Interim Management Statement

RNS Number : 3044Y

SSE PLC

23 January 2014

 



SSE plc

INTERIM MANAGEMENT STATEMENT

SSE plc is focused on working with customers, politicians, regulators and other stakeholders to ensure it fulfils its core purpose, which is to provide the energy people need in a reliable and sustainable way, and it is on course to achieve key operational and financial objectives for the financial year to 31 March 2014.

Alistair Phillips-Davies, Chief Executive of SSE, said:

"I'm very encouraged that this is a financial year in which the concerns of bill-payers have been put at the heart of the debate about how to meet the country's energy needs.  An energy policy can only be sustainable if it is affordable and December's decision by the UK government to make changes to reduce the future costs associated with the Energy Company Obligation is an important step in the right direction.  In the interests of fairness, however, there is still more to be done to achieve what we have argued for some time is the fairest, most progressive solution - which is to shift the full cost burden of environmental and social policies from the energy bill payer to the taxpayer.

"We have a clear appetite for reform and an enthusiasm for working with anyone who wants to improve further customers' experience of the energy sector.  This continuing commitment to reform underpins our focus on providing the energy people need in a reliable and sustainable way through our networks, retail and wholesale businesses and, in turn, on delivering the financial results necessary to give shareholders a return on their investment through dividend growth.  

"Despite what is clearly a difficult business environment, the overall performance of the company has been solid in 2013/14 and the efforts of employees, shown recently in the response to the Christmas week storms, have been excellent.  It is encouraging that SSE is on course to deliver real growth in the dividend and increases in adjusted earnings per share¹ and adjusted profit before tax¹.

"The operating environment is not expected to be any easier in 2014/15 but we have a well-balanced range of businesses and a good range of assets and we are determined to maintain our operational focus and financial discipline for the benefit of customers and investors."

Operations
In the nine months to 31 December 2013 (comparisons with the same nine months in 2012, unless otherwise stated):

·     SSE's Total Recordable Injury Rate was 0.10 per 100,000 hours worked, compared with 0.14 during 2012/13 as a whole;

·     Networks: the number of Customer Minutes Lost in the Scottish Hydro Electric Power Distribution area was 57, compared with 52; in the Southern Electric Power Distribution area it was  47, compared with 49;

·     Networks: the amount of replacement and reinforcement gas mains laid by Scotia Gas Networks was 738km, compared with 788km;

·     Retail: SSE's number of electricity and gas customer accounts in markets in Great Britain and Ireland fell from 9.47 million to 9.22 million;

·     Retail: average consumption of electricity by SSE's household customers in Great Britain is estimated to have fallen by 4.3% from 2,990kWh to 2,860kWh; average consumption of gas by SSE's household customers in Great Britain is estimated to have fallen by 9.5%  from 315 therms to 285 therms;

·     Wholesale: total electricity output* from gas-fired power stations was 7.6TWh, compared with 6.4TWh; from coal-fired power stations output was 11.3TWh, compared with 13.6TWh;

·     Wholesale: total electricity output* from renewable sources (conventional and pumped storage hydro electric schemes, onshore and offshore wind farms and dedicated biomass plant) was 6.1TWh, compared with 5.2TWh; and

·     Wholesale:total output from gas production assets was 300 million therms, compared with 131 million therms, reflecting the contribution of the Sean gas field assets acquired in April 2013.

* Output from electricity generating plant in which SSE has an ownership interest (output based on SSE's contractual share).

Investment
In its Annual Report 2013, SSE set out its investment priorities for 2013/14, including commissioning new assets and meeting other construction and development milestones in its programme of investment in electricity generation and networks. It is now forecasting total capital and investment expenditure of over £1.5bn for 2013/14 as a whole. In the nine months since 1 April 2013:

·     Networks: SSE's subsidiary Scottish Hydro Electric Transmission has undertaken capital works totalling £280m to improve and increase the capacity of its network, including work on SSE's section of the Beauly-Denny line which now has over 350 of the 537 towers installed;

·     Wholesale:  Works are progressing at SSE's 460MW CCGT development at Great Island in the South-East of Ireland and it remains on course to be commissioned in the second half of 2014;  and

·     Wholesale:  Multifuel Energy Ltd, the 50:50 joint venture between SSE and Wheelabrator Technologies Inc, is continuing to make progress with the £300m, 68MW  multi-fuel generation facility adjacent to SSE's Ferrybridge power station and the plant remains scheduled to be operational next year.

SSE was disappointed that neither the Galloper (SSE stake 50%) nor the Beatrice (SSE stake 75%) offshore wind farms have been included in the 'provisionally affordable' list of projects under the Final Investment Decision Enabling for Renewables announced by the UK government (see 'Energy market reforms' below).  It will complete a wide ranging review of its offshore wind development portfolio by the end of this financial year and will report on its conclusions then. 

This is one example of why there is greater uncertainty about the shape and extent of SSE's capital and investment programme in the five years from 2015, and it is likely to be lower than the £1.5bn to £1.7bn range invested in each of the years since 2010.

Other developments

Since the publication of SSE's six-month financial report on 13 November 2013:

·     Scottish and Southern Energy Power Distribution's business plan was not fast tracked under the ED1 electricity distribution price control review and it is now preparing to resubmit its business plan to Ofgem in March.

·     Greater Gabbard Offshore Winds Ltd (GGOWL) - a 50:50 joint venture between SSE and RWE npower Renewables - has, as expected, transferred the Offshore Transmission Owner (OFTO) assets associated with the Greater Gabbard offshore wind farm to Greater Gabbard OFTO plc for total sale proceeds of £317m that have been shared equally between SSE and RWE npower Renewables.

·     The Scottish government has published a White Paper setting out its guide to an independent Scotland.  SSE does not have a view on whether Scotland should remain part of the United Kingdom and believes that constitutional arrangements are matters for voters.  Determining arrangements for the energy sector would be just one aspect of the extensive negotiations between the Scottish and UK governments which would follow a 'yes' vote in the forthcoming referendum.  As stated by SSE in February 2012 the uncertainty associated with any constitutional change represents increased legislative and regulatory risk, of which SSE has to take account in making decisions. 

·     The UK government's announcement of a consultation on proposals to reduce the future costs associated with the Energy Company Obligation and to facilitate other measures to reduce the cost of electricity and gas for customers, means SSE will reduce its household energy prices on 24 March and, unlike some companies, it will also pass on the cost saving to customers on fixed and capped price tariffs.  SSE intends to cap energy prices at their new level until at least the Spring of 2015.

·     SSE has successfully launched an eight year/€500m euro bond, maturing February 2022 with a coupon of 2.37% and an all-in funding cost of 3.56% once swapped to Sterling.

·    SSE plc has decided to select the Limited Life Derogation (LLD) option under the Industrial Emissions Directive (IED) for the remaining capacity at its coal-fired power stations at Ferrybridge (North Yorkshire) and Uskmouth (South Wales). Under this 'opt-out' derogation, the plant (defined by the stack configuration) can run without fitting further abatement technology for a total of 17,500 hours or to the end of December 2023, whichever is the earlier.  It has also decided to progress with up to £15m of investment at its Peterhead power station to extend the life of the plant and allow it to operate more flexibly and efficiently in future years. 

·    SSE Power Distribution teams restored electricity supplies to 130,000 homes following the very high winds and flooding that affected the UK on 23/24 December, in some of the most challenging working conditions that have been faced in recent years.  On 3 January, it published a consultation document, Network Resilience: getting the lights back on safely following extreme weather, seeking feedback from customers and interested parties on what more can be done to meet and exceed customers' expectations during a power cut.  The consultation runs until 28 March.

·    The Board has agreed to replace SSE's Management Board with a smaller Executive Committee, which will be responsible for implementing agreed strategy and policy and for the operational management of all of SSE's businesses. Its members will be: Alistair Phillips-Davies, Chief Executive; Gregor Alexander, Finance Director; Jim McPhillimy, Managing Director, Enterprise; Mark Mathieson, Managing Director, Networks; Will  Morris, Managing Director, Retail; Martin Pibworth, Managing Director, Wholesale.  SSE's other Managing Directors all retain senior responsibilities within the organisation.

Energy market reforms

The Energy Act 2013 provides a framework for Electricity Market Reform (EMR), including Contract for Difference Feed-in Tariffs (CfDs) and a Capacity Market.  The consultation on proposals for EMR implementation concluded in December, with further consultations on the CfD contract and allocation process either open, or expected shortly.  Strike prices for renewable energy technologies for the period to 2018/19 have also been published as have details of projects qualifying for Final Investment Decision Enabling for Renewables.  Ofgem's consultation on National Grid Electricity Transmission's plan to introduce two new balancing services from the winter of 2014/15 concluded in December. 

While all of this represents progress in determining the eventual EMR framework it also illustrates the extent to which important detail has still to be confirmed.  SSE believes it has, and wishes to maintain and invest in, a diverse generation portfolio that helps to keep the lights on for people, businesses and organisations by being available, reliable and flexible.  The prospects for investment in generation assets in Great Britain are, however, not encouraging.

In addition, the Labour Party published in November its 'green paper' Powering Britain: One Nation Labour's plans to reset the energy market.  The paper states that 'energy that is affordable is essential' and includes a commitment to 'continue to work with industry and beyond' and invites comments on the proposals outlined in it by the end of March.  As stated in its six-month financial report on 13 November, there is an appetite for reform in SSE and it will look for ways of responding constructively to political and regulatory initiatives and responding further to the implications of the widely-held concerns about energy affordability.  It will publish in March its response to the proposals in the Labour Party's green paper.

Outlook
SSE will publish its results for the financial year to 31 March 2014 on 21 May 2014. While its final results remain subject to the factors set out in its six-month financial report in November, it expects that it will deliver:

·     an increase in the full-year dividend that is expected to be around 3% - SSE's target is to deliver annual real² dividend increases while maintaining dividend cover over the medium term within a range around 1.5 times;

·     an increase of between 2% and 4% in adjusted earnings per share¹, which SSE uses to monitor financial performance over the medium term because it defines the amount of profit after tax that has been earned for each Ordinary share; and

·     an increase in adjusted profit before tax¹ which is in line with the consensus of analysts' forecasts³.

SSE will issue its Notification of Close Period statement by 31 March 2014.

¹  As defined in SSE's six-month financial report published in November 2013.

²  Measured against the average annual rate of RPI inflation across each of the 12 months to March.

³  SSE believes that the consensus is around £1,535m, calculated as the average of 18 analysts' forecasts at 21 January 2014.  This is before charges for coupon payments associated with hybrid capital, which are presented with dividends and reflected within adjusted earnings per share.

Enquiries

Sally Fairbairn - Director of Investor Relations [phone]

Brian Lironi - Head of Media [phone]

 

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