SSE plc

 TRADING STATEMENT

SSE plc completed the first quarter of its financial year on 30 June 2016 and its Annual General Meeting is taking place today (21 July) in Perth.  This trading statement provides information on its operational and investment activities in the first trading quarter of the financial year including:

·     a summary of operational performance in SSE's Wholesale, Networks and Retail (including Enterprise) businesses; 

·     progress made in SSE's plans to invest around £1.75bn in 2016/17 in energy infrastructure in the UK and Ireland;

·     agreement to dispose of its three remaining PFI street lighting special purpose entities;

·     an update on the possible sale of up to one third of SSE's equity stake in SGN, as announced at the 2015/16 Preliminary Results; 

·     confirmation that SSE is targeting a return to growth and adjusted earnings per share of at least 120p in 2016/17; and

·     confirmation that SSE is continuing to target 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.

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

"SSE has made a solid start to the financial year with continued focus on operational efficiency, putting our customers at the heart of everything we do and progressing long-term investments in the UK's and Ireland's energy infrastructure, including significant progress with the Beatrice Offshore Wind Farm and the new Caithness-Moray electricity transmission link. 

"The external operating environment continues to have an impact on SSE. Whilst the publication of the final remedies by the CMA brings clarity, it does constitute a considerable package of reforms to be implemented into the fast changing energy supply market.  The outcome of the UK's referendum on membership of the EU could lead to aspects of the financial, regulatory and political environment becoming more uncertain in the years ahead.

"Nonetheless, SSE's balanced range of energy businesses and strategic focus on the delivery of efficient operations and investments, and meeting the needs of our customers, means that we remain well placed to fulfil both our core purpose, of providing energy people need in a reliable and sustainable way, and our financial objectives in the years ahead."

Business-by-business operational performance

Efficient operations are at the core of SSE's strategic framework. Operational performance in the three months to 30 June 2016 (comparisons with the same three months in 2015, unless otherwise stated) included: 

·     Safety: Total Recordable Injury Rate for employees and employees of other companies working on SSE sites was 0.26 per 100,000 hours worked, compared with 0.20 on a rolling 12 month basis;

·     Wholesale: total electricity output from gas- and oil-fired power stations was 4.40TWh, compared with 2.42TWh; Fiddler's Ferry coal-fired power station did not produce any electricity due to market conditions (coal-fired power stations produced 0.41TWh in the same three months in 2015);

·     Wholesale: total electricity output from renewable sources (conventional and pumped storage hydro electric schemes, onshore and offshore wind farms and dedicated biomass plant) was        1.51TWh, compared with 2.20 TWh reflecting differences in weather between the two periods; 

·     Wholesale: total output from gas production assets was  158 million therms (2.56 MMboe) of gas  and 0.20 MMboe of liquids, compared with 115 million therms (1.87 MMboe) and negligible liquids, as a result of the Greater Laggan Area assets coming on-line in February 2016;

·     Networks: the number of Customer Minutes Lost in the Scottish Hydro Electric Power Distribution area  was  16, compared to 13; in the Southern Electric Power Distribution area it was  10, the same as the previous year;

·     Networks: the number of Customer Interruptions (power cuts) per 100 customers in the Scottish Hydro Electric Power Distribution area was 14, compared with 18; in the Southern Electric Power Distribution area, it was 11, the same as the previous year;

·     Retail: SSE's number of electricity and gas customer accounts in markets in Great Britain and Ireland fell from 8.21 million on 31 March 2016 to 8.16 million; its number of home services customer accounts grew from 400,000 to 416,000 in the same period; and

·     Retail: average consumption of electricity by SSE's household customers in Great Britain was estimated to be 821 kWh, compared with 822 kWh; average consumption of gas by SSE's household customers in Great Britain was estimated to be 78 therms, compared with 75 therms.

Capital and investment expenditure in long-term energy infrastructure

SSE continues to expect that its capital and investment expenditure will total around £1.75bn in 2016/17 and be in the range of £5.5 - £6.0bn across the four years to March 2020. Progress with SSE's major investments since 1 April 2016 includes:

·     Wholesale:  after reaching Financial Close in May 2016 manufacturing and construction has begun for the Beatrice Offshore Wind Farm, in which SSE has a 40% stake. Work at the operations and maintenance facility in Wick and the transmission works in Moray will commence this year. Offshore construction will begin in 2017. The 588MW, 84 turbine project, situated in the Outer Moray Firth, is expected to become fully operational in 2019;

·     Wholesale: a final investment decision has been taken to progress a second Multi-Fuel plant at the Ferrybridge Power Station site in West Yorkshire. The 70MW Ferrybridge Multifuel 2 (FM2) project will be built next to the recently completed FM1 project,  will require total investment of around £350m and is expected to be fully operational by the end of 2019; 

·     Networks: SSE's subsidiary Scottish Hydro Electric Transmission continues to progress the construction of the new link between Caithness and Moray, the largest capital project undertaken by SSE, which is expected to be operational by the end of 2018. The onshore cable installation in Caithness is almost complete, as is the manufacture of the offshore cable; and

·     Retail:  SSE has continued to make investments in its customer-facing digital channels.

In addition, together with its meter asset providers, SSE continues the roll-out of smart meters for all its customers in GB.  On 4 July 2016, SSE installed 1,000 smart meters in a single day for the first time and to date SSE has installed over 250,000 smart meters in total. 

Disposal of UK PFI street lighting special purpose entities (SPEs)

SSE has signed a sale and purchase agreement with DIF Infrastructure IV for its equity interest in its three remaining UK PFI street lighting SPEs.  The sale is expected to reduce SSE's net debt by around £130m on completion through the removal of project-related senior debt together with the cash consideration, although the exact amount will not be finalised until after completion, which is expected later this financial year.  Further information on this disposal can be found on sse.com/newsandviews.

This disposal, when completed, will conclude SSE's two-year value programme, and is expected to take the total disposal proceeds and debt reduction to over £1.1bn to support future operations and capital expenditure as part of SSE's long-standing strategic commitment to efficiency and disciplined investment.

Reviewing the value of SSE's equity stake in SGN

At its Preliminary Results 2015/16 SSE announced that it has decided to consider options to crystallise some value for shareholders from its long-term investment in SGN and is considering the sale of up to one third of its 50% equity stake in SGN Limited. In considering whether to progress the disposal of part of its equity in SGN, SSE will be very mindful of the need to ensure that SGN itself is in a good position to build on its track record of success in the future.

A sale process is now under way.  Should a sale be completed, SSE would expect to use the proceeds to return value to its shareholders or to invest to create value for shareholders, should there be the right opportunity, in a way that would be determined at the time.

Financial outlook

SSE continues to fulfil its core purpose of providing the energy people need in a reliable and sustainable way. It operates with a clearly-defined and long-term strategic framework built around a continued focus on efficient operations and investment. The financial objective of SSE's strategy is a commitment to give shareholders a return on their investment through the payment of a full-year dividend that increases at least in line with RPI inflation.

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 targeting a return to growth and adjusted earnings per share of at least 120p in 2016/17.

As a result of its investment over the last five years, the majority of SSE's asset base and operating profit now relates to economically-regulated Networks and government-mandated renewable sources of energy.  Over the three years to 2018/19, SSE continues to expect its dividend cover could range from around 1.2 times to around 1.4 times, based on dividend increases that at least keep pace with RPI inflation.  SSE continues to maintain a long term target for dividend cover of above 1.4 times and closer to 1.5 times, based on dividend increases which at least keep pace with RPI inflation.

SSE believes that the quality and efficiency of its operations, assets and investment opportunities means it can continue to deliver a full-year dividend that at least keeps pace with RPI inflation in 2016/17 and in the subsequent years.

SSE has also published its Consolidated Segmental Statement for 2015/16 on sse.com, the content of which was previewed in its 2015/16 Preliminary Results. 

The outcome of the UK's referendum on membership of the European Union

SSE noted in its Annual Report 2016 that the markets in which it operates are subject to a high degree of regulatory and legislative intervention and that politics, regulation and compliance is one of its principal risks.  Political and regulatory issues and uncertainties have long been factored into SSE's capital investment and expenditure considerations, and will continue to be so.  

Consequently, the potential impact to the SSE Group of the outcome of the referendum on the UK's membership of the European Union has been considered against this identified principal risk and SSE will continue to monitor and manage any impact on its businesses following the result of the EU referendum. 

SSE continues to engage openly and constructively with the four governments within the UK, the Irish government and the EU institutions, and encourages them to take every opportunity to work together also. It is optimistic that this will happen in practice and that the four governments within the UK will each adopt a carefully considered and responsible approach to all of the issues arising from the EU referendum result.

Energy flows across geographical borders and SSE believes that the UK's focus should be on competitively and cost-effectively maintaining security of supply and decarbonising the economy, supported by progressive market harmonisation.  In its representations to governments, SSE will therefore make the case in this period for stability, market harmonisation and effective carbon pricing.

Despite uncertainty arising from the result of the EU referendum, much of the UK Government's agreed agenda for the GB energy market is progressing following the result of the EU referendum. Important details about how the Energy Company Obligation (ECO) will function in 2017/18 have been published. SSE also particularly welcomes the UK Government's decision to accept the fifth carbon budget, setting a target for the UK's emissions between 2028 and 2032 to be 57% below 1990 levels, and Parliamentary approval of the planned reforms to the functioning of the Capacity Market.  These include the increased procurement volumes for the auction in January 2017, for delivery in 2017/18, and for the T-4 auction for delivery in 2020/21. SSE will now prepare for pre-qualification and the auctions taking place in December 2016 and January 2017. 

The publication by the Competition and Markets Authority of its Final Decision on Remedies 

After two years of thorough scrutiny, of what is a dynamic GB energy market, the CMA's final remedies published on 24 June 2016 present a considerable package which can help to deliver a competitive market which customers can trust.

SSE does not support every aspect of the CMA's final remedies. Remedies such as the prepayment meter price cap will need to be implemented with due consideration to the impacts on competition and customers' engagement with the market; and the same concerns apply to the proposal for a database of customers who have not switched supplier in the last three years, which SSE believes risks deterring customers from engaging with the energy market.

If however, implementation of the remedies is conducted in a collaborative and practical manner, with the regulator working closely with the industry and other stakeholders, then the CMA's proposals can help to deliver meaningful market reforms for customers. Considerations of how the CMA remedies may impact on customers' engagement with the energy market must also be assessed alongside existing market changes such as smart metering, faster switching and measures being taken by SSE to invest in its customer-facing digital channels.

Overall SSE recognises that the CMA has set the direction of travel in the GB energy supply market and the onus is now on suppliers to work with the regulator and other stakeholders to deliver a package of reforms that are in the interests of customers.

Notification of Close Period

SSE will issue a Notification of Close Period statement on Wednesday 28 September 2016.

Enquiries

Investors and Analysts                 ir@sse.com                        +44 (0)845 0760 530

Media                                                  media@sse.com              +44 (0)845 0760 530

Notes

1.Adjusted earnings per share describes earnings per share based on adjusted profit after tax which excludes exceptional items and re-measurements arising from IAS39, deferred tax and interest costs on net pension scheme liabilities.

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

3. Customer minutes lost excludes exceptional events.