Annual Financial Report 2018

�

Following the Preliminary Results announcement on 25 May 2018, SSE plc confirms that it has published its Annual Report and Accounts for the year ended 31 March 2018.

�

The Annual General Meeting (AGM) will be held at the Perth Concert Hall, Mill Street, Perth PH1 5HZ on Thursday, 19 July 2018 at 12.30pm.� The mailing to shareholders of the AGM documentation has commenced, and copies of the Annual Report and Accounts and the Notice of Annual General Meeting for 2018 are available to view on the Company's website: www.sse.com .

�

In accordance with Listing Rule 9.6.1, copies of the Annual Report and Accounts, Notice of Annual General Meeting, and Form of Proxy for 2018 have been submitted to the UK Listing Authority and will shortly be available for inspection via the National Storage Mechanism, which can be accessed at: www.hemscott.com/nsm.do

�

A condensed set of SSE plc's Group financial statements, and information on important events that have occurred during the year and their impact on the financial statements, were included in SSE's Preliminary Results announcement issued on 25 May 2018. That information, together with the information set out in Sections 1 to 3 below, which is extracted from the 2018 Annual Report and Accounts, constitute the material required by Disclosure Guidance and Transparency Rule 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2018 Annual Report and Accounts.� Page numbers and cross-references in the extracted information refer to page numbers and cross-references in the 2018 Annual Report and Accounts.�

�

Section 1. Principal Risks and Uncertainties �

The following information is extracted from pages 28 to 32 of the 2018 Annual Report and Accounts.

Risk Report

Managing SSE's Risks

During 2017/18, the Board sought to continue to mature SSE's Risk Management Framework to further enhance flexibility and decision-making throughout SSE, in support of creating value in a sustainable way. SSE's Strategic Framework is part of the wider System of Internal Control (as described on page 114 of the Directors' Report) and is used to support the setting of objectives for the SSE Group and its businesses.

Renewing our business

Sustainable and risk informed strategic decision making

When setting strategic objectives the Board considers all material influencing factors, including those relating to climate change, technological developments and customer expectations.

During the course of the year, the Board made the proposal to merge SSE's household energy supply and services business in Great Britain (now named SSE Energy Services) with npower, the retail business of innogy SE, to form a combined independent retail company. As highlighted by the Chief Executive on page 24, a dedicated project team has been put in place to manage this transaction and the risks associated with it and is reporting on its progress to the Board and Executive Committee on a regular basis. Material changes in the nature and impact of SSE's Group Principal Risks are continuously assessed with mitigating actions implemented wherever necessary. The risk factors directly associated with the transaction will be set out in the Shareholder Circular which will be published on 27 June 2018.

The Executive Committee and sub-committees have responsibility for overseeing SSE's Principal Risks. During the third quarter of SSE's financial year, an assessment of each Principal Risk is completed by the assigned oversight committee. This assessment requires committee members to provide commentary on contextual changes to the risks and whether they consider them to have become more or less material during the year. These responses are then consolidated into reports, one for each Principal Risk, which are presented back to the committees along with the results of provisional viability testing and analysis of relevant, current management information and key information relating to interconnecting risks. These reports form the basis for the committees to discuss and confirm risk trend (more, less or equally material), overall effectiveness of the risk control and monitoring environment, and whether any additional actions are required to improve the control environment. The outputs from these 10 committee assessments are then presented to the Executive Committee for full review, with any emerging risks or additional material changes resulting from this being proposed to the Board for approval.

Following the 2017/18 annual review process, SSE's 10 existing Group Principal Risks remain unchanged. Important revisions have however been made to the descriptions of each to take account of key developments and corresponding mitigations during the year. Full Principal Risk descriptions can be found overleaf [ pages 30 to 32 of the 2018 Annual Report and Accounts] .

Risk Appetite Statement

No business is risk free and indeed the achievement of SSE's strategic objectives necessarily involves taking risk. SSE will however only accept risk where it is consistent with its core purpose, strategy and values; is well understood and can be effectively managed; and offers commensurate reward.

The sectors in which SSE operates are inherently subject to a high degree of political, regulatory and legislative risk. Furthermore, each of SSE's business divisions has differing levels of exposure to additional risks. For example, the Networks business is largely economically regulated and is characterised by relatively stable, inflation-linked cash flows while the Wholesale business benefits from cash flows linked to government-mandated renewables. In fulfilling its core purpose, the Wholesale business is however also exposed to significant energy market and commodity risk in its operational and investment decision making.

The key elements of SSE's strategic framework - including the range and nature of the energy businesses and assets within the SSE Group and its financial objective in relation to dividend growth - are fully reflective of its risk appetite. Fundamentally:

·   SSE maintains a balanced range of economically regulated and market-based energy businesses and assets ranging from energy production and delivery to the provision of energy and complementary services. These provide a diversified portfolio of business activities whilst keeping the depth of focus on a single sector - energy;

·   SSE has a clear understanding of the risks and opportunities in the Great Britain and Ireland energy markets and these markets therefore continue to provide the Group's geographic focus.

In areas where SSE is exposed to risks for which is has little or no appetite, even though it has implemented high standards of control and mitigation, the nature of these risks mean that they cannot be eliminated completely.

In determining its appetite for specific risks, the Board is guided by three key principles:

1. Risks should be consistent with SSE's core purpose, financial objectives, strategy and values. In particular, safety is SSE's first value and it has no appetite for risks brought on by unsafe actions;

2. Risks should only be accepted where appropriate reward is achievable on the basis of objective evidence and in a manner that is consistent with SSE's purpose, strategy and values; and

3. Risks should be actively controlled and monitored through the appropriate allocation of management and other resources, underpinned by the maintenance of a healthy business culture.

The Board has overall responsibility for determining the nature and extent of the risk it is willing to take and for ensuring that risks are managed effectively across the Group.

Group Principal Risks

SSE operates in fast moving markets that are subject to a high degree of political, regulatory and legislative intervention. It is therefore essential that SSE's Risk Management Framework is dynamic and flexible, allowing decision makers to focus on material risk information that may have an impact, whether positive or negative, on strategic objectives.

The Board and Executive Committee look for as complete a perspective as possible when assessing the Principal Risks that face the Group. This graphic [set out on page 29 of the 2018 Annual Report and Accounts] illustrates SSE's 10 Group Principal Risks positioned on a relative basis against the output of the Principal Risk Self  Assessment process (based on changes in the context and current prevalence of each risk) and potential impact on Group Viability based on critical risks scenarios developed in conjunction with business experts.

In addition, Principal Risks that were considered by their oversight committees to have increased in materiality during the year are shown in red, those that have not changed significantly are shown in blue, and those that were deemed to have decreased in materiality are shown in green.

Viability Statement

As required within provision C.2.2 of the UK Corporate Governance Code, the Board has assessed the prospects of the Company over the next 3 financial years to the period ending March 2021. The Directors have determined that as this time horizon is consistent with the Group's current capital programme and is within the strategy planning period, a greater degree of confidence over the forecasting assumptions modelled can be established.

In making this statement the Directors have considered the resilience of the Group taking into account its current position, the Principal Risks facing the Group and the control measures in place to mitigate each of them. In particular the Directors recognise the significance of the strong balance sheet, and committed lending facilities of £1.5bn which could be drawn down in most circumstances.

The Group also has a number of highly attractive and relatively liquid assets - including a regulated asset base which benefits from a strong regulated revenue stream as well as the operational wind portfolio - which provide flexibility of options. This was demonstrated in the successful sale during the 2016/17 financial year of a 16.7% share of Scotia Gas Networks Ltd.

To help support this Statement, over the course of the year a suite of severe but plausible scenarios has been developed against each of SSE's Principal Risks. These scenarios are based on relevant real life events that have been observed either in the markets within which the Group operates or related markets globally. Examples include persistently low commodity prices (for Commodity Prices); changes to key government energy policies (for Politics, Regulation & Compliance); and the impact of the loss of key systems (for Cyber Security and Resilience). Analysis relating to reverse stress testing is also incorporated into the assessment.

Scenarios that most have the potential to adversely affect SSE's ability to deliver its core purpose to responsibly provide the energy and related services needed now and in the future are stress tested against forecast available financial headroom. In addition to considering these in isolation, the Directors also consider the cumulative impact of different combinations of scenarios, including those that individually have the highest impact and those that are most heavily interconnected with SSE's other Principal Risks. This year, neither regulatory or shareholder approval have yet been received in respect of the proposal to merge SSE's household energy supply and services business in Great Britain (SSE Retail) with the retail business of innogy SE to form a combined independent retail company. As such two assessments have been carried out for the Group - one on the assumption that the approval is received and the other assuming not.

On the basis of the analysis undertaken, and on the assumption that the fundamental regulatory and statutory framework of the markets in which the Group operates does not substantively change, the Directors have a reasonable expectation that the Group will be able to continue to meet its liabilities as they fall due in the period to March 2021.

Group Principal Risks

Section 2. Directors' Responsibility Statement

The following information is extracted from page 140 of the 2018 Annual Report and Accounts.

Statement of directors' responsibilities

Statement of directors' responsibilities in respect of the annual report and the financial statements

The directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent Company financial statements in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the directors are required to:

·   select suitable accounting policies and then apply them consistently;

·   make judgements and estimates that are reasonable, relevant, reliable and prudent;

·   for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;

·   for the parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements;

·   assess the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

·   use the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

·   the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

·   the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Alistair Phillips-Davies                                    Gregor Alexander

Chief Executive                                                Finance Director

24 May 2018

Section 3. Related Party Transactions

The following information is extracted from Accompanying Information A5. on page 217 of the 2018 Annual Report and Accounts.  A condensed version of this extract was published as Note 18 in the Preliminary Results Statement for the year ended 31 March 2018.

A5. Related party transactions

The immediate parent and ultimate controlling party of the Group is SSE plc (incorporated in Scotland). Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

Trading transactions

The following transactions took place during the year between the Group and entities which are related to the Group but which are not members of the Group. Related parties are defined as those in which the Group has control, joint control or significant influence over.

The transactions with Seabank Power Limited and Marchwood Power Limited relate to the contracts for the provision of energy or the tolling of energy under power purchase arrangements. Scotia Gas Networks Limited has operated the gas distribution networks in Scotland and the South of England from 1 June 2005. The Group's gas supply activity incurs gas distribution charges while the Group also provides services to Scotia Gas Networks in the form of a management service agreement for corporate services, stock procurement services and the provision of the capital expenditure on the development of front office management information systems.

The amounts outstanding are trading balances, are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. Aggregate capital loans to joint ventures and associates are shown in Note 16.