OREANDA-NEWS. SSE plc will today hold its Annual General Meeting in Perth. This Interim Management Statement summarises SSE’s performance since the start of the current financial year on 1 April 2013, and includes updates on operations and investments in SSE’s Networks, Retail and Wholesale businesses.

As previously stated, SSE does not expect to provide an outlook for adjusted profit before tax before the publication of its third quarter Interim Management Statement; however it remains on course to deliver a full year dividend increase for 2013/14 that is greater than RPI inflation and to deliver above-RPI inflation dividend increases in the years after that.

Operations

In the three months to 30 June 2013 (comparisons with the same three months in 2012, unless otherwise stated):

SSE’s Total Recordable Injury Rate was 0.15 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 14, compared with 17; in the Southern Electric Power Distribution area it was 16, compared with 17;

Retail: SSE’s number of electricity and gas customer accounts in markets in Great Britain and Ireland fell from 9.47 million to 9.46 million;

Retail: average consumption of electricity by SSE’s household customers in Great Britain was estimated to be 920kWh, compared with 940kWh; average consumption of gas by SSE’s household customers in Great Britain was estimated to be 96 therms, the same as in the previous year. On a weather-corrected basis however, there was an underlying reduction of 2% in average household electricity consumption and an underlying increase of 0.3% in average household gas consumption.

Wholesale: total electricity output* from gas and oil fired power stations was 2,219GWh, compared with 1,954GWh, partly reflecting the return to service of Medway; from coal-fired power stations output was 3,569GWh, compared with 3,737GWh; and

Wholesale: total electricity output* from renewable sources (conventional hydro electric schemes, onshore and offshore wind farms and dedicated biomass plant) was 1,756GWh, compared with 1,331GWh, partly reflecting additional capacity being in operation.

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 its Networks and Wholesale businesses. It is forecasting total capital and investment expenditure of around ?1.5bn for 2013/14 as a whole. In the three months since 1 April 2013:

Networks: SSE’s subsidiary Scottish Hydro Electric Transmission has completed work on reinforcing and upgrading the transmission network between Dounreay and Beauly; in addition, the Beauly-Fort Augustus (‘North’) section of the 400kV Beauly-Denny replacement line has now been energised.

Wholesale: SSE has continued to add to its capacity for generating electricity from renewable sources, including Calliachar wind farm (32MW), which has taken its total to 3,283MW.

Wholesale: Work is progressing well at SSE’s 460MW CCGT development at Great Island in the South-East of Ireland. The majority of civil works are completed, the 400-tonne transformer has been delivered, the power train has been positioned and the 60-metre stack has been constructed. The main activity is now focused on the delivery of mechanical and electrical works. The plant is expected to be commissioned in the second half of 2014.

Other developments

Since the publication of SSE’s financial results on 22 May 2013:

Galloper offshore wind farm, a 50:50 joint venture between SSE and RWE npower renewables, has received development consent from the Secretary of State for Energy and Climate Change. The Galloper site is adjacent to the fully operational Greater Gabbard offshore wind farm, and will be taken forward with a capacity of up to 504MW;

SSE has successfully launched a seven-year, €600m euro bond with a coupon of 2 per cent;

SSE’s subsidiary, Scottish and Southern Energy Power Distribution, has published a detailed business plan for the electricity distribution Price Control for 2015-23 that aims to deliver a 10% cut to the distribution network costs for customers in central southern England and the north of Scotland in 2015;

SSE has completed the assessment of 98% of cases under its Sales Guarantee raised by around 16,000 of its customers since 3 April and, following assessments, made payments averaging around ?75 to around 9,000 of those customers;

Alistair Phillips-Davies has become Chief Executive, in succession to Ian Marchant;

Sue Bruce, the Chief Executive of the City of Edinburgh Council, has been appointed a non-Executive Director of SSE with effect from 1 September;

SSE has entered into a new ?1.3bn Revolving Credit Facility provided by a group of ten banks. This facility - which was a self arranged deal - will run until July 2018 and replaces an existing ?900m committed facility that had been due to mature in August 2015; and

Ofgem has set out its ‘minded to’ position on the Needs case for the proposed reinforcement of the electricity transmission network around the Kintyre peninsula, designed to deliver around 260MW of capacity at an estimated cost of just over ?200m and planned to be completed in 2016.

Retail Market Review

Ofgem’s statutory consultation on the licence conditions associated with what it has described as ‘the most radical reforms to the retail market since competition began’ concluded on 23 July.

The reforms, which will take effect in the months from August 2013 onwards, are designed to limit to four the number of tariffs per fuel type, prescribe the information that suppliers give to customers and establish new enforceable standards of conduct for electricity and gas supply licence holders.

SSE remains supportive of the ‘simpler, clearer, fairer’ objectives behind the Ofgem reforms, but remains concerned that they will in practice add cost and complexity to energy suppliers’ relationships with customers. Nevertheless, the reforms that SSE itself has undertaken in the past two years mean it is in a relatively good position to implement as effectively as possible the new licence conditions.

Electricity Market Reform

On 27 June the UK government published a series of documents relating to its electricity market reform programme. On the same day, Ofgem published an electricity capacity assessment that contained a clear warning on security of electricity supply in the coming few years.

Against this background it is vital that the right balance is struck between keeping open existing electricity generation plant and making the electricity market economic for new plant. SSE believes that the capacity market, which has been designed as part of the EMR process, can achieve this and can therefore ensure that the UK’s electricity supply remains secure. The UK government’s intention to defer delivery of the capacity market until 2018/19, however, means that the next few years will remain uncertain for both existing and new plant, and does not address the risk of imminent shortages.

National Grid’s proposal to procure two new types of ‘balancing’ services may provide additional security for this period but will not improve market conditions. It will not, therefore, enable investment decisions for new plant to be made and may create uncertainty about the viability of existing plant in the energy-only market.

The government’s plans for Contract for Difference Feed-in Tariffs to remunerate the production of electricity from low carbon sources are continuing to evolve, but the level of detail underpinning the planned Contracts is not yet enough to allow SSE to determine whether the balance between risk and reward for investing in low carbon electricity generation in the future will be the right one. In line with its long-standing financial principles, SSE will maintain its rigorous approach to investment decision-making and so will only make decisions to invest on the basis of a clear and appropriate risk and reward balance.

Financial outlook

SSE will publish its results for the six months to 30 September 2013 on 13 November 2013. In measuring adjusted profit before tax, SSE focuses on the full year, as opposed to six months, because half-year results at group level and within reportable segments, especially in Retail and Wholesale, are more likely to fluctuate, with unusual variations or circumstances.

As stated in its Annual Report 2013, SSE’s expectation at the start of each financial year is that it will not provide an outlook for adjusted profit before tax before the publication of its third quarter Interim Management Statement, and that remains the case.

SSE’s core financial objective is to deliver annual, above-RPI inflation increases in the dividend payable to shareholders, and it remains on course to deliver a full year dividend increase that is greater than RPI inflation for 2013/14 and above-RPI inflation dividend increases in the years after that.

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

“SSE’s year has got off to an encouraging start, with a number of important issues, such as the dispute relating to the Greater Gabbard wind farm, being resolved and solid performance in operations and investments. This means we are in a good position to focus on our key operational and investment priorities for the year, including achieving further improvements in standards of customer service and further additions through investment to the asset base of the company. I am therefore confident that we will achieve our key financial goal for this year, and the years ahead, of an above-inflation increase in the dividend.”