UPDATE 2-SSE says environment challenging, demand falls

* Renewables output hit by dry, still weather in Q1

* Household electricity demand down 2 pct

* Says on course to up div by at least 2 pct above inflation

* Says no change on status of EDF networks

* SSE shares down 0.86 percent

(Recasts, adds demand figures, Aldbrough gas storage)

LONDON, July 22 (Reuters) - British utility Scottish & Southern Energy (SSE.L) said the environment remains challenging with demand falling, a rise in wholesale gas prices and a drop in renewables output due to dry and still weather.

The company, the UK's second-largest supplier of household energy, said output from hydro-electric, wind farms and its biomass plant in the first quarter to end-June fell to 700 Gigawatt hours from 1,000 GWh in the year-earlier period.

The amount of electricity used by households also fell by 2 percent in the quarter, SSE said, while gas demand fell 2.4 percent.

Households have been consuming less energy as a result of the recession and energy efficiency measures. SSE had previously announced a 5 percent fall in gas and a 4 percent fall in electricity demand over the four months to Jan. 31.

The Perth-based company, which has 9.87 million customers, did not give financial guidance for the year, but said it was on course to deliver its dividend targets.

"In this challenging environment, we have achieved solid progress across our main operations and investment projects, which means we remain on course to deliver our dividend growth target for the year of at least 2 percent more than inflation," the company said.

Analysts expect the group to report pretax profit for the year to end-March 2011 of 1.27 billion pounds ($1.93 billion), just down from 1.29 billion for last year, according to Thomson Reuters I/B/E/S.

SSE also said additional capacity at its Aldbrough gas storage facility would start in March 2011, raising storage to 200 million cubic metres (mcm) from 115 mcm. The Aldbrough storage development is scheduled to be completed in 2012 with an expected 420 mcm capacity.

A spokesman said nothing had changed concerning the UK power distribution networks of French peer EDF (EDF.PA) since its June announcement that it would not seek a substantial stake in the networks. [ID:nLDE6500AE]

Sources told Reuters last week that SSE and partner Borealis had withdrawn from the sale process. [ID:nLDE66C1HQ]

Shares in FTSE 100-listed SSE were down 0.86 percent by 0828 GMT at 1,155 pence, compared with a 0.28 percent fall in the STOXX Europe 600 utilities index .SX6P. (Reporting by Victoria Bryan, additional reporting by Kwok W. Wan; Editing by Sharon Lindores) ($1=.6598 Pound)