SSE plc

Good morning and thank you for joining us for this presentation of our interim results to the 30th of September 2023. I'm joined for today's presentation by Gregor Alexander who's presenting his 43rd and final set of results as Finance Director, Martin Pibworth our Chief Commercial Officer and Barry O'Regan who succeeds Gregor as Chief Financial Officer later this month. I'd like to start with a few words about safety, which is always SSE's primary objective. As we continue to deliver our strategy to provide energy that is cleaner, homegrown and secure, construction activity has increased, which, in turn, has driven an increase in our TRIR measure in the first half. We are continuing to invest in new initiatives, including the launch of an immersive training program to enhance our existing sector leading safety controls as we redouble efforts to address this drop in safety performance. And finally, I'd like to pause to pay respect to Richard Ellis. Richard was an employee of one of our contractors who sadly lost his life in a tragic accident on a public highway in Sussex last month. Our thoughts go out to his family and friends. Over the next 40 minutes or so, we will explain how greater visibility of SSE's growth options is underpinning a fully funded update to our CAPEX plan and how the reliability of earnings from our balanced business mix is giving us added confidence in our guidance. Our underlying strategy is built on the fact that networks, renewables and flexibility will be the bedrock of a future energy system with electricity at its heart. And as we move into a UK general election year, it is clear that policy and delivery in each area will not always move at the same pace. But the imperative to simultaneously secure affordable energy supplies whilst tackling climate change remains firm. Alongside an increasing desire to deliver jobs and industrial growth, this results in a societal trend and political consensus that remains very solid. That's why we've positioned SSE at the heart of the energy transition, able to fine tune our investment plans across the electricity value chain. And you can see this in action today. Just six months on from upgrading our net zero acceleration programme, we are increasingly confident in our ability to deliver the earnings we've promised this year and double digit growth through the five years of our NZAP+. We're delivering on a fully funded capital investment programme that is investing around £10 million a day across the plan in critical national infrastructure. Within this, as we'll explain shortly, growth in networks is coming through even faster than we anticipated. We're driving long-term sustainable earnings growth with our balanced mix of index-linked and market-based businesses that have demonstrated both our resilience and ability to capture upside when conditions are favourable. And we have the proven financial discipline and optionality to invest in opportunities only when the value proposition is crystal clear and it meets returns expectations. Dogger Bank made global headlines last month when it exported its first power. But the world's biggest offshore wind farm is just one entry in a roll call of highly complex major projects that we are progressing at pace. Seagreen is now fully operational with the capacity to power 1.6 million UK homes and Viking has all of its turbines now in place. These projects provide meaningful progress towards our ambitious growth targets. they complement our existing portfolio of assets, and they will enter a market where power prices are expected to be higher for longer than originally anticipated. At the same time, growth opportunities are being realised in networks with greater visibility of future growth in transmission, making it one of the fastest growing networks in the world. We now expect £2.5 billion of additional fully funded CapEx to be invested in the business, which I'll talk through later on. This means the Group's CapEx forecast is now £20.5 billion across the five years to financial year 2027. This revised outlook demonstrates the accretive opportunities that continue to emerge from the transition to net zero, most notably in the near term for transmission and renewables, which comprise around 70% of our investment to financial year 27, but also for the distribution and thermal businesses as we look further out. And this blend of alignment to societal trends, high quality investment options and increased visibility is driving confidence in delivering shareholder returns. The group offers stability, reliable returns and natural hedges. Networks and renewables businesses are highly complementary electricity asset businesses with similar growth characteristics and combined financial strength. We then have further synergies and optionality from our energy businesses with our own mix of stable revenues and built-in flexibility. With this mix and our revised spending plans, we now have greater confidence that we will be comfortably within the 175 to 200 pence target guidance range for financial year 27. This is underpinned by our businesses' significant indexation to inflation and our strong balance sheet, with the vast majority of debt held at fixed rates. We are seeing strong returns today from an existing portfolio of world-class assets, which are continuing to grow as major projects such as Seagreen reach production. We're also building more world-class assets that will continue to deliver step-ups in earnings, with our diversified pipeline promising far more value to come over the decade and beyond. The worldwide transition to net zero is unstoppable, but that's not to say that we should throw caution to the wind. In the recent market environment, SSE's customary discipline has never been more important. Take the recent AR5 offshore auction round in the UK. Here we decided to hold back from an offshore process that did not meet our investment criteria, but were fully rewarded with over 600 megawatts of onshore contracts, secured at a 13% premium to AR4 prices. The message is clear. Where contracts don't offer the right returns or where seabed can't be secured for the right price, we will maintain discipline. We have the flexibility to dial up our capital allocation and prioritise investment to the asset classes that offer the best returns in the prevailing market conditions. And right now, as we look across the clean energy value chain on a risk-adjusted basis, continuing to upweight our investment in regulated networks feels like the right course of action. I'll now hand you over to Gregor.

Thank you, Alistair, and good morning, everyone. With this being my final results presentation for SSE, I'm pleased to be able to talk you through such a strong set of half-year numbers. Looking at the breakdown across the segments, around 50% of adjusted operating profit was driven by our regulated networks businesses, with around 30% from energy generation and gas storage, and the remaining 20% from our customer businesses. run through the financial performance for each of the businesses in due course. However, it is clear that our networks businesses have continued to perform well, whilst our renewables and thermal businesses have demonstrated their portfolio value in the current market environment. Overall, at the group level, you can see the stability benefits of a balanced business mix in a consistent set of numbers despite the dramatically different market conditions from a year ago. Adjusted operating profit decreased by 3% to 693.2 million pounds. Adjusted profit before tax increased by 1% to 565.2 million pounds. and adjusted earnings per share was 37 pence, well above pre-closed guidance due to stronger operational performance combined with a lower effective rate of tax. This result reflects the normal seasonal nature of operations that deliver the majority of annual earnings in the second half of SSE's financial year. The success of our long-standing hedging approach has been clear over the last two years as reduced exposure to short-term commodity price movements has meant our businesses have delivered strong profitability despite unpredictable markets. At times, this approach has driven significant gains or losses through unrealised fair value movements which are unrelated to underlying operating performance. However, In this period, there has been minimal fair value movement, with forward commodity prices holding at more stable, albeit elevated levels. As Martin will elaborate on later, the acquisition of Triton Power has been an unqualified success. In the 13 months since acquisition, it has already generated over £130 million of cash, thereby paying back more than our original £123 million cash consideration. However, as these strong cash flows have been realised by Triton, it has triggered a technical non-cash impairment in the carrying value of this asset during the period. This impairment reverses previous non-cash valuation increases and Triton remains a value-enhancing acquisition that will be profitable on a cash basis going forward. Turning to SACN transmissions performance, adjusted operating profit increased by 3% to £215.6 million, mainly driven by increases in allowed revenues under Rio T2, together with a positive timing impact from tariffs. As the business continued to deliver asset growth, this increase was partially offset by additional operational costs including a higher headcount and depreciation. SACN distribution operating profit is down 31% year-on-year to £120.1 million. As we highlighted in May, this is attributable to continued inflationary pressures and increases in the cost base not being reflected in the tariffs for the regulatory year which were set in December 2021. Whilst the timing of the distribution tariff setting process means that allowed revenues are not expected to keep pace with inflation this year, this is a timing difference that will reverse in the financial year 2025 as tariffs are updated for the current cost environment. In renewables, adjusted operating profit increased to £86.8 million as the business saw year-on-year benefit from higher average hedge prices combined with lower levels of hedge buybacks required. But while profitability has increased, renewables performance remains below our expectations at the start of the year, mainly due to exceptional weather conditions with output around 19% behind plan for the first six months. This represents around a 7% shortfall to the full year's planned output. Despite this summer delivering the second lowest summer seasonal spark spread on record, our flexible thermal fleet returned a record half-year profit, With the benefit of capacity additions from Keatby 2 and Triton Power and improved year-on-year availability, our efficient fleet was able to achieve strong generation capture prices whilst also using our flexibility to optimise our market positions. Meanwhile, as flagged in the pre-close statement, a more stable market environment has driven a seasonal half-year loss for gas storage. We anticipate that this will revert to a strong profit of more than £75 million for the full year as gas is withdrawn. Turning now to our other businesses, SSE Business Energy recorded an adjusted operating profit of £88 million, which reflects the phasing of customer contract margins in competitive conditions. SSE Electricity recorded a small profit in the period and at the year end, in more benign market conditions, we expected to return to more normalised earnings, having decided to return profits last year to customers in recognition of the cost of living crisis. Our energy portfolio management business, now known simply as SSE Energy Markets, delivered an adjusted operating profit of £9 million in the period, reflecting improved market stability. And finally, losses from SSE Enterprise and NIOS Networks continued in the period as they build out their respective asset bases. Investment levels remain at higher than historic averages, reflecting the range of delivery across the group. And excluding the acquisitions last half year of the Southern European Onshore Development Platform and Triton, the £1.1 billion we have spent this period is in line with our run rate last year. Almost half of this investment has been spent on regulatory networks, as transmission delivers on existing large capital projects, such as the Shetland HVDC, whilst distribution progresses with delivery of the ambitious ED2 price control. An almost equal amount has been spent on our renewables projects, with in-flight projects such as Seagreen, Viking and Yellow River receiving increased levels of investment. SSE's strong balance sheet continues to be underpinned by high-quality assets and disciplined investment in long-term infrastructure. In September, we successfully issued a €750 million eight-year green bond at a fixed coupon of 4%, placing SSE at the top of the UK corporate league for green bonds. Adjusted net debt was just below £9 billion, with over 90% of financing still held at fixed rates and at an average debt maturity of around six years. Our credit ratings continue to compare favourably to our peers, reflecting the resilience of the business mix and its ability to create value whilst paying dividends. Meanwhile, our pension schemes remain in surplus, our cash collateral is comfortably within existing facilities and we have good liquidity. This strong financial footing provides the foundation for the NSAT Plus investment plan and delivery of high quality projects that create long term value for the group. As Alistair said, after 33 years with the company and 21 years as finance director, this is my last results presentation. I'd like to express my thanks to my many colleagues, investors and others, past and present, who have so ably supported me during my tenure as finance director. I'd like to thank particularly Alistair, Martin and Barry for being part of a great team. It's been an absolute privilege and honour working for SSE and playing my part in progressing a purpose, culture and heritage that has become a driving force behind Net Zero. I will clearly miss it, but I'm delighted to be continuing my association with SSE in my role as chair of SSEN Transmission, and is a board member of NIOS Networks. I'll now hand you over to Alastair for the Networks part of the operating review.

Thank you, Gregor. Before I move on, I'd like to pay tribute to Gregor. In a career that has spanned 33 years at SSE and 21 of those years as our finance director, he's made a huge contribution to the company. From the original merger and through a number of transformations and chapters, some challenging, but all of them moving SSE forward. Throughout, he has done so with considerable skill, professionalism and humour. He's demonstrated enormous energy and enthusiasm for the business and especially the people in it. And I found him an outstanding colleague. All of us at SSE wish him well in his retirement. Transmission is playing a critical role in unlocking the exceptional renewable resources in the north of Scotland. The business is halfway through the Rio T2 price control out to financial year 26, and good progress continues to be made on all major projects within the base plan. This includes the first energisation last month of Kintore Phase 1, part of the North East Scotland upgrade, and successful installation of the towers for the Inveraray to Cross Aig over Headline. Elsewhere, the Shetland HVDC transmission link also continues to make excellent progress, with the entire 260km of cable now installed. The project is well on track for energisation in 2024. Looking to the current project pipeline, all Lottie projects have now been granted approval of need by Ofgem and the creation of the ASTI framework is a game changer. Critically, this process allows early supply chain engagement and vital upfront community engagement to occur ahead of planning submission. All eight of SSE's ASTI projects are in different stages of development, as you can see on the slide. The most advanced of these projects is Eastern Greenlink 2, or Eagle 2 as we like to call it, which will see a 2 gigawatt HVDC subsea link connect Peterhead to Drax and relieve constraints in the network. As you would expect in the current climate, we are seeing increases in delivery costs through the project assessment and refinement stages. For example, SSE's share of Eagle 2, which is a joint venture with National Grid, is now expected to cost over £2 billion owing to a combination of supply chain inflation and project specification changes. Whilst we would be wrong to read this magnitude of increase across to all projects, our latest estimates of nominal gross spend to deliver our three Lottie projects is around £3 billion, while our Asti projects are expected to cost around £17 billion. With Scotland's resources making it the natural home of so much renewable investment, it is critical that we deliver the wider benefit that will come from this government-approved vital infrastructure in a way that recognises the views of the communities who will host it. We are consulting widely and continue to call for an ambitious approach to community benefit funding to help ensure an equitable distribution of cost and benefit between those using the output from the infrastructure and those hosting it. Clearly the connections to be constructed under ASTI and LOTI are significant infrastructure projects requiring investment which is expected to be phased over a number of years spanning out beyond the five-year plan. Nearer term, as a result of these revised cost estimates, we now expect adjusted net capex for transmission of around £7.5 billion across the five years to financial year 27, with the increase since NSAT Plus weighted towards the outer years of the plan. We've also increased our RAV outlook to financial year 27 from between £8 to £9 billion to at least £10 billion gross on a nominal basis. As there is likely to be further growth beyond the period of the plan and into the next decade, the ASTI framework delivers on the projects identified by the System Operators Holistic Network Design, or HND, as needed to enable 2030 offshore wind targets. And the sequel to the HND, the HND follow-up exercise, due early next year, is expected to outline the strategic network that bridges the current design, which consists of 11 gigawatts of Scott wind, to one that connects 28 gigawatts. We see potential for enormous growth, but until any new models and plans are confirmed by Ofgem, our focus remains on delivering the investment and RAV growth that we have increasing visibility over through the LOTI and ASDI frameworks. We were pleased with positive signals on simplification and streamlining of regulation in Ofgem's recently published decision on the future system and network regulation framework, which is an important first step in the next price control review process. We also welcome the amendment of the regulator's existing duties to include reference to net zero targets for the passing into law of the Energy Act 2023. We'll work constructively with Ofgem to ensure the future regulatory framework enables us to deliver the network infrastructure needed to secure the country's future energy independence and fully decarbonise our economy. In distribution, we bring net zero to the doorstep, and we believe that more localised grids, which SSEN distribution operates, will need the same kind of forward-thinking regulatory support that has helped get the necessary long-term strategic investment in the transmission network. There is sufficient flexibility within the Rio ED2 price control to create additional value and ease constraints for uncertainty mechanisms. And that is what we are seeking to do with targeted strategic investment on the Isle of Wight, for example. Distribution may not have the mega projects of the other businesses, but there are many, many smaller investments that compound up. and we are making progress with a £3.6 billion baseline plan with the potential for up to £700 million of additional funding through uncertainty mechanisms. The business is also making good progress improving operations. We are the fastest improving DNO for customer service and we are accelerating procurement to get ahead of the supply chain. We also have a new divisional finance director and a promising transformation project underway. We believe distribution is increasingly becoming fit for the future. But as I've said, to fully play its part in enabling net zero, we'll need more of the longer term strategic thinking that Ofgem has already applied to transmission. I'll now hand over to Martin to cover the energy businesses.