SSE plc

Good day and thank you for standing by. Welcome to the SSE of year 2022 results webcast and conference call. At this time, all participants are in list and only mode. After the speaker presentation, there will be a question and answer session. To ask a question, during this session you will need to press star 1 and 1 on your telephone. If you then hear an automated message, advise your hand is raised. Please be advised that today's conference is being recorded. I would now like to end the conference over the SSE's CF executive Alistair Philip Davies. Please go ahead.

good morning everyone and welcome to our interim results presentation i'm joined today by our finance director gregor alexander and chief commercial officer martin pibworth by the end of this presentation three things will be clear our strategy is more relevant than ever and is delivering results recent market conditions have validated our diversified business mix enabling us to create value for shareholders and society And we are delivering on our record CapEx programme, investing more in large capital projects than we are making in profit. Global and domestic events in the past 12 months would have tested any company's strategy, but our NZAP, as we refer to it, and the strategy that underpins it, have stood up extremely well. Our plans cement SSE's standing as a clean energy champion, positioning us to invest around £25 billion in critical infrastructure this decade while delivering sustainable long-term value. Our diverse and well-balanced business mix is helping us navigate turbulence with its natural hedges and synergies, providing stability against a volatile backdrop. And we are making good progress in executing our investment programme. This morning you will hear updates on flagship projects at Dogger Bank, Viking, Seagreen, KB2 and our Shetland Link, as well as progress on ED2. You will also hear how our acquisitions in Southern Europe, Japan and in the hydrogen space are creating further growth options, complementing our growing project pipeline in transmission. We are accelerating into growth. and we'll cover how all this, combined with strong operational performance, has led to good financial performance, therefore benefiting shareholders as well as wider society. People are our most important asset, and our first priority is to ensure everyone gets home safe each working day. Our record investment programme comes with increased construction activity, so we're pleased to have had four less injuries in the same period last year, and a small decrease in our total recordable injury rate. But of course, devastatingly, in June we saw the death of BAM Nuttall contractor Liam McDonald. And this loss remains very much front of mind. The future energy landscape has electricity at its core and brings decades of opportunities. Clearly in the short term this year's energy crisis has led to market and policy uncertainty and we are hoping for clarity on some of the key issues in the Chancellor's statement tomorrow. However, for our part, we have proactively proposed interventions that help households while not damaging investor confidence or impacting energy security. Over the medium term, we see real opportunity for market reforms that will encourage investment and benefit consumers. We called for the Bayes-Rima process and have advocated for evolving successful existing mechanisms to accommodate more renewables whilst breaking the link between wholesale gas and electricity prices. And over the longer term, UK policy ambition remains high, which plays to SSE's strengths and Britain's comparative advantage, most obviously in offshore wind and CCS, where seabed and storage options are the envy of much of Europe. And in Europe, long-term policy is strengthened too. The RepowerEU package has inspired an upping of clean and renewable energy ambitions in Ireland, the Netherlands, Germany and other markets. While challenges clearly exist in the short term, our NSAP looks even better than it did a year ago because it is geared firmly at tackling the critical long-term issues of energy security and climate change. Our business mix enables our strategy. Following significant reshaping, we've created an ESG-aligned group comprising an attractive blend of regulated and market-based businesses, offering optionality across the electricity value chain. Our core businesses share common capabilities in the financing, development, building and operation of highly technical electricity assets. Our assets enable electrification and decarbonisation, containing huge flexibility, critical to energy security. We are diversifying via technologies and markets, while adapting to change. In the last six months we have strengthened this business mix via the acquisition of an onshore renewables pipeline in Southern Europe and the Triton Power portfolio. The political, economic and social context has led to a genuine cost-of-living crisis, underlying the criticality of energy to society. However, cheaper energy is on the way. Had the UK's 2030 renewable targets been met in 2022, Britain would have saved approximately £30bn of spend on gas this year alone. Our primary role is investing in the infrastructure needed to prevent a repeat of the energy crisis. We are doing this as fast as we can and will invest more if we can. We have taken immediate action too, advocating for solutions to smooth energy costs and supporting electricity customers by freezing prices and helping the vulnerable. And we ensure our approach to sustainable development has a social impact, whether through paying fair value tax, investing into communities, increasing local content, or creating 1,000 jobs a year. These are just some of the ways we create growth and value for both shareholders and society. I'll now hand over to Gregor to cover financial results.

Thanks, Alistair, and good morning, everyone. Unprecedented energy commodity price volatility combined with inflationary pressures, interest rate increases, and currency fluctuations have made this one of the most challenging operating environments I've seen as finance director. But we've performed well and delivered a solid set of results. Our balanced portfolio means our regulated networks businesses are insulated from energy price movements. whilst our thermal and renewables generation fleet and our gas storage and customers' businesses provide offsets that help manage volatility. Our strong balance sheet with high levels of available liquidity have enabled us to navigate fluctuating collateral positions without affecting our commercial strategy. Our business mix is also better placed than many to manage inflationary pressures. Networks RAV and revenues are index linked, and so too are our renewable CFDs and generation capacity payments. Our stable debt profile and ongoing careful financial management, supported by our disposals programme, mean the Group expects minimal refinancing or funding requirements until financial year 25. These factors, alongside our established approach to hedging and our risk management procedures, have helped limit short-term volatility exposure whilst maintaining the strong balance sheet and liquidity required to execute on our NZAP. In terms of our results, around 50% of adjusted operating profit was driven from our regulated networks businesses, with around 35% from energy generation and gas storage. Whilst renewable profitability was hit by hedge buybacks in a higher price environment and lower volumes against plan, thermal and gas storage have responded to system demands well. providing their value after a period of limited returns. On networks, businesses have also performed well as they built out and reinforced the networks for net zero. And whilst our customer solutions businesses have generated a profit, this is largely due to phasing, and we expect these businesses to be around break-even for the full year. Overall, at the group level, adjusted operating profit increased by 90% to £716 million. Adjusted profit before tax increased by 221% to £559 million. And an adjusted EPS was 41.8 pence, in line with pre-closed guidance. In these volatile times, it is no surprise that unrealised fair value re-measurements are driving the reported loss before tax at 30 September, and I will discuss these shortly. However, there were a number of other items reflected in that reported number. Sustained forward power prices have resulted in impairment reversals for gas storage and our Great Island CCGT. And higher power prices also meant a net gain was realised on the Triton acquisition. These gains, which do not impact cash, evidence the strategic value of flexible generation in times of volatility and the merits of investing in these assets during more difficult years to ensure they can respond when needed. Higher commodity prices have also resulted in the gain being recognised on the revaluation of a residual gas production decommissioning obligation. The majority of the movement in unrealised fair value remeasurements, however, relates to forward commodity contracts entered into under an established hedging approach. This approach secures value for the business by reducing exposure to short-term commodity price movements, which would drive variable operating and financial performance. Whilst the hedging in place removes that unpredictability from future profits, the accounting standards require us to include the mark-to-market of some contracts as an unrealised re-measurement at the end of each accounting period. This re-measurement is unrelated to underlying operating performance and therefore the Group has consistently shown the change in the fair value of these contracts separately. The Group has continued its approach to hedging in the year and despite reduced market liquidity has been successful in securing stable long-term value backed by its operational assets. Counterparty credit risk and cash collateral requirements have always been a focus for the group when entering into hedges and the recent volatility has only sharpened that focus. I will cover liquidity later. We have successfully managed collateral requirements to date at limited additional cost with liquidity headroom to allow for further volatility. Before moving on to the business segment results, I wanted to briefly update on the network's minority interest disposals. As stated last November, the key to delivering our NZAP is ensuring investment is targeted to give the optimal mix of returns across a blend of assets. We will retain management control and the minority stake disposals will enable the significant growth we see in networks whilst maintaining an attractive balance of capital allocation and returns across the group. The transition transaction is progressing well and we continue to target signing in the next few weeks with completion falling shortly thereafter. For distribution, the business has been focused on securing the best ED2 outcome possible, and we therefore expect to commence its process at the start of 2023. In terms of SSEN transmission, performance, adjusted operating profit increased by 15% to £208 million, mainly driven by increasing allowed revenues under the T2 price control, partially offset by cost increases as the business positions itself for future growth. While investment levels remain high, CapEx has slightly reduced from the prior period to £271 million, as large capital projects have been re-phased. SACN distribution has also continued to show growth, with adjusted operating profit increasing by 14% to £175 million. This reflects higher allowed revenues for the current regulatory year, including an additional £40 million of allowances which were not recovered in the financial year 2021 due to the impact of coronavirus. However, the half-year operating results reflects under-recovery on expected volumes. And investment has slightly increased in the prior period to £176 million as the business entered the final year of ED1. In renewables, adjusted operating profit decreased marginally to £22.5 million. Having experienced exceptionally still and dry weather last summer, volumes increased by 0.8 TWh or 28% in the current year, but were still 0.5 TWh or 13% behind planned levels. This was partly due to unfavourable wind conditions, but also reflects delays in achieved first power at Seagreen, resulting from a crane failure on an installation vessel earlier in the year and subsequent poor weather. Undelivered volumes paired with extremely high market prices led to an increase in hedge buyback costs, of which £57 million related to Seagreen. For SSE Thermal, adjusted operating profit for the full year increased to just over £100 million, reflecting not only higher prices and increased output, but also plant availability and flexibility in volatile markets. However, the business has had a number of unplanned outages, most notably for the Great Island CCGT, which did not generate for the majority of the period due to a cooling system fault and subsequent turbine overhaul. Recent volatility has resulted in higher achieved spark spreads, and we believe that these assets will continue to provide highly valued future flexibility. SSE's gas storage business is operated to capture positive gas price spreads, which typically occur between summer and winter prices. This year, the usual seasonal price spread was inverted, with summer gas prices higher than winter due to lower Russian supplies, and focus across Europe on building up stores for winter. By selling stored gas into that price environment, the business captured the higher summer prices whilst providing liquidity into the market to reduce the peak gas prices. Combined with normal trading activity, which has intensified in the recent market environment, the business has achieved an adjusted operating profit of £148 million in the period. This follows many years of challenging financial performance. And with almost 150 million therms of gas stored at 30 September, over 80% of SEC's capacity, the assets are well placed to capture the winter spread, whilst providing vital energy security in times of high gas demand. Business Energy recorded an adjusted operating profit of £60 million in the period, which reflects the phasing of customer contract margins in the first six months of the year. In a higher price environment, the seasonality has been amplified, particularly for fixed price contracts, and we therefore expect that the profits will reverse into a round break-even position for the full year. AirTristi recorded a small profit in the period, but as Martin will cover later, we do not expect this business will recognise a profit this financial year. EPM has delivered an adjusted operating profit of £30 million in the period as it has worked hard to manage the group's commodity positions. And finally, losses from distributed energy and NEOS continued in the period as they build out their asset base. However, corporate costs have reduced following a review of the corporate cost base. SEC's strong balance sheet continues to be underpinned by high-quality assets and following continued capital investment in long-term infrastructure. Adjusted net debt was just under £10 billion at 30 September 2022, with 92% of debt held at fixed rates. Our S&P credit rating remains at BBB+, stable outlook, and our Moody's rating remains at BA1, having been updated to stable outlook following the publication of our well-supported NZAP in November 2021. These compare favourably to peers and reflect the group's business mix, funding plans and future dividends. Whilst there has been a turbulent time for pensions due to their exposure to the liability-driven investment portfolios, our schemes have relatively low levels of leverage on their LDIs and as such, no additional liquidity has been required from SSE. Both defined benefit schemes remain in surplus, with the combined surplus having increased in the period to £649 million. We prudently utilised capital markets where we saw opportunities, issuing 1 billion euros of hybrid capital at a coupon of 4% in April, a 350 million pounds 10 and 15 year dual tranche private placement in June at an average rate of 3.19%, and a 650 million Euro, seven year green bond at a coupon of 2.875% in July, well below current market prices. And we have recently entered into £1 billion of new revolving credit facilities for our transmission and distribution businesses to support their future growth plans. Our cash collateral requirements are comfortable within existing facilities. At 30 September, SSE had around £2 billion of available liquidity. And whilst volatility in the market has continued and the group's cash collateral requirements have increased by around 70% to around £1 billion at 11 November 2022, the majority of liquidity facilities still remain unutilised going into the winter. We remain on course to report full-year capex in excess of £2.5 billion, including acquisitions, and continue to expect leverage to be well below our target 4.5x net debt to EBITDA ratio. It is this strong financial footing that enables the Group to invest in its major projects, creating long-term value. SSE's balanced portfolio means that we are performing well in volatile market conditions. Whilst a higher price environment provides opportunities for value creation, it also increases risks when generation output is lower than expected. Most of SSE's profits are earned on the second half of its financial year, and in the context of the prevailing market conditions, SSE's guidance of adjusted EPS for financial year 23 of at least 120 pence remains unchanged. As well as out-turn market conditions, SSE's results will be determined by potential policy interventions, plant availability and weather conditions. Correspondingly, SSE does not expect to provide further detail on profit expectations until later in the financial year. We remain fully committed to our dividend plans and continue to target increases in line with RPI for this year. As such, we are declaring an interim dividend of 29p. In line with the 2023 dividend plan, we will rebase our dividend to 60p in FY24. before targeting at least 5% dividend increases in FY25 and FY26, taking into account earnings growth. This rebasing will enable growth across the group as we invest for the long term. So to conclude, in the face of market volatility, we have continued to perform well with solid earnings whilst delivering our ambitious investment plans. We're fully financed, the balance sheet is strong, and we continue to project adjusted EPS CAGR growth of 7% to 10% by March 26 from an 87.5 pence baseline. I'll now hand you over to Martin to cover developments in our market-based businesses.