SSE to reject break up, invest £12.5bn, sell stakes

SSE, the Perth-based renewable power and networks giant, announced on Wednesday a “Net Zero Acceleration Programme” including an “enhanced, fully funded £12.5bn strategic capital investment plan to 2026 alongside ambitious 2031 targets, aligned with net zero and 1.5 degrees.”

Announcing the plan, SSE rejected calls from US activist hedge fund Elliott Management to break up — and proposed instead to sell 25% minority stakes in SSEN Transmission and SSEN Distribution.

Elliott Management has been pushing hard for a breakup of SSE into two separate companies after buying up a small stake in the Scottish firm, arguing for a sale or separation of SSE Renewables.

As part of its investment plan, SSE announced what it called a “growth-enabling dividend plan” paying at least £3.50 per share across the five years, comprising “a rebase to 60p in 23/24, with attractive annual growth of at least 5% to March 2026.”

Shares of SSE, one of Scotland’s largest listed companies and biggest employers, fell about 4%.

SSE said the £12.5 billion capex investment to 2026 “represents +65% step-up in annual investment (£1bn additional capital investment per year) on previous plan with over 2.5 times more capital now allocated to renewables growth.”

SSE also announced results for the six months to September, 2021, showing a 116% increase in statutory H1 profit before tax to £1.686 billion “mainly due to mark-to-market revaluation gains on operating derivatives of c£1.2bn in the period, a result of recent market volatility.”

Adjusted profit before tax rose 30% to £174.2 million.

SSE said: “The board carefully considered a wide range of available strategic options, including a separation of SSE Renewables.

“This was a rigorous process involving constructive engagement with shareholders, and consideration of independent advice.

“The board ultimately assessed that separation would not be the best route for growth, execution and value creation …”

Explaining the decision, SSE said: “Growth is best achieved through the balance sheet strength and funding options derived from a mix of market-based and economically-regulated businesses, with the latter providing both capital strength and growth …

The loss of scale, reduced capital structure and weaker credit position of a standalone renewables business would ultimately impact on the ability to fund larger scale projects such as Dogger Bank and Berwick Bank …

Separation would risk losing valuable growth options arising from SSE’s integrated business model and position across the clean energy value chain in areas such as carbon capture and storage, hydrogen and distributed energy solutions, amongst other emerging technologies …

A break-up of the group would result in substantial dis-synergies and a loss of the shared services and world class capabilities that SSE’s electricity-focused business mix provides. A considered, detailed assessment of quantifiable dis-synergies of approximately £95m/year of recurring value lost through a break-up, approximately £200m of one-off separation costs, and a wide range of intangible dis-synergies such as loss of shared skills, natural hedges and liquidity benefits …

There would be a period of significant disruption, cost and uncertainty to the business, its partners and counterparties leading to project delays.

“This would limit SSE’s ability to secure pipeline opportunities at a critical time for accelerated net zero investment.”

SSE CEO Alistair Phillips-Davies said: “In recent years we have made great progress in focusing the SSE group on the delivery of the electricity infrastructure needed in the transition to net zero.

“We are constructing more offshore wind than anyone else in the world right now and expanding overseas, delivering the electricity networks needed for net zero and pioneering carbon capture, hydrogen and battery technologies to deliver system flexibility.

“Our Net Zero Acceleration Programme represents the next phase of SSE’s growth and involves a substantial ramping up of investment — equivalent to nearly £7m each day in net zero infrastructure — backed up by clear delivery and funding plans.

“It builds on our existing strong platform for growth and highly desirable pipeline to create significant value for shareholders and wider society while further enhancing the long-term potential of the business.

“Today’s announcement means SSE will maximise its long-term potential and capture growth opportunities during a critical time for the energy sector, strengthening and growing its core businesses, creating jobs, delivering for wider society and offering attractive shareholder returns.”

AJ Bell investment director Russ Mould said: “SSE’s pivot towards renewables has been well-timed.

“Having sold its household energy supply and services firm at the beginning of 2020, it is not directly exposed to the current energy crisis, where even the larger operators will be running many loss-making accounts as the wholesale cost of gas and electricity soars above fixed tariffs.

“The company’s first half results saw the company double down on its commitment to clean energy as it outlined plans for a multi-billion pound investment funded by the sale of a 25% stake in its network distribution arm.

“This is unlikely to be sufficient to get activist investor Elliott off its back, which having joined the shareholder register earlier this year has been reportedly pushing for SSE to take more radical action and separate the renewables assets from the grid business.

“The rationale for such a move is that it could see SSE lifted to the more elevated market valuations enjoyed by other firms which concentrate purely on renewables.

“However, today’s first-half results perhaps offered an indication why SSE is resisting such a move, at least for the time being.

“Renewable output dropped sharply due to unfavourable weather conditions – essentially it just wasn’t windy enough – but the company benefited from higher volumes through its regulated networks division.

“The unpredictability associated with renewables has also affected their role in providing baseload power and perhaps SSE might be tempted to revisit a more dramatic shake-up of the business once the storage technology needed to smooth out the contribution of renewables has developed further.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.