, adaptable and efficient future network for its customers.

Through this initial research and engagement with key stakeholders, SSEN has identified a divergence in the trend of energy demand requirements for its industrial and commercial customers when compared to the GB average. This research has shown that industrial and commercial electricity consumption has increased in SSEN's transmission area by over 13% in the last decade, in contrast to a 7% decline seen across GB as a whole. Further work is required to fully understand the reasons behind this and whether this is forecast to continue from April 2021 when next price control is scheduled to begin.

SSEN has also started to engage with its generation customers to understand potential onshore wind repowering scenarios as existing onshore wind farms start to approach the end of their current renewable policy support mechanisms, predominately the Renewables Obligation. This work and the energy trends research will inform a North of Scotland Future Energy Scenarios paper due to be published for consultation later this year, helping build the evidence base to underpin SSEN's next transmission business plan.

Throughout the second half of 2017/18, SSEN will undertake further engagement and consultation with a range of key external stakeholders including its Stakeholder Advisory Panel: to help shape and influence its future business plan commitments; to help understand and prepare for the specific requirements of its transmission network from April 2021 onwards; and to ensure SSEN continues to delivers value for money services that consumers want and need.

Electricity Distribution

Scottish and Southern Electricity Networks (SSEN), operating as Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) under licence, is responsible for maintaining the electricity distribution networks supplying over 3.7 million homes and businesses across central southern England and north of the central belt of Scotland, the Mull of Kintyre and the Scottish Islands.

Delivering for customers

Now in the third year of the RIIO-ED1 Price Control, SSEN's electricity distribution business continues to adapt to the regulatory framework and has delivered significant changes to its operations, processes and standards to ensure the needs of its customers remain at the forefront of decision making.

Under the RIIO ED1 price control, SSEN's performance is assessed against the commitments made in its business plan and this drives the revenue which is earned. The key areas addressed by the business plan are network availability and reliability; social obligations; safety; environmental impact; connections; and customer satisfaction. Each of these areas of focus has the current and future needs of customers at its heart.

The outcomes of the incentive based framework within which SSEN operates are increasingly dependent on customer opinion and feedback. Financial performance is reflected against: the Interruption Incentive Scheme; Ofgem Customer Satisfaction Measures; Incentive in Connections Engagement; Complaints Performance and Stakeholder Engagement and Customer Vulnerability.

By making a concerted effort to focus on its people and its processes, SSEN has made significant changes to ensure it is meeting its customers' needs and delivering against the measures as set by the RIIO ED1 price control. This has ensured it is able to deliver outputs aligned to the expectations of its customers, stakeholders and the regulator while delivering a fair financial return to investors.

Keeping the lights on

As part of RIIO-ED1, SSEN is incentivised on its performance against the loss of electricity supply through the recording of Customer Interruptions (CI) and Customers Minutes Lost (CML), which include both planned and unplanned supply interruptions.

In the six months to 30 September 2017, Customer Interruptions decreased to 25 in Scotland (34 in HY16/17) and rose slightly to 27 in England (26 in HY16/17) per 100 customers. Average Customer Minutes Lost decreased to 23 minutes in Scotland (27 in HY16/17) and decreased to 22 minutes in England (23 in HY16/17).

SSEN's continued adoption of the 'restore first, repair second' method has helped deliver another strong performance for its customers and continues to outperform the pre-determined targets set by Ofgem.

SSEN's commitment to providing a safe and secure electricity supply and to minimise unplanned interruptions requires a continuous programme of investment in the network. In the six months to 30 September 2017, SSEN's programme of network investment included reinforcements, upgrades to automation and tree cutting, as well as investments in new innovative technologies.

Investing in innovation to improve network reliability

In July 2017, SSEN was awarded £2m as a discretionary award from Ofgem for its Tier 1 innovation projects. The award, the highest amount awarded to any Distribution Network Operator (DNO) group, was based on the performance of SSEN's portfolio of innovation projects under Low Carbon Networks (LCN) funding between 2010 and 2015.

SSEN continues to invest in innovative technologies to help improve the service to its customers and also improve operational efficiency. This includes an initial investment of £255,000 in new power cut detection technology, which will help engineers locate the source of underground cable faults much quicker, minimising the duration of power cuts and in some cases even stopping them happening altogether.

TOUCAN - Thermal imaging Of Underground Cable Networks - is a new hand-held technology which during initial trials has shown signs of significant benefits, allowing operatives to quickly locate and identify faults with precision, eliminating ambiguity of location and minimising potential disruption to SSEN's customers and the electricity network.

Innovation continues to play a key role in the development and improvement of the service provided to SSEN's customers, at the same time improving operational efficiency and delivering shareholder value by improving SSEN performance against its reliability incentives.

Protecting vulnerable customers

SSEN remains fully committed to protecting its vulnerable customers and ensuring suitable support is provided to its Priority Services Register (PSR) Customers during network outages.

One of its greatest challenges is identifying those customers who are eligible for its PSR and SSEN continues to look at innovative ways of reaching these customers, from its vulnerability mapping portal, which provides detailed demographic information about its communities, which SSEN is now using to directly target eligible groups of customers across its regions, to partnerships with third party organisations, such as its link up with Home Energy Scotland, to help identify SSEN's hard to reach vulnerable customers.

Throughout the second half of 2017/18, SSEN will maintain a clear focus on identifying and supporting its vulnerable customers, particularly as the winter season approaches and potential impact on electricity supplies of seasonal stormy weather.

Responding to Ofgem's proposed ICE penalty 

In August, Ofgem published a consultation setting out proposed financial penalties, as part of the Incentive on Connection Engagement, across all electricity DNOs for failing to meet minimum expectations when dealing with customers who request new electricity connections. Following the subsequent consultation on the proposed penalties and the robust set of evidence provided in SSEN's consultation response, Ofgem announced in October that it no longer intended to impose a penalty on SSEN. Over recent years, SSEN has made significant changes and improvements to its connections process, informed by the needs and expectations of customers, and remains fully committed to further improve its connections service based on the needs and expectations of customers.

Setting out a customer focused DSO strategy

SSEN has published its DSO strategy, Supporting a Smarter Electricity System, alongside this statement, setting out the five key principles it believes should underpin the transition to a smart, flexible electricity system: working for all customers, ensuring cost efficiency, market neutrality, removing barriers to local solutions and adopting an approach of learning by doing.

SSEN will continue to engage with industry, policy-makers and the regulator in support of a phased approach to the DSO transition whereby impacts can be carefully reviewed and the best interests of customers maintained.

A proposed new energy solution for Shetland

The Shetland Islands are not currently connected to the GB Main Island Transmission System and all Shetland's energy needs are met from a range of generation sources located on the islands, underpinned by the existing Lerwick Power Station. As Lerwick Power Station is reaching the end of its operational life, SSEN was instructed by Ofgem to conduct a competitive tender to find an economic and efficient solution to meet the future electricity demand requirements of Shetland's homes and businesses. 

Based on the bids received, a joint venture project from National Grid Shetland Link Interconnector Holdings Ltd and partner Aggreko UK Ltd was recommended to Ofgem in May 2017 and SSEN now awaits the outcome of Ofgem's subsequent consultation.

SGN

Scotia Gas Networks (SGN) manages the gas networks distributing natural and green gas to 5.9 million homes and businesses across Scotland, the south of England and now Northern Ireland. In-line with its equity holding, SSE is entitled to receive 33.3% of SGN's distributed earnings.

By leading the way on innovation and putting its customers at the heart of its operations, SGN looks to meet customer expectations by exceeding its commitments under the RIIO Price Control. This is done while ensuring it runs a safe, efficient and reliable gas network. SGN has marked the mid-point of the current eight-year price control with a strong performance providing value for shareholders and customers through the regulatory sharing mechanism. SGN's investment programme is a key element of this and, within overall total cost allowances for the regulatory period of over £4.6bn (2012/13 prices), Ofgem has allowed around £2.8bn to cover new capital investment and to manage the risks relating to SGN's existing assets.

For the start of this financial year SGN continues to deliver a high standard of customer service with its Scotland gas network currently number one out of eight for customer satisfaction and its southern network ranked fourth, achieving scores in excess of nine out of ten for the first time. In terms of operational performance and safety, 98.6% of uncontrolled gas escapes reported by the public were attended within one hour of notification, exceeding Ofgem's 97% standard.

Networks - Conclusion and Priorities

In addition to their first priority of safety, SSE's economically regulated Networks businesses play a crucial role in the provision of energy in Scotland and southern England, delivering value for money for customers and a fair return for investors. SSE will work, in 2017/18 and beyond, to ensure it continues to meet the needs of customers and earn returns for shareholders through focusing on the current and future needs of customers, disciplined investment and innovation and excellence in delivery, creating a stable platform for future growth.

Networks priorities for 2017/18 and beyond

SSE's Networks businesses' priorities in 2017/18 and beyond are to:

· operate safely and meet all compliance requirements;

· provide an excellent service to all customers who rely on their networks and related services;

· deliver required outputs while maintaining tight controls over expenditure;

· maintain good progress in the safe delivery of new assets and enhancing DSO capability;

· progress innovations that will improve network reliability, efficiency and customer service and inform industry-wide improvements; and

· develop and maintain effective stakeholder relationships and conduct constructive engagement with regulators and legislators, advocating clarity and stability in the regulatory framework.

RETAIL (including Enterprise)

Retail (including Enterprise) Key Performance Indicators

Supplying energy and essential services across Great Britain and Ireland

SSE is one of the largest energy suppliers operating in the competitive energy markets in Great Britain and Ireland. At 30 September 2017, it supplied electricity and gas to 7.72 million household and business accounts. It also provides other related products and services through its SSE Energy Related Services division including telephone, broadband and boiler care to 0.46 million household and business customers.

SSE Business Energy (included above) provides energy to businesses, the public sector and other organisations; and the SSE Enterprise business, which provides energy-related and telecoms services to meet the needs of businesses and public sector organisations. Taken together, these B2B businesses contribute balance to the SSE Group and demonstrate SSE's commitment to efficient operations and industry leading customer service.

In the six months since 31 March 2017, SSE Retail has undergone a change in leadership with the departure of Will Morris, SSE's Managing Director of Retail, who left SSE after five years to pursue new opportunities. While the longer-term Retail leadership structure is reviewed, the responsibilities of Managing Director have been shared between two new co-Heads, who step into expanded roles: Stephen Forbes, who has been appointed Chief Commercial Officer, and Tony Keeling, who had been appointed Chief Operating Officer.

Financial performance in Retail

During the six months to 30 September 2017, total adjusted operating profit across the Retail and Enterprise division was £70.3m compared to £60.5m in the same period last year.

Adjusted operating profits and the principal movements in Retail's business segments during the six months to 30 September 2017 are as follows; comparisons are with the six months to 30 September 2016 unless otherwise stated:

Energy Supply: adjusted and reported operating profit across Energy Supply as a whole remained broadly flat at £46.7m compared to £47.1m. Within this, GB household energy supply was again loss making in the first half, in line with demand seasonality. Results were impacted by reduced customer numbers and the Pre-Payment Meter (PPM) price cap, offset by a continued focus on efficiency and costs.

Energy related services: adjusted and reported operating profit showed an encouraging start to the financial year, increasing to £11.4m, compared to £8.6m, as the customer facing telecoms business sees the benefits of previous customer acquisitions, alongside efficiency improvements.

Enterprise: also showed improved performance with adjusted and reported operating profit increasing to £12.2m from £4.8m, mainly due to improved business performance and a reduced cost base providing a more effective platform for growth.

Reported Retail operating profit: was the same as adjusted operating profit in the six months to 30 September for both 2017 and 2016.

Adapting to a changing market

As a provider of an essential service, SSE's operations in the GB energy supply market are subject to considerable, and legitimate, political interest.

Standard Variable Tariffs (SVTs)

Following the publication of the CMA Final Report in June 2016, there has been political debate about the future role of SVTs in the market and the differential to the cheapest deals suppliers offer. As of 30 September, the annual differential between SSE's SVT and cheapest Fixed tariff was £57, based on Ofgem's average consumption estimates.

Having listened carefully to the public and political debate around the role of SVTs in the GB energy market, SSE is committed to building on the significant progress that has been made to date in engaging customers and supporting them to make active, informed decisions around their energy tariff and supplier. , Enabled by the recent rule changes announced by Ofgem, from the early part of next financial year SSE will no longer automatically roll customers onto the SVT once they have come to the end of their fixed term contracts. Instead, SSE intends to move customers onto an equivalent or cheaper fixed term tariff, which would fix prices for 12 months with no exit fees. As is customary now, each year SSE will proactively communicate with all customers coming to the end of their fixed term tariffs to prompt them to consider which energy tariff is most suitable for their needs. This decision will effectively introduce an annual engagement prompt for these customers. We anticipate these changes, along with continued efforts to engage customers with proactive communications, will accelerate the reduction in the number of SSE customers on SVTs.

Regulatory and political intervention on tariffs

In October 2017, the UK Government published a draft Bill that, if enacted, would mandate Ofgem to cap prices for GB customers on SVTs . This policy intervention is currently undergoing pre-legislative scrutiny and the stated intention is that a price cap would come into force in January 2019. As of 30 September 2017, of its 6.5 million GB domestic customer accounts, SSE has 2.7 million electricity accounts on SVTs and 1.8 million gas accounts on SVTs which could be impacted by the Government's proposed broader cap.

Furthermore, Ofgem is consulting on its proposals to extend the existing Pre-Payment ,Meter safeguard tariff to customers in receipt of the Warm Home Discount (WHD). As final WHD customer numbers are only known at the end of each scheme year, it is difficult to forecast how many customers could be impacted by this. However, in the year to March 2017, SSE had 0.3m customers who were in receipt of the Warm Home Discount, around 70% of which were on the SVT and not supplied through a Pre-Payment Meter.

 How these issues develop is currently unclear. As ever, SSE's approach will be to engage constructively with the UK Government, Ofgem and other stakeholders as these regulatory and public policy changes are progressed. Through its engagement, SSE will seek to emphasise that competition not price caps best serves customers' long term interests. SSE also remains committed to identifying solutions that contribute towards positive, sustainable outcomes for customers and, in particular, vulnerable consumers.

SSE will also highlight the importance of ensuring any whole of market price caps are set using a methodology that accurately reflects the cost of supplying energy. It would not be appropriate to simply extent the current Pre-Payment Meter safeguard tariff methodology to a wider group of customers. SSE continues to believe that any price cap must time-limited and applicable to all suppliers operating in the GB market to avoid unintended consequences for customers and competition.

Progress in Energy Supply

Owing to ongoing competitive pressures, in the six months to September 2017, SSE's energy customer accounts in Great Britain and Ireland fell from 8.00 million to 7.72million. SSE Retail has a long-standing strategy to respond to increased competition in the market by investing in retention, taking additional steps to engage and reward its customers, aiming for high levels of customer service, delivering efficiencies, and redoubling efforts to digitalise and diversify the business. This approach will enable the development of stronger, more enduring customer relationships based on engagement, service and value.

During the six months to 30 September 2017, SSE has continued its efforts to deliver sustainable reductions in operating costs through digitalisation and, specifically, back office process automation. This has already proved effective in reducing the manual handling by customer service agents of routine data processing, for example, with the associated reduction in cost and risk from this activity. Having successfully proved the case, SSE will now accelerate its use of back office automation, while also moving towards deployment of AI-enabled webchat facilities at the front end to provide quicker resolution of simpler customer service issues and free up its dedicated customer service team to focus on resolving more complex customer problems.

Moving towards a smarter market

The energy sector in Great Britain is undergoing a radical transformation, in particular through the digitalisation of the underlying infrastructure through the smart meter programme. SSE views the smart meter rollout as a unique opportunity to transform the relationship between customers, their energy supplier and the energy they use. SSE's focus remains on delivering its obligations in a way that is cost effective and customer centric, to maximise the net benefits for customers.

SSE has continued to make good progress, increasing the recruitment of installers in order to continue to support the transition to mass smart meter deployment. As of 30 September 2017, SSE had around 625,000 smart meters on supply and, to date, customer feedback on their experience of the installation has been positive. A multi-channel communication strategy has been put in place to help drive customer demand while an online smart meter booking system has been established to make it easier for customers to book appointments. In accordance with the UK Government's proposal to end SMETS1 delivery from July 2018, SSE is also preparing to transition from SMETS1 to SMETS2 meters.

The programme is now reaching a critical juncture. Delays to the delivery of the enabling central infrastructure, including the Data Communications Company (DCC), have compressed the timetable for delivery and impacted the industry's ability to make progress. In parallel, media attention around the costs and safety of the programme has negatively impacted customer sentiment towards smart meters and the ability of suppliers to generate demand. As with any infrastructure programme with dependencies and of this complexity and scale, there continue to be challenges associated with SSE's obligations under the smart meter rollout but SSE is working hard to mitigate any risks to delivery. As the roll-out progresses, SSE continues to build an evidence base to support its concerns and encourage pragmatic and flexible decision-making around the programme.

Helping vulnerable customers

SSE recognises the impact higher energy costs can have on customers, particularly the most vulnerable. With that in mind, alongside its electricity price rise in March 2017, SSE introduced a new £5m Customer Support Fund, intended to provide additional assistance for customers who need it most, particularly those who rely on electricity to heat their homes. In the six months from March 2017, SSE has distributed £767,000 of this fund to help over 1,000 customers, all of whom are on a low income with children, or of pensionable age. With the onset of winter, energy costs can be felt most acutely and so SSE will distribute the remaining £4.23m to vulnerable customers who are struggling with debt.

In addition, SSE helps vulnerable customers manage their energy costs in a number of ways:

· Through the Warm Home Discount scheme - as of 30 September 2017, SSE had allocated over 214,000 rebates at £140 each and by the end of the scheme year on 31 March 2018, SSE expects to spend over £46m, helping over 290,000 customers.

· In the Benefit Entitlement Scheme (BEC) Year 6 ending early May 17; SSE's customer service advisers proactively identified and referred over 4,000 customers for benefit entitlement checks, with more than 2,300 customers successfully completing the check, resulting in an average increase in income of more than £2,700 a year per customer. Good progress has been made delivering this year's scheme and to date SSE's customer service advisers have proactively identified and referred over 700 customers for a Benefit Entitlement Check.

· SSE's Priority Assistance Fund provides additional support to low income and vulnerable customers, including debt relief, free energy efficiency advice, and help with bespoke payment arrangements.

· It also offers a free Careline priority service, dedicated to helping customers who are elderly, disabled or have special medical needs.

· In line with its licence obligation, between the start of October and the end of March (or longer if the weather is unseasonably cold), SSE has a no disconnection policy covering all household customers. In addition, SSE is a member of Safety Net, which is an additional voluntary commitment overseen by Energy UK. This commits signatory suppliers to never knowingly disconnect vulnerable customers at any time.

· SSE aims to engage constructively and sympathetically with customers in arrears as early as possible, making sure support is provided for those struggling with their energy costs and that payment plans are manageable.

Maintaining high standards in customer service

As outlined in its Treating Customers Fairly Statement, published in August 2017, SSE works hard to maintain high standards and quality of service, not just because customers expect it in an increasingly competitive GB retail market, but also because it is the right thing to do. Notable highlights of progress include:

· SSE has changed its customer service opening hours following a review. Phone lines are now open until 10pm Monday to Friday and until 6pm on Saturdays, making it easier for customers to make contact. SSE has also reviewed its complaints handling process and has made improvements to ensure complaints are escalated earlier and that the root causes of common themed complaints are addressed.

· SSE has improved its websites and digital platforms to make it easier for customers to manage their account online by streamlining the process for setting up accounts, changing tariffs or booking smart meter installations.

· Good progress is being made in working towards achieving the British Standard for Inclusive Service Provision in the early part of 2018. This accreditation represents the gold standard in recognising and catering for vulnerability in all its forms.

These innovations have resulted in direct improvements in SSE's customer service and between April - June 2017, SSE outperformed 17 of the largest energy suppliers to be ranked first for customer service in Citizens Advice's new, more holistic comparison tool. SSE is proud of its sector-leading customer service and aims to build on these high standards throughout the remainder of 2017/18.

Energy Related Services

Diversifying through energy related services

As part of efforts to further diversify its customer base, SSE provides energy related services, including boiler cover, electrical wiring and home broadband and telephone, to 0.46m customers. Over the last six months, SSE Home Services Limited has become authorised and regulated by the Financial Conduct Authority, allowing it to expand its business by offering innovative insurance based propositions to customers. SSE is already seeing the retention benefits of providing customers with these broader range of services and will continue efforts to cross-sell other home and essential services to add more value for its energy customers.

Business Energy

Meeting the needs of business customers

Business Energy continues to focus on meeting business customers' core energy needs with efforts concentrated on controlling operating costs while offering an enhanced proactive approach to its key customers and partners.

Business Energy continued to be recognised for its customer service commitment, ranking highly in the Citizens Advice league table that scores non-domestic energy providers on how well they handle complaints from small business customers. Business Energy has continued to build its offering in the commercial sector, including its 100% renewable energy proposition known as 'SSE Green'.

Business Energy has mobilised its Smart Meter programme in preparation for the rollout of meter installations to eligible business customers, which will begin in Summer 2018. Third Party Intermediaries (TPIs) remain an important channel for Business Energy growth and SSE continues to provide ongoing support to its TPIs by providing access to its industry experts via sales channels, engagement sessions and regular industry updates.

Supplying energy and essential services across Ireland

In Ireland's all-island energy market, SSE's retail arm SSE Airtricity is the second largest provider of energy and related services across the Republic of Ireland (ROI) and Northern Ireland (NI), and the only retail energy brand to operate in each of the competitive gas and electricity markets across the island.

At 30 September 2017, SSE Airtricity supplied electricity and natural gas to 0.77 million household and business customer accounts in ROI and NI, reflecting a fall in customer numbers due to increased competitive pressures, particularly in electricity markets.

In Home Energy, the company has launched new retention products to reward customer loyalty as well as innovations designed to continually deliver high standards in customer experience. These include a new Easypay subscription option giving customers an easy way to pay for essential Home Services on their energy bill, convenient self-serve options that allow customers to order associated energy products and services from their online energy account, and the introduction of a new video chat customer service channel.

In NI, SSE Airtricity increased its household electricity prices by 7.5% from 1 October 2017 while in ROI electricity prices increased by 5.6% from 1 November 2017. These were the first such increases in both markets since 2013 and were as a result of increases in the cost of supply including wholesale and regulated networks costs.

In Business Energy, customer load has increased by 21% since 31 March 2017, while the company's Eco team has facilitated energy efficiency initiatives that are saving businesses almost 45GWh of primary energy annually. SSE's Energy Portfolio Management (EPM) team is leading preparations for the introduction of the new Integrated Single Electricity Market (I-SEM) next year. This team is providing a competitive route to market for other generators.

Enterprise

A forward facing business delivering long term growth

SSE Enterprise is a group of businesses that provides energy and telecoms services to industrial, commercial and public sector customers across the UK. Its four main business areas are: Contracting, Utilities, Telecoms and Rail. It has undergone a period of efficiency savings to compete effectively in its target markets.

There is a pipeline of encouraging opportunities which the four Enterprise business streams are well placed to compete in. These include: bigger and better opportunities in mechanical and electrical engineering, energy storage and distributed energy for clients, electric vehicle infrastructure, fibre networks, 5G infrastructure, and rail power and communications infrastructure.

To ensure Enterprise is a growth driver for the SSE Group it aims to:

· Focus on growth in its existing core markets;

· Develop larger projects which give longer term visibility of earnings and build on the strengths of the company's diverse business areas and multi utility capabilities;

· Develop further the capacity of the business to 'build, own and operate', (and finance) assets; and

· Focus on providing innovative solutions to meet the changing needs of customers.

Performance summary of four business streams

Contracting

A substantial cost reduction process has been undertaken in SSE Enterprise Contracting to increase efficiency which has already improved the underlying profitability of the business. It has a clear focus on mechanical and electrical work as well as high voltage activity, which is generating margin improvement. There are larger scale opportunities in the pipeline based on a focused approach to market segments and key customers.

Utilities

SSE Enterprise Utilities is aiming to be a leader in utility infrastructure and distributed energy networks. It is looking to increase the size and scale of the energy assets and networks it currently builds, owns and operates as distributed energy becomes a larger presence in the market. The business is assessing the electric vehicle market, which is set to grow significantly, and is actively involved in the installation and power supply of EV infrastructure. Enterprise Utilities has also grown its customer numbers for District Heating, Water and Out of Area Electricity Networks because it is servicing the connection needs of customers on a number of new flagship developments and making further connections each year as these projects are progressed. Slough Heat and Power continues to be focused on the growth of its electrical private network.

Telecoms

SSE Enterprise Telecoms continues to accelerate new network development to help bring major UK data centres "on net" and expand its commercial footprint throughout the UK, especially on key strategic routes. It is winning long term core network agreements with new clients in the banking, transportation and service provider markets. In Ireland, SSE is part of a consortium which has submitted a 'Detailed Solution' as part of a competitive bid process for the National Broadband Plan, being carried out by the Irish State. The company has similar ambitions to develop its proposition for rural broadband rollout in Scotland.

Rail

SSE Enterprise Rail continues its healthy growth trajectory in terms of size of business. The business has ambitions to become a 'supplier of choice' for Network Rail in the delivery of multidisciplinary rail projects, and it is well placed to win bids in major projects such as HS2. It is also increasing its focus on potential asset ownership in the energy and communications space.

Retail (including Enterprise) - Conclusion and Priorities

In addition to their first priority of safety, SSE's Energy Supply, Energy-Related Services and Enterprise businesses continue to operate in challenging competitive markets and are each focused on adapting to meet the changing energy needs of household, commercial and public sector customers. This means maintaining a clear focus on delivering the propositions and services that customers need, while actively managing key risks and leveraging SSE's core strengths.

Key priorities for 2017/18 and beyond 

SSE's Retail priorities in 2017/18 and beyond are to:

· actively manage the implementation of proposed intervention in the GB energy supply market, in particular, by responding positively to the views of political, regulatory and consumer stakeholders;

· retain and gain domestic and business customer accounts, minimising losses where possible;

· continue to build on SSE's strong culture of customer service in both GB and Ireland with new products and services;

· continue to make progress in delivering smart meters to customers and ensure readiness to transition from SMETS1 to SMETS2;

· continue to deliver operational efficiencies by further digitalising the business and moving towards an operating model capable of meeting the future needs of customers; and

· re-focus the Enterprise business so it has the strongest possible foundations for future growth.

Condensed Interim Statements

Alternative Performance Measures

When assessing, discussing and measuring the Group's financial performance, management refer to measures used for internal performance management. These measures are not defined or specified under International Financial Reporting Standards (IFRS) and as such are considered to be Alternative Performance Measures ("APMs").

By their nature, APMs are not uniformly applied by all preparers including other participants in the Group's industry. Accordingly, APMs used by the Group may not be comparable to other companies within the Group's industry.

Purpose

APMs are used by management to aid comparison and assess historical performance against internal performance benchmarks and across reporting periods. There has been no change to the adjustments applied by management in calculating the alternative performance measures. These measures provide an ongoing and consistent basis to assess performance by excluding items that are materially non-recurring, uncontrollable or exceptional. These measures can be classified in terms of their key financial characteristics:

· Profit measures allow management to assess and benchmark underlying business performance during the year. They are primarily used by operational management to measure operating profit contribution and are also used by the Board to assess performance against business plan.

· Capital measures allow management to track and assess the progress of the Group's significant ongoing investment in capital assets and projects against their investment cases, including the expected timing of their operational deployment.

· Debt measures allow management to record and monitor both operating cash generation and the Group's ongoing financing and liquidity position.

The following table explains the key APMs applied by the Group and referred to in these statements:

Rationale for adjustments

Adjustments to Profit Measure

1 Movement on operating and financing derivatives ('certain re-measurements')

This adjustment can be designated between operating and financing derivatives.

Operating derivatives are contracts where the Group enters into forward commitments or options to buy or sell electricity, gas and other commodities to meet the future demand requirements of its Energy Supply business or to optimise the value of its Wholesale assets. Certain of these contracts are determined to be derivative financial instruments under IAS 39 and as such are required to be recorded at their fair value. Changes in the fair value of those commodity contracts designated as IAS 39 financial instruments are reflected in the income statement (as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments due to the volatility that can arise on revaluation. The Group will recognise the underlying value of these contracts as the relevant commodity is delivered, which will predominantly be within the subsequent 12 to 36 months. Conversely, commodity contracts that are not financial instruments under IAS 39 are accounted for as 'own use' contracts and are consequently not recorded until the commodity is delivered and the contract is settled.

Financing derivatives include all fair value and cash flow interest rate hedges, non-hedge accounted (mark-to-market) interest rate derivatives, cash flow foreign exchange hedges and non-hedge accounted foreign exchange contracts entered into by the Group to manage its banking and liquidity requirements as well as risk management relating to interest rate and foreign exchange exposures. Changes in the fair value of those financing derivatives are reflected in the income statement (as part of 'certain re-measurements'). The Group shows the change in the fair value of these forward contracts separately as this mark-to-market movement is not relevant to the underlying performance of its operating segments.

The re-measurements arising from operating and financing derivatives, and the tax effects thereof, are disclosed separately to aid understanding of the underlying performance of the Group.

2 Exceptional Items

Exceptional charges or credits, and the tax effects thereof, are considered unusual by nature or scale and of such significance that separate disclosure is required for the underlying performance of the Group to be properly understood. Further explanation for the classification of an item as exceptional is included in Note 2 (iii).

3 Share of joint ventures and associates interest and tax

This adjustment can be split between the Group's share of interest and the Group's share of tax arising from its investments in equity accounted joint ventures and associates.

The Group is required to report profit before interest and tax ('operating profit') including its share of the profit after tax of its equity accounted joint ventures and associates. However, for internal performance management purposes and for consistency of treatment, SSE reports its adjusted profit measures before its share of the interest and/or tax on joint ventures and associates.

4 Interest on net pension assets/liabilities (IAS 19R)

The Group's interest charges relating to defined benefit pension schemes are derived from the net assets/liabilities of the schemes as valued under IAS 19R. This will mean that the charge recognised in any given year will be dependent on the impact of actuarial assumptions such as inflation and discount rates. To avoid income statement volatility derived from this basis of measurement and reflecting the non-cash nature of these charges, the Group excludes these from its adjusted profit measures.

5 Deferred tax

The Group adjusts for deferred tax when arriving at adjusted profit after tax and its adjusted effective rate of tax. Given deferred tax arises as a result of potential future tax credits or charges, and is therefore unrelated to the current period tax charge or payments made, the Group excludes these from its adjusted profit measures.

Adjustments to Debt measure

6 Hybrid capital

The characteristics of certain hybrid capital securities mean they qualify for recognition as equity rather than debt under IFRS. Consequently, their coupon payments are presented within dividends rather than within finance costs. As a result, the coupon payments are not included in SSE's adjusted profit before tax measure. In order to present total funding provided from sources other than ordinary shareholders, SSE presents its adjusted net debt measure inclusive of hybrid capital to better reflect the Group's funding position.

7 Outstanding liquid funds

Outstanding liquid funds are SSE cash balances held by counterparties as collateral at the year end. SSE includes these as cash until they are utilised. Loans with a maturity of less than three months are also included in this adjustment. The Group includes this adjustment in order to better reflect the immediate cash resources to which it has access, which in turn better reflects the Group's funding position.

8 Finance leases

SSE's reported loans and borrowings include finance lease liabilities, most significantly in relation to its tolling contract with Marchwood Power Limited, which are not directly related to the external financing of the Group. The Group excludes these liabilities from its adjusted net debt and hybrid capital measure to better reflect the Group's underlying funding position with its primary sources of capital.

Adjustments to Capex Measure

9 Other expenditure

Other expenditure primarily represents subsequently derecognised development expenditure which is excluded to better reflect the Group's ongoing capital position.

10 Customer funded additions

Customer funded additions represents additions to electricity and other networks funded by customer contributions and accounted for under IFRIC 18. Given this is directly funded by customers, this has been excluded to better reflect the Group's underlying investment position.

11 Allowances and certificates

Allowances and certificates consist of purchased carbon emissions allowances and generated or purchased renewable obligations certificates (ROCs) and are not included in the Group's Capital Expenditure and Investment alternative performance measure to better reflect the Group's investment in enduring operational assets.

12 Additions subsequently disposed

Additions subsequently disposed in the current period represent capital additions related to Ferrybridge MFE2 Limited which were subsequently disposed to Wheelabrator Technologies Inc. (see Note 11). In the year ended 31 March 2017 the Group had invested in capital additions related to smart meter installations which were subsequently disposed to Meter Fit 2 Limited.

13 Joint ventures and associates additions

Joint ventures and associates additions represent funding provided to joint venture arrangements in relation to capital expenditure projects. This has been included to better reflect the Group's use of directly funded equity accounted vehicles to grow the Group's asset base. Project finance raised by the Group's joint ventures and associates is not included in this adjustment.

The table below reconciles the adjusted performance measures to the reported measure of the Group.

(i) Restated to include the Clyde fair value uplift of £59.1m as an exceptional item. See note 4.2 (iii)

Consolidated Income Statement

for the period 1 April 2017 to 30 September 2017

(i) Restated to include the Clyde fair value uplift of £59.1m as an exceptional item. See note 4.2 (iii)

The accompanying notes are an integral part of this interim statement.

Consolidated Income Statement

for the year ended 31 March 2017

Consolidated Statement of Other Comprehensive Income

for the period 1 April 2017 to 30 September 2017

(i) Restated to include the Clyde fair value uplift of £59.1m as an exceptional item. See note 4.2 (iii)

Consolidated Balance Sheet

as at 30 September 2017

(i) Restated to include the Clyde fair value uplift of £59.1m as an exceptional item. See note 4.2 (iii)

Consolidated Statement of Changes in Equity

for the period 1 April 2017 to 30 September 2017