Scottish and Southern Energy (LON:SSE)

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Scottish and Southern Energy (LON: SSE) is a gas and electricity utility company in Scotland with a strong focus on renewable energy. It is the UK's second largest energy supplier (11.1 GW generation capacity) behind Centrica and the largest supplier of renewable energy which accounts for 2.2GW of its generation capacity. SSE is involved in the generation and supply of electricity and gas along with other energy-related services such as gas storage, contracting, connections and metering. ^[1] The company earned £26.18 billion and £1.29 billion in revenue and operating profit in 2009.

SSE is a large utility company with respect to its revenue and generation capacity with a diverse generation portfolio. In Scotland, SSE is the largest energy supplier and its only competitor is Scottish Power. In the UK, Centrica is its main rival with £22.0 billion in revenue in 2009. SSE's capacity mix is what sets it apart from other utility companies. In 2008, SSE drafted large investment plans focusing on renewable energy with 41% of expenditures in 2008/09 spent on renewables. Renewable energy is key to the company's future with 4.0 GW of capacity expected by 2013. It is focusing on hydro and on/off-shore wind projects. With a more diverse generation portfolio SSE is better hedged to changes in oil prices and new regulations on the utility companies.

In May 2010, the Company sold its 100% interest in Ardrossan Windfarm (Scotland) Ltd., to Infinis.^[2]

Company Profile

Scottish and Southern Energy's subsidiaries are organized into the businesses of electricity generation, transmission, distribution and supply; gas storage, distribution and supply; electrical and utility contracting; home services, supplying a range of electrical and gas appliances and complementary products; and telecommunications.

SSE owns around 10,700 megawatt of electricity generation capacity in the United Kingdom and Ireland, consisting around 4,500 megawatts of gas- and oil-fired capacitym, 4,000 megawatts of coal-fired capacity (with biomass co-firing capability), and 2,200 megawatts of hydro, wind and dedicated biomass capacity.^[2]

SSE supplies energy under the names Southern Electric, SWALEC, Scottish Hydro Electric, Atlantic Electric and Gas and SSE Renewables brands. SSE has 10.7 GW of generation capacity in Ireland and the UK, comprised of 4.5 GW of gas- and coal-fired capacity, 4.0GW of coal-fired capacity and 2.2 GW of hydro, wind and dedicated biomass capacity. ^[3]

Renewable energy is the focus of SSE's growth plans with £535 million invested in renewable energy in 2009 up from £132 million in 2008. In 2009, SSE invested in several on-shore and off-shore wind farm projects in countries including The Netherlands, Ireland and Sweden. It has a large investment in the Glendoe hydro electric project which was opened in June 2009 and has a generation capacity of up to 100MW. ^[4]

In 2010, SSE announced that it will work with the city of Glasgow to develop low-carbon technology to provide the city with sustainable energy. The investment was announced at £100 million over the next 5 years.^[5]

SSE has 9.05 million residential, commercial, and industrial customers, up 0.6 million from the previous year. SSE provides service to its customers, and has received a 1st place service ranking from uSwitch.com.^[6] The ranking is measured by minutes lost due to power interruptions. In 2009, the average number of minutes lost per customer was 66 (down from 67 in 2008). This is one of the reasons why SSE's customer base has grown by an average of 0.8 million customers per year since 2001. ^[7]

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Business and Financial Metrics

2009 Results

SSE posted a strong revenue increase in 2009 with £26.18 billion compared to £15.99 billion in 2008. A near doubling of generation and supply wholesale and trading revenue from £8.3 to £15.4 billion accounted for this increase. EBIT for 2009 was £1.29 billion, a 2% increase from 2008.

Capital expenditures totaled £1.28 billion in 2009, up from £810 million in 2008. Over the past 5 years, capital expenditures have tripled with profits remaining constant. Borrowing and investment in new projects and partnerships have resulted in a doubling of assets and liabilities from 2008 to 2009. Cash flows from investing activities was -£1.2 billion and -£1.5 billion in 2008 and 2009. Profits have increased slightly (2%) in 2009, but the new investments are expected to result in more profits from 2010-2020. ^[10]

Business Segments

Generation and Supply (93% of 2009 Revenue, 58% of 2009 Operating Profit)

SEE operates as Southern Electric in England, Scottish Hydro Electric in Scotland and SWALEC in Wales. Scotia Gas Networks, which SEE has a 50% share, provides gas distribution to 5.7 million customers operating two of the largest of eight regional gas distribution networks in Britain. ^[12] SSE Renewables was acquired by SSE in 2008 under its previous name Airtricity. It has developed 40 wind farms across Europe and North America since then. Community and Commercial Wind (CCW) is SSE's on-shore UK wind development team. SSE owns and operates almost half of the UK’s total renewable generation capacity, including the UK’s largest wind farm.^[13] In 2010 it started developing two of Europe’s larger wind farms, a 350MW onshore wind farm, Clyde in Scotland and a 504MW offshore wind farm, Greater Gabbard, located off the coast of England.^[14]

Energy Systems (3% of 2009 Revenue, 33% of 2009 Operating Profit)

SSE distributes electricity to 3.5 million customers across one third of the UK's total land area with 106,000 substations and 128,000 km of overhead lines. Scotia Gas Networks distributes gas to 5.7 million customers, runs 74,000 kilometres of gas mains and is the gas provider to 75% of Scotland's households. It operates two of the largest of eight regional gas distribution networks in the UK. ^[15]

Other Segments (4% of 2009 Revenue, 9% of 2009 Operating Profit)

SSE Telecoms and Neos Networks operates a 10,300km UK-wide telecoms network providing services to other telecoms providers, companies and public sector organizations. It is the 4th largest Telecoms network in the UK. Neos became the UK's first and only national ethernet service provider in 2001 and was acquired by Scottish and Southern Energy in 2003 providing various high performance.

SSE’s Contracting business has three main areas of activity: industrial, commercial and domestic mechanical and electrical contracting; electrical and instrumentation engineering; and public and highway lighting. It is one of the largest mechanical and electrical contracting businesses in the UK. SSE's Energy and Home Services team offers gas heating and electrical wiring installation, maintenance packages, and renewable, sustainable and energy efficient products. It has over 330,000 customers.

SSE owns and operates the UK’s largest onshore gas storage facility at Hornsea in East Yorkshire with 325 million cubic metres (mcm) of gas storage capacity. In a joint venture with Statoil (UK), it is developing what will become the UK’s largest onshore gas storage facility, at Aldbrough. This will have a total capacity of around 420 million cubic metres, of which SSE will have an ownership interest in 250 million cubic metres. The investment in this venture is estimated at £290 million. ^[16]

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Trends and Forces

New Ofgem Regulation for 2010 Cutting Profit Margins

Energy suppliers are making more money from household customers, with margins doubling in the past year. Ofgem, the UK's regulator, said gross margins rose to £210 per dual-fuel customer in November, up from £160 in August. Higher household bills had been offset by lower generation returns caused by faltering economic demand and lower prices. Ofgem's role as regulator is to ensure that companies can invest, but do not use investment as an excuse to overcharge consumers. This is what they are trying to prevent with this call for a lowering in prices starting in 2010. It stated it would limit the power firms to increasing electricity bills by more than £4.30 a year on average to pay for upgrades to regional distribution networks. SSE complained that the new regulations could lead it to reassess its appetite for further investment in, and acquisition of, electricity distribution and transmission assets. Despite this all seven major UK utility companies have accepted the new proposals. ^[18]

Ofgem proposes a 4.7% pretax rate of return limit on investments in local electricity networks from 2010 through 2015(compared with 5.1% allowed by water regulator Ofwat). Ofgem’s goal in this proposed rule is to promote investment of GBP6.7 billion in upgrading existing power networks including a GBP500 million sustainability fund allowing them to undertake largescale trials of smart grids and other technology required in a low carbon economy.^[19]

Gas Price Risk

Volatility in gas prices pose risk to the company's performance. Wholesale gas prices directly affect the prices charged to SSE's electricity customers because gas is used to produce their electricity. In 2009, SSE benefitted from low gas prices. Whether this will continue depends on the market which experienced an unusual trend in the past year.

UK wholesale gas prices have been resilient in 2009 in the face of falling oil prices. Historically there has been parity in oil and gas prices in the UK. The spot UK gas price since the summer of 2008 is down 40% while oil prices are down 70%. This de-correlation can be seen in the graph below. Whether this de-correlation will last over the next year or oil and gas prices will return to historical parity should be closely watched.

Commitment to Renewable Energy Sets SSE Apart

SSE is particularly invested in renewable energy which gives it more sustainable energy production. Acquisitions since 2005 help prepare SSE for climate change and fuel security challenges along with creating new investment opportunities. It is taking advantage of the new carbon credit market created by the Kyoto Protocol which became international law in 2005. Under the Clean Development Mechanism investment in clean energy in developing nations yields carbon credits to the investor. SSE is obtaining carbon credits (CERs) from new renewable projects and is contracted in 2012 for around 2 million CERs. Some nations already invested in include China, with China Guodian Corporation as a partner, and Brazil with a hydro project planned. The Kyoto Protocol is set to expire in 2012 with a new agreement still being negotiated. The Large Combustion Plant Directive (LCPD) which sets emission standards for E.U. nations is working to create a UK capacity requirement for 2015. The EU Climate and Energy package, agreed in April 2009, states that 20% of the EU's all-energy consumption must come from renewable sources by 2020.

SSE's renewable strategy is stated as such, "Renewable targets are a dominant driver of new investments to address climate change and energy security and will provide new opportunities from the development of an international business focusing on renewable energy." Around 45% of SSE's investment in focused on renewables. The graph below outlines the company's investment strategy for the next 5 years. SSE's goal is 4.0 GW of renewable energy generation capacity to be in place by 2013. These targets for renewable energy are lofty and larger in scale than competitors' plans. SSE invested £132 million in renewable energy in 2008 and another £525 million in 2009. In the future, if oil prices rise SSE is able to capitalize because of their more diverse generation portfolio including renewables. SEE would be able to offer lower prices than competitors. Increasing regulations ordering lower carbon emissions by companies also places SSE ahead of competitors in tailoring their generation portfolio towards low carbon technologies. ^[21]

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Competition

Within the UK, SSE competes with:

• E.ON AG (EON) - A major European public utility company headquartered in Germany with other assets in Russia and the United States. They owns 50% of the London Array project, which is the largest wind farm ever built with 1GW of capacity.^[23]
• RWE AG (RWE-FF) - Another major European player based in Germany with subsidiaries across Europe serving 20 million electricity and 10 million gas customers.^[24]
• Centrica (LON:CNA) - The UK's largest electricity producer with strong interests in the North Sea gas fields along with expansion plans in the United States.
• Scottish Power - The company is a subsidiary of the Spanish utility company Iberdrola. It operates in the central and southern Scotland and the Merseyside and North Wales regions.^[25]
• EDF Energy - The worlds largest utility company and the leader in electricity supply to Europe. Its operates a diverse portfolio of 127GW of generation capacity in Europe, Latin America, Asia, the Middle-East and Africa.^[26]

All data is from 2009 from UK business operations.

References

1. ↑ Annual Report 2009
2. ↑ ^{2.0 2.1} Reuters: SSE Company Profile
3. ↑ Annual Report 2009
4. ↑ 2009 Press Releases
5. ↑ Glasgow Investment Plans
6. ↑ |uswitch
7. ↑ Annual Report 2009
8. ↑ Annual Report 2009
9. ↑ Annual Report 2009
10. ↑ Annual Report 2009
11. ↑ SSE Annual Reports 2006-2009
12. ↑ Our Business
13. ↑ Our Business
14. ↑ (SSE Renewables)
15. ↑ Businesses
16. ↑ Our Business
17. ↑ Annual Report 2009
18. ↑ watchdog Ofgem tells UK suppliers to reduce domestic charges
19. ↑ & Southern Energy Accepts Ofgem Power Grid Proposals
20. ↑ Centrica 2008 Annual Report
21. ↑ Energy Strategy
22. ↑ Energy Strategy
23. ↑ E.ON Annual Report
24. ↑ RWE Investor Relations
25. ↑ Scottish Power
26. ↑ EDF Key Figures
27. ↑ EDF 2009 Annual Report
28. ↑ EDF Energy Generation
29. ↑ EDF Energy Generation
30. ↑ EDF 2009 Annual Report
31. ↑ Centrica 2009 Annual Report
32. ↑ Centrica: At a Glance
33. ↑ Centrica: At a Glance
34. ↑ Centrica 2009 Annual Report
35. ↑ E.ON Annual Report 2009
36. ↑ E.ON Annual Report 2009
37. ↑ E.ON Statistics: Portfolio
38. ↑ E.ON Annual Report 2009
39. ↑ SSE Annual Report 2009
40. ↑ S & S Power Generation
41. ↑ S & S Generation Portfolio
42. ↑ SSE Annual Report 2009
43. ↑ RWE 2009 Annual Report
44. ↑ RWE Power Generation
45. ↑ RWE Sites UK
46. ↑ RWE 2009 Annual Report
47. ↑ Scottish Power 2009 Report
48. ↑ Scottish Power 2008 Report
49. ↑ Scottish Power Sites
50. ↑ Scottish Power Wind Locations
51. ↑ Scottish Power 2009 Report