SSE Remains on Course to Deliver Key Operational Goals (UK)

SSE plc remains on course to deliver an increase in the dividend per share, an increase in adjusted profit before tax for the financial year to 31 March 2012 and to deliver on its key operational goals.

This Interim Management Statement includes updates on operations, major projects, issues such as household customers’ energy consumption, other developments and an updated financial outlook.

Operations

In the nine months to 31 December 2011 (comparisons with the same nine months in 2010, unless otherwise stated):

•  SSE’s Total Recordable Injury Rate was 0.11 per 100,000 hours worked, compared with 0.12 during 2010/11 as a whole;
• its number of electricity and gas customer accounts in markets in Great Britain and Ireland fell by 50,000 to 9.60 million; including home services, customer accounts now total 10 million;
• wholly-owned gas-fired power stations achieved 93% of their maximum availability to generate electricity, excluding planned outages, the same as in 2010; coal-fired stations achieved 86%, compared with 83%; and wind farms achieved 97%, the same as in 2010;
• total electricity output from gas-fired power stations* was 18.6TWh, compared with 23.0TWh; from coal-fired power stations* it was 10.7TWh, compared with 7.8TWh;
• total electricity output from renewable sources (conventional hydro electric schemes, onshore wind farms*, offshore wind farms and dedicated biomass plant) was 5.3TWh, compared with 3.2TWh, reflecting wet and windy weather conditions and additional generation capacity in operation;
• actual consumption of electricity by SSE’s household customers in Great Britain fell by 8.3%; actual consumption of gas by SSE’s household customers fell by 26.6%;
• the average number of Customer Minutes Lost in the Scottish Hydro Electric Power Distribution area was 54 per customer, compared with 55; in the Southern Electric Power Distribution area it was 46, compared with 49; and
• the amount of replacement and reinforcement gas mains laid by Scotia Gas Networks was 758km, compared with 750km.

The number of Customer Minutes Lost does not include those arising from exceptional weather events such as those experienced in May and December 2011. Following each of these events, and those experienced in early January 2012, supplies of electricity were restored as quickly as possible through the efforts of hundreds of engineers in the north of Scotland and central southern England.

* Output from electricity generating plant in which SSE has an ownership interest (output based on SSE’s contractual level).

 Large capital projects

In its Annual Report 2011, SSE set out its investment priorities for 2011/12, including commissioning new assets and meeting other development and construction milestones in its programme of investment in renewable energy, electricity networks and gas storage. It continues to expect total capital and investment expenditure to be around £1.7bn for 2011/12 as a whole.

SSE announced on 3 January 2012 that ongoing progress in the construction of its large capital projects means that its onshore wind farm capacity now exceeds its conventional hydro electric capacity of 1,150MW for the first time.

Progress has been made in the following key onshore wind farm and other large capital projects:

Clyde onshore wind farms (350MW development): Turbines with a total capacity of over 180MW have now been energised and are able to export electricity and the wind farm as a whole should be completed in the middle of this calendar year. It is expected to produce over 1,000GWh of electricity in a typical year, and its final construction cost is expected to be over £500m.

Griffin onshore wind farm (156MW development): All 68 turbines have now been energised and are able to export electricity. The wind farm is expected to produce over 350GWh of electricity in a typical year, and its final construction cost is expected to be over £200m.

Gordonbush onshore wind farm (70MW development): Turbines with a total capacity of 40MW have now been energised and are able to export electricity, and the wind farm as a whole should be completed in the next few months. Its final construction cost is expected to be just over £100m.

Greater Gabbard offshore wind farm (500MW development; SSE stake in Greater Gabbard Offshore Winds Limited – 50%): All 140 monopile foundations are in place at the wind farm and 133 turbines have been installed, of which 108 have exported electricity. Work is continuing on the installation of the third and final electricity export cable. All of this means that construction work should be completed, as planned, before the end of 2012. As described in SSE’s six-month financial report in November 2011 however, GGOWL continues to be in contractual dispute with Fluor Limited, the principal contractor for the wind farm, regarding the quality of the lower foundations (monopiles) and upper foundations (transition pieces) used in the early stages of the development and supporting 52 of the 140 turbines.

Walney offshore wind farm (367MW; SSE stake 25.1%): The first phase of Walney is operational and construction of the second and final phase of the wind farm, which also comprises 51 turbines with a total installed capacity of 183.6MW, is now well under way. All of the turbines have been installed, of which 10 are able to export electricity, and the whole wind farm should be completed later this calendar year.

Beauly-Denny replacement electricity transmission line (SSE section Beauly to Wharry Burn): Scottish Hydro Electric Transmission Ltd has begun construction of its section of the replacement line, between Beauly and Wharry Burn. Remedial work, including removal of related overhead transmission lines, and construction work, including the erection of new pylons, is now under way. The replacement line should be completed in 2014.

Northern electricity transmission upgrades (Knocknagael Substation, Beauly-Blackhillock-Kintore and Beauly-Dounreay): These three projects have a total value of almost £200m. The first project, the upgraded Knocknagael Substation, has been completed. Work on the remaining two projects is under way and they are on course for completion by 2015.

Aldbrough gas storage capacity (around 330mcm; SSE stake 66.6%): Six of the nine caverns are already storing gas. Leaching at the remaining three caverns has been completed and they are now being de-watered through injection of gas. They should be ready for operation by the summer of this calendar year.

 Glendoe hydro electric scheme

Work on the restoration of electricity generation at the Glendoe hydro electric scheme is continuing to progress well. The process of re-filling the reservoir should begin in the spring and electricity generation should resume in the middle of this calendar year. In the meantime, SSE is continuing to pursue its legal and insurance options following the loss of electricity generation at Glendoe in August 2009.

 Gas-fired power stations

The operation of SSE’s electricity generation portfolio is founded on a series of principles, including diversity to avoid over-dependency on particular fuels or technologies and flexibility to ensure that changes in the supply of and demand for electricity can be managed.

Against this background, and following a sustained period of low ‘spark’ spreads, SSE has decided to undertake a comprehensive programme of maintenance to support more flexible operations at its Keadby and Medway power stations from 2013 onwards. It will therefore suspend electricity generation at the stations, with effect from 26 March 2012. There will be no loss of jobs as a result of this decision.

SSE is considering whether changes in the way in which the stations operate should be recognised through an impairment in their book value, which would be recognised in its financial statements for the year to 31 March 2012. Any impairment would be treated as a non-cash exceptional item.

 Household energy bills in Great Britain

Based on the actual levels of electricity and gas consumption set out above, an average household customer of SSE paid £710 for electricity and gas in the nine months to 31 December 2011, compared with £760 in the nine months to 31 December 2010.

On 12 January 2012, SSE announced a cut of 4.5% in its unit price for household gas with effect from 26 March 2012 and extended by two months its pledge not to implement any increase in household electricity and gas prices, to October 2012 at the earliest.

 Other developments

Since the publication of its six-month financial report on 9 November 2011, SSE has also:

•  received approval and funding from Ofgem for its £64m innovative low carbon network projects in the Thames Valley and Shetland;
• opened the UK’s largest carbon capture pilot plant at the coal-fired power station at Ferrybridge;
• started to implement its sales guarantee for household energy customers; and
• secured from Ofgem a recommendation that its electricity transmission business should be ‘fast tracked’ under the RIIO T1 process for the Transmission Price Control for the eight years to March 2021.

Financial outlook

SSE will publish its results for the financial year to 31 March 2012 on Wednesday 16 May 2012. It expects that it will deliver:

•  an increase of at least 2% more than RPI inflation in the full-year dividend; and
• an increase in adjusted profit before tax for 2011/12, delivering a similar level of growth to that achieved in each of the last three years.

The expected increase of at least 2% more than RPI inflation should result in a full-year dividend of around 80p per share. The actual level of adjusted profit before tax will be influenced by the factors set out in SSE’s six-month financial report in November 2011, including the impact of the weather on customers’ consumption of energy.

 Board

As announced on 19 January 2012, Rene Medori, non-Executive Director and Chairman of the Audit Committee, has joined the Board of Petrofac Limited. He will step down from the Board of SSE on 25 June 2012. On that date, Richard Gillingwater, non-Executive Director, will become Chairman of the Audit Committee and he will become Senior Independent Director on 24 July 2012 in place of Susan Rice, who will remain an independent non-Executive Director. From 25 June 2012, the Board of SSE will comprise three Executive Directors, five independent non-Executive Directors and the Chairman.

 Ian Marchant, Chief Executive of SSE, said:

“This financial year has been characterised by continuing economic uncertainty and ongoing challenges in global energy markets. That uncertainty and these challenges are likely to continue in the new financial year. Nevertheless, SSE remains on course to deliver further growth in the dividend and in adjusted profit before tax and I am particularly pleased with the continuing good progress in large capital projects.”

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Offshore WIND staff, January 31, 2012; Image: ewea