Interim Management Statement

RNS Number : 2286N

SSE PLC

28 January 2016

 

TRADING STATEMENT

SSE plc completed the third quarter of its financial year on 31 December 2015. This trading statement:

·     includes information about SSE's operational and investment activities for the nine months to 31 December 2015;

·     provides updates on key developments since SSE published its interim results on 11 November 2015;

·     announces that SSE will reduce household gas prices in Great Britain by 5.3% on 29 March 2016;

·     confirms SSE remains on target to deliver adjusted earnings per share* for 2015/16 of at least 115 pence;

·     confirms that SSE still expects to report an increase in the full-year dividend for 2015/16 that will at least be equal to RPI inflation; and

·     confirms that SSE is targeting an increase in the full-year dividend for 2016/17 of at least RPI inflation, with annual increases thereafter of at least RPI inflation also being targeted.

*As defined in SSE's interim results statement on 11 November 2015

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

"SSE continues to fulfil its core purpose of providing the energy people need in a reliable and sustainable way.  I am pleased that we have been able to announce a reduction in retail gas prices - our third consecutive reduction in household energy prices - and to achieve a significant reduction in the number and duration of power cuts experienced by our networks customers.

"Market conditions, however, continue to be challenging. Nevertheless, SSE remains a resilient and diverse business, with a strong commitment to operational efficiency and delivering value for customers and investors.  It remains firmly focussed on delivering this year's financial objectives and making sure that the business is fully prepared for the future."

Operations in the nine months to 31 December 2015
In the nine months to 31 December 2015 (comparisons with the same nine months in 2014, unless otherwise stated):

·     SSE's Total Recordable Injury Rate was  0.12 per 100,000 hours worked, compared with 0.12 during 2014/15 as a whole;

·     Wholesale: total electricity output¹ from gas-fired power stations was 6.6 TWh, compared with 7.5TWh; from coal-fired power stations output was 3.7TWh, compared with 5.1TWh;

·     Wholesale: total electricity output¹ from renewable sources (conventional and pumped storage hydro electric schemes, onshore and offshore wind farms and dedicated biomass plant) was 6.8TWh, compared with 5.6TWh; 

·     Wholesale: total output from gas production assets was 290 million therms, compared with 296 million therms;

·     Networks: the number of Customer Minutes Lost² in the Scottish Hydro Electric Power Distribution area was 42, compared with 50; in the Southern Electric Power Distribution area it was 30, compared with 43;

·     Networks: the number of Customer Interruptions (power cuts) per 100 customers in the Scottish Hydro Electric Power Distribution area was 49, compared with 53; in the Southern Electric Power Distribution area, it was 34, compared with 46;

·     Retail: SSE's number of electricity and gas customer accounts in markets in Great Britain and Ireland fell from 8.58 million on 31 March 2015 to 8.28 million; during the same period, the number of home services customer accounts increased by 14% to over 390,000;

·     Retail: average consumption of electricity by SSE's household customers in Great Britain is estimated to have fallen by 3% from 2,700kWh to 2,618kWh; average consumption of gas by SSE's household customers in Great Britain is estimated to have remained flat at  240 therms; and

·     Retail: in total to 31 December 2015, SSE had installed over 135,000 smart meters in customers homes.

Relative to the 1981-2010 average used by the Met Office, the nine months period to 31 December 2015 was 0.5C warmer than average in the UK; and there was 110% of average rainfall in the north of Scotland, where SSE's hydro electric schemes are located.

¹ Output from electricity generating plant in which SSE has an ownership interest (output based on SSE's contractual share).

² Excludes exceptional events

Managing electricity networks for customers

Since the start of October 2015, SSE's electricity distribution business has issued nine weather warnings in relation to its Networks, and has experienced one so-called 'exceptional event' as a result of Storm Frank in late December 2015 affecting its network in the north of Scotland.  It brought winds of up to 90mph and resulted in significant flooding issues.  In extremely challenging working conditions power was restored to 93% of customers within 12 hours. SSEPD worked collaboratively with the Emergency Services, Local Authorities and other agencies to ensure that its customers were looked after.

Disposing of assets to support future investment

SSE has an established value programme which aims to deliver the disposal of assets which are not core to its future plans, result in a disproportionate financial burden or which could release capital for future investments.  The disposal of such assets is taken into account in SSE's total expected net capital and investment expenditure of £5.5bn across the four years to March 2018.  Proceeds and debt reduction from these planned and completed disposals are expected to result in a financial benefit in excess of £1bn and, to date, disposals with a total value of around £650m have been completed or agreed.

Investment in the nine months to 31 December 2015
SSE expects that its capital and investment expenditure will total around £1.65bn (gross) in 2015/16 and in the nine months since 1 April 2015 spend included:

·     Wholesale: over £200m in new onshore wind farms and almost £30m in E&P;

·     Networks: over £400m in Transmission investment, including progress with the Caithness-Moray transmission line, the largest capital project undertaken by SSE;

·     Retail:  investment totalling over £100m in energy supply and related services, including work associated with the roll-out of smart meters and improving digital services for customers.

Result of the Capacity Auction in December 2015

In the Capacity Auction in December 2015, SSE secured agreements to provide a total of 3,150MW of de-rated capacity from October 2019 to September 2020 at a price of £18/kW.   This comprises:

·     855MW of hydro electric and pumped storage plant;

·     2,252MW of gas-fired and embedded power generating plant; and

·     43MW of demand-side response

This means de-rated SSE capacity totalling 2,972MW did not secure an agreement, including the Peterhead and Fiddler's Ferry power stations. Since the result of the Capacity Auction, SSE has been analysing market conditions and options  for the future operation of power generating plant and expects to complete that analysis and reach conclusions shortly.  

Meanwhile, since the start of this winter, SSE has returned its gas-fired power station at Keadby (735MW) from 'deep mothball' to full commercial operation and completed investment to enable capacity (400MW) at its gas-fired Peterhead power station to operate commercially - a total of 1,135MW.

Following the Government's decision in December to no longer fund a carbon capture and storage demonstration project, SSE is unlikely to proceed further with the proposed project at Peterhead power station.

Investments in renewable energy

Strathy North onshore wind farm (67MW) located in Sutherland, Scotland became fully operational late November 2015 which means SSE's onshore wind farm capacity across GB and Ireland now totals 1,619MW.

The closure of the Renewables Obligation (RO) for new onshore wind projects from March 2016 will affect SSE's remaining onshore wind development pipeline. Following the pragmatic approach taken by the UK Government to grace periods, SSE expects to construct around 400MW of onshore renewable energy under the RO, subject to the Parliamentary passage of the legislation.

Two notable projects (Stronelairg - up to 240MW; and Strathy South - up to 133MW) continue to have significant uncertainties associated with their development timelines. In December the Court of Session quashed the consent decision for Stronelairg wind farm and SSE is appealing the decision alongside the Scottish Government. Strathy South does not have a final planning decision as it has been going through a public inquiry process and therefore may not qualify for the RO grace periods.  SSE will engage with the UK Government regarding future possibilities for these projects as policy develops.

In January SSE announced that jointly with Ireland's state commercial forestry company Coillte it had completed bank financing of €176m for the construction of the second and final stage of Galway Wind Park. The 169MW project, located south-west of Oughterard, is set to be Ireland's largest wind farm. Phase 1 of the project (64MW), which entered construction in February 2015, is owned and financed by SSE. Phase 2 (105MW) is a 50/50 joint venture between SSE and Coillte. Galway Wind Park is expected to complete in 2017, qualifying the project for the REFIT II support scheme.

SSE also has interests in offshore wind energy. The Beatrice Offshore Wind Farm Limited (BOWL) is an incorporated joint venture which, due to a recent agreement between SSE and Copenhagen Infrastructure Partner (CIP), will now consist of equity ownership at SSE 40% (previously 50%), CIP 35% (previously 25%) and Repsol (25%).  The proposed BOWL offshore wind farm was consented by Scottish Ministers in March 2014 and granted an Investment Contract by the UK Government in May 2014. The wind farm is expected to have capacity of up to 588MW, and while there remains significant work to do, BOWL plan to be in a position to reach Final Investment Decision by the end of March, in line with its Investment Contract.

Household energy prices in Great Britain

SSE will reduce household gas prices on its standard tariff in Great Britain by 5.3%** on 29 March 2016 - three months before SSE's current price freeze is due to come to an end. 

This latest reduction will save a typical household gas customer on our Standard tariff £32 per year* compared to existing prices and is SSE's third gas price cut in two years when it announced a unique price freeze in March 2014. SSE customers have not seen an energy price increase since November 2013; indeed, the new gas prices will be 12%, or £78 lower for an average customer than 2013 levels*. And a typical dual fuel Direct Debit bill on our Standard tariff will be £1,068 compared with £1,162 in November 2013***

Wholesale energy prices account for an ever-smaller proportion of the bill and there are different cost pressures affecting electricity and gas, but SSE is pleased that it will be able to bring down gas prices three months before its current price freeze is due to end.

* Based on Ofgem's typical annual consumption of 12,500 KWh for gas per year and inclusive of VAT.

**Based on Ofgem's typical annual consumption of 12,500 KWh for gas per year, and averaged across all regions and payment methods.

*** Based on Ofgem standard annual consumption of 3,100 KWh for electricity and 12,500 KWh for gas and averaged across all regions. Inclusive of VAT..

West of Shetland upstream gas assets

In July 2015 SSE announced  that it had entered into an agreement with Total E&P UK Limited to acquire: a 20% interest in the four gas fields and surrounding exploration acreage approximately 125km north west of the Shetland Islands, collectively known as the Greater Laggan Area; and a 20% interest in the new Shetland Gas Plant.  These investments are expected to help meet SSE's gas demand requirements, create value over the long term despite short term headwinds and represent SSE's focus on maintaining a balanced range of energy businesses across the portfolio. Work is progressing well at the Shetland Gas Plant in readiness for start-up and a major milestone was reached on the 31st December when the vent flare was lit.  The aim is to have the subsea wells open, and start gas export and sales in the coming weeks.

Progress with the Competition and Markets Authority investigation

SSE has long acknowledged that the CMA investigation into the GB energy market provides a degree of uncertainty and risk, but also presents the opportunity to achieve a stable policy and regulatory framework that gives customers confidence, allows regulators to regulate and encourages investors to invest in the GB energy market.

From the outset SSE's engagement with the CMA has highlighted the features of the GB energy market that are well-functioning  and benefiting customers while also proposing sustainable improvements to advance widely-shared objectives. The CMA is now expected to publish its provisional decision on final remedies in March 2016. SSE will consider these remedies in detail with a view to engaging constructively with the CMA, other stakeholders such as Ofgem and consumer groups as well as the Government.  It is important that the overall package of measures, expected to be determined in June 2016, benefits customers and can be effectively assimilated into the dynamic and changing retail market which is already undergoing significant modernisation and change.

Financial outlook
SSE uses adjusted earnings per share* 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.

Although the nature of energy provision means that its financial results in any single year are always subject to well-documented uncertainties, SSE is continuing to target adjusted earnings per share* for 2015/16 of at least 115 pence and will, as usual, update its financial outlook for 2015/16 in its Notification of Close Period.

As stated in its interim results statement in November 2015, in view of the wider energy sector conditions, SSE continues to recognise that adjusted earnings per share* is subject to significant uncertainties. This means that its dividend cover, based on dividend increases that at least keep pace with RPI inflation, could range from around 1.2 times to around 1.4 times over the three years to 2017/18. Nevertheless, SSE believes that a long-term target for dividend cover of closer to 1.5 times, based on a dividend that at least keeps pace with RPI inflation, is the right one to aim for and the development of the business is geared towards that goal.

SSE will publish its preliminary results for the financial year ending 31 March 2016 on 18 May 2016, and in advance of that will publish a Notification of Close Period on 24 March 2016.

Enquiries

Sally Fairbairn - Company Secretary and Director of Investor Relations [phone]

Sam Peacock - Director of Group Communications [phone]

 

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