Half Year 2020 SSE PLC Earnings Call
Tayside Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of SSE PLC earnings conference call or presentation Wednesday, November 13, 2019 at 9:00:00am GMT
TEXT version of Transcript
* Alistair Phillips-Davies
SSE plc - CEO & Executive Director
* Gregor Alexander
SSE plc - Finance Director & Executive Director
* Martin Pibworth
SSE plc - Wholesale Director, Energy Director & Executive Director
Alistair Phillips-Davies, SSE plc - CEO & Executive Director 
Good morning, everyone. Today, Gregor, Martin and I will set out how the financial year so far represents encouraging progress for SSE.
We're on track to deliver our key financial goals for the year with positive updates on the outlook for adjusted EPS, close to completing the sale of Energy Services, focusing on core businesses that are geared to realizing the opportunities presented by the U.K.'s legislation on net 0 emissions, working to build on Renewables' success in the recent CfD auctions for offshore wind and set to submit next month a strong RIIO T2 business plan for Transmission.
In summary, we're working through a complex operating environment to create value from developing, operating and owning world-class assets in order to deliver our 5-year dividend plan to 2023.
The encouraging progress across SSE includes safety. Over the past year, our total recordable injury rate has improved from 0.2 to 0.13. Good performance such as this, however, is no excuse for complacency, and our ultimate goal remains injury-free working.
I'll now hand over to Gregor to cover financial performance.
Gregor Alexander, SSE plc - Finance Director & Executive Director 
Thanks, Alistair. I'll start with 3 positive updates since we issued our preclose statement in September.
First, in our notification of close period, we forecast full adjusted EPS to be around 80p to 85p after the impact of forwarding for sale interest in gas production, about which there are a number of things to say. These interests comprise assets and hedging contracts. The structure of the planned transaction means hedging contracts will be retained. We estimate these will contribute around 3p to our adjusted EPS for the financial year 2019/'20. And this takes forecast adjusted EPS to around 83p to 88p.
Second, the European Commission's green light for the capacity market means our forecast adjusted EPS is no longer subject to receiving around GBP 100 million of suspended payments for the period from the scheme suspension to 30th September.
Third, our forecast adjusted EPS is always subject to our hydro and wind assets benefiting from normal weather conditions. The key months lie ahead, and they could be dry and still. But there has been enough wind and rain since September to put renewal energy output as a tail in November, slightly ahead of plan. These developments are all encouraging as we look to the full year and beyond.
I'll now take you through the half year results. We expect a full year EPM loss of around GBP 125 million to GBP 130 million, which is within the range we provided in September. Today's results are impacted by GBP 130 million of that loss being incurred in the first half. Looking ahead, EPM remains on track to earn a small adjusted operating profit from its service provision activities from 2020.
Excluding the businesses held for sale, adjusted operating profit is up 14% to GBP 491.9 million. Adjusted PBT is up 15% to GBP 263.4 million, and adjusted EPS is up 10% to 18p. This reflects a forecast adjusted current tax rate for '19/'20 of 12% compared to 6.9% in the same period.
In terms of businesses held for sale, gas production assets had an adjusting operating loss of GBP 15.3 million, and Energy Services had an adjusting operating loss of GBP 7.4 million. Exceptional items comprise a GBP 186 million charge related to continuing operations and a GBP 489.1 million impairment related to the planned sale of Energy Services. Of the total, less than 10% is cash. The GBP 186 million covers 3 main areas: impairment of coal stocks; redundancy costs; and operating losses at Fiddler's Ferry, which closes next March; charges relating to the sale of Energy Services, that's impairment to group assets; and impairment charges and redundancy costs from transforming IT systems and moving to cloud-based arrangements that offer greater efficiencies. The impairment of GBP 489.1 million to the carrying value of Energy Services is based on the headline consideration anticipated on completion of the sale of [SL] to OVO. We explored all available ownership options and believe the sale at an enterprise value of GBP 500 million will best serve customers, employees and shareholders.
There was a favorable IFRS 9 operating derivative remeasurement of GBP 154.6 million in the period, arising from an improvement in the out-of-the-money fair value of forward gas contracts. The adverse IFRS 9 financing derivative movement of GBP 69.9 million reflects the net impact of rate movements on cross-currency and interest rate swaps.
Our core businesses are electricity networks and Renewables. And together, they contributed GBP 410.8 million of adjusted operating profit in the first 6 months, up from GBP 372.7 million in the same period last year. These businesses have important common features. Networks deliver regulated returns, and Renewables offer significant levels of contracted income. They require common sales across project development, construction and operations where we have strong capabilities. And they both play an increasingly important role in the transition to net 0 emissions. These core businesses are at the heart of our focus on creating value and delivering on our dividend commitments to shareholders.
Our electricity network businesses and our investment in SGN had a combined adjusted operating profit of GBP 363 million in the first half, down 4%. The total RAV of our networks businesses is now about GBP 9 billion. I now take you through each of the businesses.
In Transmission, adjusted operating profit fell by 14%, mainly due to the phasing of allowed revenue, along with increased depreciation relating to ongoing capital expenditure. But the key development in the first half of the year was the publication of and positive stakeholder reaction to our draft business plan for RIIO T2. The central case for Totex is now set to be closer to GBP 2.4 billion, which could take our Transmission RAV to over GBP 5 billion by 2026. Alistair will say more about this later.
In distribution, higher costs associated with supplying Shetland, increased network fault costs and slightly lower-than-expected distribution use of system electricity volumes resulted in adjusted operating profit falling 10% to GBP 150.8 million.
Importantly, Ofgem's RIIO E2 process got underway in August, and we are responding constructively to its early thinking. Alistair will also say more about that later.
SSE's 1/3 ownership stake in SGN continues to deliver value with increases in allowed revenue and other income leading to a 20% rise in operating profit to GBP 102.1 million. For SSE Renewables, there was a 91% rise in adjusting operating profit to GBP 149.9 million, mainly due to a net increase in wind energy capacity in operation over the period, along with more favorable weather conditions for electricity output compared with the same period last -- a year ago.
The inherent flexibility of our hydro assets means they continue to deliver. And in the first half, it contributed around 1/3 of SSE's renewable EBIT. September CfD auction results were very encouraging for SSE Renewables. There's a huge amount of work to do with contractors and potential equity and project finance partners, but at this relatively early stage, we expect potential equity investment by SSE in these projects of between GBP 1 billion and GBP 1.5 billion, net of all sell-downs and project finance.
SSE Renewables is complemented by our thermal generation business, as Martin will explain later. The key positive developments was the reinstatement of the Capacity Market. The business made an adjusted operating profit of GBP 57.8 million compared to a loss of GBP 3.5 million in the same period a year ago. Martin will describe later the important role of other businesses in the SSE group.
For the businesses other than EPM, which I mentioned earlier, the half year results were: in Business Energy, adjusted operating profit was disappointing at GBP 2.9 million as a result of reduced volumes of energy sold, industry mutualization and increased bad debt. This reflects challenging market conditions, but profitability is expected to improve in the rest of the financial year. Airtricity saw improved margins, meaning adjusted operating profit was GBP 16.4 million, up from GBP 12 million. In Enterprise, the reduction in adjusted operating profit reflected the sale last March of a 50% stake in SSE Telecoms. Gas storage adjusted operating profit was 20.7 -- sorry, gas storage adjusted operating loss was GBP 20.7 million compared to GBP 3.7 million, reflecting that this year's auction of storage capacity resulted in no contracted sales. The plant will be operated on a merchant basis this winter, and we expect gas storage to earn a small profit for the full year.
On pensions, the Scottish hydroelectric and southern electric schemes at a total net accounting surplus of GBP 403.9 million at 30 September, an improvement of GBP 116.8 million on 31 March 2019. Due to the Scottish hydroelectric pension scheme being in surplus, we've agreed with the trustees to take a contributions holiday.
SSE is in year 2 of the GBP 6 billion 5-year investment and capital expenditure plan set out in May 2018. The phasing of projects means we're on course to invest around GBP 1.4 billion in this financial year. We are creating significant future investment opportunities. The CfD projects will be funded optimally, and we'll be in a position to give more detail as we reach final investment decision in the first half of 2020 for Seagreen and by late 2020 for Dogger Bank. As I said earlier, SSE's equity investment, net of sell-downs and project finance, is expected to be around GBP 1 billion to GBP 1.5 billion. We plan to set out our updated CapEx plans by May 2020. As ever, it will be guided by strong financial discipline.
Since April 2014, we've successfully created value by securing proceeds of over GBP 3 billion from sales of assets and businesses. This has resulted in gains on sale, fair value uplift and finance to be recycled through investment in new opportunities for growth in our core businesses. This recycling of capital from mature investments into new opportunities is a common feature of the utility landscape in Europe. And our approach here leads to value creation from developing and operating as well as owning assets.
Raising funds at competitive rates is fundamental to creating value through investment, and we've confirmed our position as the largest issuer of green bonds in the U.K. corporate sector. In September, our Transmission business issued SSE's third green bond, a 16-year, GBP 350 million eurobond maturing in September 2035 with a coupon of 2.25% and an all-in funding cost of 2.39%.
At 30 September, our adjusted net debt and hybrid capital stood at GBP 10.3 billion. Excluding hybrids, our average debt maturity is 7 years, unchanged since March. Adjusted net debt is expected to be around GBP 10.4 billion at March 2020. This forecast is based on cash inflow from the sale of Energy Services and proceeds from the sale of a stake in Seagreen but excludes proceeds from gas production assets, which are expected after the year-end.
We've always said the forecast level of net debt may vary to support value creation. And we also continue to be agile looking at potential disposals, investments and acquisitions whilst carefully managing overall debt levels. Our average cost of debt is now 3.6%, and we forecast in May adjusted net finance costs for the full year, excluding the impact of IFRS 16, are expected to be just over GBP 450 million, reflecting additional joint venture interest costs from Beatrice and lower capitalized interest.
Our current credit ratings remain amongst the strongest held by private sector utilities across Europe. And as a long-term business, we believe SSE should maintain a strong balance sheet. With high-quality assets and increasing focus on regulatory electricity networks and renewables and a wide variety of options for the future, I'm confident we'll maintain credit ratings that are sustainable and consistent with an ability to secure funding from debt investors at competitive rates.
SSE's first financial goal is to remunerate shareholders for their investment. The interim dividend of 24p is in line with the full year dividend of 80p that we expect to recommend in May and is another step in delivering on our 5-year plan to March 2023.
The encouraging progress we've seen so far in this financial year further underlines our confidence in the long-term value of our assets and earnings that will ultimately support the dividend in the years ahead.
I now pass you on to Alistair.
Alistair Phillips-Davies, SSE plc - CEO & Executive Director 
Thank you, Gregor. Amidst obvious political uncertainty, there's one issue on which society is broadly aligned: the urgent need to tackle climate change. Looking back over the half year, perhaps the most positive long-term policy developments for SSE's businesses with a net 0 legislation passed in the U.K. and the climate action plan published in Ireland. With the UN Climate Change Conference in Glasgow this time next year, we'll be encouraging the U.K. and Irish governments and other stakeholders to enable faster and further decarbonization across the electricity, transport and heat sectors, fulfilling the huge potential of renewable sources of electricity. Taking carbon out of electricity is at the heart of our strategy to develop, operate and own assets supporting the transition to net 0 emissions.
We're in the right place, doing the right things at the right time to create sustainable value for shareholders and society. That's why SSE doesn't have a strategy for sustainability. It has a sustainable business strategy. We have 4 strategic goals directly linked to the UN Sustainable Development Goals. We have pledged to cut carbon emissions, deliver more renewable electricity, enable more electric vehicles and lead in fair wages and tax. Our sustainable business strategy is reflected in good performance in key environmental, social and governance indices. These are increasingly important benchmarks for investors, and we're positioning ourselves to be attractive to ESG-minded funds.
Following the CMA's launch of its merger inquiry into the Energy Services OVO sale, I'm optimistic of a successful completion of the transaction early in the new year. This will be a major milestone in reshaping SSE to focus on electricity networks and renewables. Earlier, Gregor set out some of the common features of those core businesses. But after the sale of Energy Services and then gas production assets, we'll retain other businesses that complement this core. Martin will now look at what these businesses bring to the reshaped SSE group.
Martin Pibworth, SSE plc - Wholesale Director, Energy Director & Executive Director 
Thank you, Alistair. Even after Energy Services is sold, SSE will retain customer-facing businesses for a simple, strategic reason. They complement our core market-based business of Renewables.
Business energy provides a route to market for the electricity outputs from a generation, and this could become even more valuable to SSE Renewables in the years ahead as markets seek corporate PPAs and emissions reductions.
Across Ireland, the benefits to customers and other stakeholders of the vertically integrated model exemplified by SSE electricity and its Generation Green campaign are substantial and enterprises our division for new businesses to create platforms for growth as the energy system evolves such as distributed energy and electric vehicle infrastructure. These businesses, therefore, complement our core, and they create opportunities and options in changing markets.
The reality of the net 0 transition is that variable renewable output requires backup generation. Older, higher carbon stations have come to the end of their life. Nuclear is too expensive, and we don't yet have enough cost-reflective zero-carbon flexible power. With some of the most flexible and efficient gas-fired power stations, SSE is filling this gap. And we are today publishing a paper that shows gas-fired generation will continue to provide a unique and important role in the U.K. and Ireland energy systems in the short, medium and long term.
Providing flexibility in National Grid's balancing mechanism will remain an important income stream. They vary from year-to-year, but earnings can exceed GBP 50 million per annum. We also have a leadership position in new flexible plants through the GBP 350 million Keadby 2 project in Lincolnshire. We believe it will be one of the cleanest and most efficient CCGTs in the world, and it's on target for commissioning by 2022.
Our thermal business has a new leadership team under Stephen Wheeler with a mandate to explore emerging technologies like hydrogen and carbon capture usage and storage. We'll be guided by financial discipline and won't develop further CCGTs without a pathway to decarbonization, which these technologies could provide.
Our growing portfolio of multi-fuel plants also has an important transitionary role in waste management as we move towards a secular economy. Building on the success of the third plant at the site, Ferrybridge Multifuel 2 is now taking deliveries of fuel as we test the plant before full commissioning shortly. We'll also make a final decision soon on whether to go ahead with investments in a new 50-megawatt multi-fuel plant at Slough, which we would expect to be completed in 2023. Including Slough, in a typical year, SSE's share of its multi-fuel assets is expected to prevent more than 1 million tonnes of waste going to landfill and generates over 600 gigawatt hours of electricity. These are high-quality assets, providing significant economic and societal value.
Over the past 5 years, we've secured a significant reduction in carbon emissions. We expect to show a temporary increase for the full year as the remaining coal stocks at Fiddler's Ferry are used before the station closes in March 2020. But we remain committed to a target to achieve a further 50% reduction in carbon intensity by 2030. In fact, we aim to beat this, and our future plans for thermal generation will always be consistent with our 2030 targets and wider ambitions for net 0 emissions in the U.K., Ireland and elsewhere. I'll now hand you back to Alistair.
Alistair Phillips-Davies, SSE plc - CEO & Executive Director 
Thank you, Martin. A year ago, we announced our plan to create SSE Renewables, and since then, I've grown even more optimistic about this business for 4 reasons. First, the completion of Beatrice has confirmed our capability in partnering to develop and operate world-class offshore wind farms. Secondly, through our development capability and procurement and partnership skills, we've shown we can compete successfully in renewable energy auctions. Third, our wind energy pipeline is progressing. We're moving some onshore wind projects closer to being subsidy free, and we have offshore wind sites in advancing stages of development. And fourth, the skills, scale and future pipeline of this business are being demonstrated to a wide range of stakeholders, which in itself should open up new opportunities in the future.
Clearly, the successful bidders for CfD contracts face a potential delay from the judicial review process. This is disappointing, but we're in regular dialogue with the U.K. government and the Low Carbon Contracts Company. We believe the government will robustly defend its position and aims to secure a positive resolution to this issue. So we're looking forward to progressing Dogger Bank and Seagreen. The projects as a whole should generate over 20-terawatt hours of renewable energy in a typical year, equal to around 7% of the U.K.'s current electricity demand. Our share of the projects is currently 2.2 gigawatts, and the success in securing 15-year CfD contracts was testament to SSE Renewables' capability. The strike price levels are consistent with securing sustainable returns on investment across the contract term, and we believe that well-designed assets should generate sustainable returns well beyond the 15 years.
With offshore wind now one of the cheapest forms of electricity generation in the U.K., well below nuclear, we believe the next U.K. government must raise its ambition well above the 30 gigawatts of offshore wind operating by 2030.
Dogger Bank is a 50-50 joint venture with Equinor and will be the world's biggest offshore wind farm. It will also feature the world's most powerful wind turbine, GE's 12-megawatt Haliade-X. Dogger comprises 3 projects that are each expected to generate more than 5,000 gigawatt hours annually and combined will power 4.5 million homes. We have a series of key steps in order to deliver Dogger, and these include a target of starting onshore works next spring before financial close late in 2020.
Seagreen Phase 1 is currently wholly owned and will benefit from the CfD for 454 megawatts. We plan to build the full 1,075 megawatts with the remainder operating on a mix of PPAs and merchant basis. This is expected to generate annual volumes of around 5,000 gigawatt hours. In line with our strategy to lead in development and operations and to optimize our ownership assets, we intend to sell down an equity stake in Seagreen, expected prior to financial close. There's development premium to be realized, and we believe SSE Renewables is a premium developer. As with Dogger, there is work still to do as we approach a final investment decision on Seagreen, which we would expect in the course of 2020.
SSE Renewables has 2 gigawatts of installed onshore wind capacity in GB and on the island of Ireland. We also have a pipeline of over 1 gigawatt of project options, including the fully consented 457-megawatt Viking wind farm in Shetland. Viking was unsuccessful in securing a CfD contract, but there is an opportunity to develop on a subsidy-free basis as long as Ofgem's consultation results in endorsement and Scottish Hydro Electric power distributions propose contribution towards the new transmission link for Shetland. Beyond Viking, we believe we can deliver subsidy-free merchant onshore wind at high-quality sites. We have several such sites with potential routes to market, including extensions to existing wind farms such as Gordonbush, which secured consent earlier this month.
Whilst SSE Renewables currently has an 8-gigawatt pipeline of onshore and offshore developments in the U.K. and Ireland, we're looking beyond that and expect to be an active participant in the future Crown Estate in Crown Estate Scotland rounds. In Arklow Bank, Ireland, this also represents an important offshore wind option, and we hope to see the project securing necessary policy support from the Irish government that it works towards delivery under the climate action plan. As we've said before, extending to other geographies, our core competencies in renewables present significant potential for future growth. We continue to explore opportunities and assess whether the right risk/reward balance can be achieved. As ever, strict capital discipline will guide any decisions.
Hydroelectricity was the first chapter in SSE's long-running renewable story, and nature's batteries in the Scottish glens continue to create value. Our hydro fleet is operationally best-in-class with high levels of availability and efficient OpEx, supported by a proactive long-term capital investment program. There are options, too, such as new pumped storage at Coire Glas.
SSE's regulated electricity networks business are integral to the U.K.'s decarbonization ambitions and should be a source of value for shareholders and society for years to come. With such a strong track record in maintaining power supplies and investment and innovation all heading in the right direction, it's disappointing that they continue to feature in Labor's proposals for renationalization. We're in no doubt that the interest of electricity customers and the attainment of net 0 emissions are best served by well-run, independently regulated private companies. We'll continue to keep shareholder value at the forefront of our minds and make this powerfully as we can the case against state control.
We have a progressive electricity distribution business that's central to decarbonization with electrification likely to be a key means for decarbonizing heat and transport as a clear potential for future RAV growth. Alongside this, we must expect to see new opportunities for growth through the procurement and management of flexibility services as we progress through to RIIO ED2. We're heavily focused on improving performance in distribution by delivering significant change and modernization of operations, infrastructure and work practices, alongside a major investment program. We're progressing internally, but we know we need to deliver and to move faster, and this we will do.
We're focusing heavily on regulatory incentives with a good start to the year on customer supply interruptions and customer minutes lost. Increased system automation is a key part of this success. We're focused on maintaining good performance through the winter. I believe we're also leading the pack on innovation. We're replacing legacy systems with new technology and investing in the systems, platforms and scalable technologies needed to become distribution system operators in a more localized system.
Ofgem's early engagement on the RIIO ED2 priorities, regulatory framework and approach is encouraging. We believe the price control needs to build on ED 1 progress on network reliability, customer service, connections and innovation; enable a proactive approach to the investment needed to accommodate new services such as electric vehicles while maintaining security of supply; provide strong incentives to encourage more innovation and reflect the changing DSO role; and deliver a regulatory settlement that's fair for both consumers and investors.
Investment in the transmission grid in the north of Scotland is critical to delivery of the U.K.'s net 0 goals and also creates significant growth opportunities for SSE. With the remaining investment pipeline of GBP 500 million in the current price control, we're on track to grow RAV to around GBP 3.6 billion by 2021. We believe the network will require further investment that could take the RAV to over GBP 5 billion by 2026. The case for this investment plan will be set out in transmission RIIO T2 business plan and network for net 0 based on analysis of the certain needs of users. The plan proposes a minimum total expenditure of closer to GBP 2.4 billion over the 2021 to 2026 price control. The final business plan will be submitted next month, and we believe it will represent a package that's fair to both customers and investors.
Transmissions' forecast RAV growth doesn't include up to GBP 1.5 billion for the provision of island links. Whether the 600-megawatt Shetland link is built first depends on confirmation by Ofgem that the proposed contribution from Scottish Hydro Electric Distribution represents the best means of meeting Shetland's future energy demand and will require an approved needs case. The 600-megawatt Western Isles link hinges on appetite for investment on the part of renewable developers, and SSE continues to liaise with developers and Ofgem on the issue. We're doing the same in relation to the 220-megawatt Orkney link.
Taken together, our electricity networks are strong, stable businesses with a central part to play as decarbonization of power, transport and heat gathers pace and a positive outlook for future value creation. Along with our stake in SGN, they should provide a total RAV of around GBP 10 billion by 2023.
To summarize before questions, this financial year so far represents encouraging progress for SSE. We are set to meet our full year financial goals with positive updates on the outlook for adjusted EPS, close to completing the sale of Energy Services, focusing on core businesses that are delivering on a low-carbon strategy, working to build on recent successes in CfD auctions for offshore wind and ready to submit a strong business plan for the next transmission price control period.
In summary, we're working through a complex operating environment to create value from developing and operating as well as owning world-class assets in order to deliver our 5-year dividend plan to 2023.
We'll now take questions. Thank you. Mark first, please.