SSE Plc – Half-year Report

This report sets out the interim results for SSE plc for six months to 30 September 2018, which are ahead of the expectations set out in the Trading Statement and Notification of Close Period Statement issued on 12 and 25 September 2018 respectively.  

Headline results (excluding SSE Energy Services)

Excluding SSE Energy Services, which is held for disposal:

·     adjusted earnings per share is 19.6 pence (down 39.9%);

·     adjusted profit before tax is £246.4m (down 40.9%);

·     reported loss per share is 22.6 pence; and

·     reported loss before tax is £265.3m.

SSE has also today announced the interim dividend per share for 2018/19 of is 29.3 pence, an increase of 3.2%.

SSE is today announcing that it will consolidate the development, operation and ownership of all of its renewable energy assets in the UK and Ireland under a single entity called SSE Renewables.

Revenue – adoption of IFRS15

As a consequence of adoption of IFRS 15 on 1 April 2018, optimisation trading revenue and costs of sales, which were previously presented gross, are now presented within cost of sales on a net basis. This has reduced revenue and cost of sales by £7.9bn in the six months ended 30 September 2018, with no impact on gross profit or the Group's cashflows.

Outlook

Dividend

SSE continues to intend to recommend a full-year dividend of 97.5 pence per share for 2018/19 and to deliver the five-year dividend plan set out in May 2018.

Adjusted operating profit (excluding SSE Energy Services)

The outlook for SSE's Networks and Wholesale businesses for the financial year to 31 March 2019 is in line with that set out in its Trading Statement:

·     Adjusted operating profit for the Networks businesses is expected to increase by a mid-single digit percentage; and

·     Performance of Wholesale businesses will continue to be dependent on the range of factors set out at the start of the financial year; Energy Portfolio Management (EPM), however, is now expected to incur a slightly lower than previously forecast adjusted operating loss for 2018/19, at around £300m, as a result of action taken since September.

Adjusted earnings per share (excluding SSE Energy Services)

Excluding the results for SSE Energy Services, which is now held for disposal, SSE currently expects to deliver adjusted earnings per share in the range of 70p to 75p for 2018/19 as a whole, which compares to 98.3p on a like for like basis for the year ended 31 March 2018.

The forecast adjusted EPS number excludes two gains on sale: £74.2m recognised from the sale in May 2018 of a further 14.9% stake in Clyde Wind farm. A further £53m is expected to be received as a distribution from the Environmental Capital Fund (in which SSE has a 48% stake) as a result of its sale of the independent gas transportation network Indigo Pipelines in November 2018SSE Energy Services

SSE currently expects that its household Energy Supply Business (part of SSE Energy Services) will report an adjusted operating profit margin of between 2% and 3% for the year ended 31 March 2019 compared to 6.8% in the year ended 31 March 2018, reflecting competitive pressures and the anticipated impact of the Default Tariff Cap from 1 January 2019.  Margins are expected to be lower still in 2019/20.

Following Ofgem's final decisions on the Default Tariff Cap on 6 November and the end of the period for appeals on the CMA's approval of the proposed transaction on 7 November, SSE and innogy SE made an announcement regarding discussions on revised commercial terms and the potential implications of these discussions for the likelihood and timetable for completing the proposed combination of SSE Energy Services and npower Ltd.  As previously stated, these discussions are expected to take place over several weeks and an update on their progress will be provided as soon as possible, and certainly by mid-December. 

SSE does not intend to provide further comment on the discussions until such an update, but creating a new independent energy supplier remains its objective.  There is now some uncertainty as to whether this transaction can be completed, as originally contemplated; nevertheless, the Board believes that the best future for SSE Energy Services, including its customers and employees, will continue to lie outside the SSE group.

Capital and investment expenditure

SSE's capital and investment expenditure for 2018/19 is still expected to total around £1.7bn.  Around two thirds of this relates to economically-regulated networks and renewable energy.  Material progress has been made at key projects such as the new Caithness-Moray transmission link, the Stronelairg onshore wind farm and the Beatrice offshore wind farm, which all continue to be on schedule for completion as planned.

Forecast EPM impact in 2019/20 and new approach to hedging

Looking ahead, the financial impact of the energy portfolio situation set out in the Trading Statement on 12 September 2018 is expected to extend into 2019/20.  Following action taken since September, SSE currently expects EPM to report an adjusted operating loss of around £115m in 2019/20 with a potential variation around this of +/-£25m. Thereafter EPM is expected to earn a small profit through service provision.

SSE has today published on sse.com a document setting out its new approach to the management of its energy portfolio, the objective of which is to reduce SSE's exposure to volatility in energy commodities and so make their impact on shorter-term earnings more visible and predictable.  SSE expects to transition to this hedging approach over the period to 31 March 2020.

Focus on core businesses

The evolution of the SSE group of businesses is continuing.  SSE is today setting out how it is taking forward its plans to focus on its core businesses of economically-regulated networks and renewables, complemented by flexible thermal generation and business energy sales.  This focus is in line with its vision of being a leading energy company in a low carbon world.  This includes:

·     Setting out options for securing value including planned disposals of stakes in two onshore wind farms; and through partial or full disposal of its investment in Gas Production.  Options for use of any proceeds from disposals include debt management, returning value to shareholders through share buy backs and/or creating value through investment.  SSE is also engaging with partners to help its Telecoms business deliver value for customers and shareholders.

·     Confirming its investment pipeline in Electricity Transmission, its focus on leadership in innovation in Electricity Distribution and its commitment to targeting frontier performance in the RIIO 2 price control.

·     Announcing plans to consolidate the development, operation and ownership of all of its renewable energy assets under a single entity called SSE Renewables, with its own experienced management team focused entirely on delivering a strategy to create long-term value from and future opportunities in renewable energy; and

These plans support the evolution of the SSE group to be clearly focused on low-carbon infrastructure, providing high earnings visibility and positioned to create value for shareholders and society through the low carbon transition.

Richard Gillingwater, Chairman of SSE, said:

“Although our half-year results are slightly ahead of the position we set out in September, they fall well short of what we hoped to achieve at the start of the year.  This is disappointing and regrettable, but important changes are now being made to the way SSE manages its exposure to energy commodities.   

“The commercial terms of the proposed combination of SSE Energy Services and npower are the subject of ongoing discussions, and creating a new independent energy supplier remains our objective.  The Board believes that the best future for SSE Energy Services, including its customers and employees, lies outside the SSE group.

“Looking ahead, we are taking forward the strategy we set out in May to position SSE as a leading energy company in a low carbon world, with a focus on regulated networks and renewables, complemented by flexible thermal generation and business energy sales.  Material progress is being achieved in these businesses, which make up most of the value in SSE.

“The 29.3 pence interim dividend that we have announced today is the first step in delivering our five-year dividend plan and paves the way for the 97.5 pence full-year dividend that we expect to recommend in May. 

“This is a company with a clear strategy for its core businesses and highly valuable assets in a sector that's yielding investment opportunities that go with the grain of political, economic and environmental focus on decarbonisation, and it is this that will support the delivery of our dividend plan in the years to come.”

SSE's financial performance in the six months to 30 September 2018 at-a-glance

At 30 September 2018 SSE Energy Services is held for disposal and has been accounted for as a discontinued operation. Therefore, the results of SSE Energy Services have been excluded from the profit and loss metrics in the tables below. However, as the Group continues to fund SSE Energy Services, and will do so until completion of the transaction, the capital expenditure and debt related metrics presented below include the activity of that business. Details of SSE Energy Services performance can be found in the Group Financial Overview.

Note:  The definitions SSE uses for adjusted measures are consistently applied and are explained in the Alternative Performance Measures section of this document, before the Condensed Interim Statements

Further Information