Quashing breakup calls, SSE targets networks sales to fund £12.5B green plan

SSE PLC will plow £12.5 billion into an accelerated renewables strategy to 2026 as it distanced itself from calls by an activist investor to break up the business by splitting off renewables into a new entity.

U.S. hedge fund Elliott Management Corp. had lobbied extensively for a breakup, according to multiple press reports in recent months, arguing that the company's renewables unit could deliver stronger returns to investors as a stand-alone business. But in a Nov. 17 strategy update, SSE said that a split is not in the long-term interests of its shareholders.

The company said growth is best delivered with a large balance sheet drawing from a mix of market-based and regulated divisions. It would expect a weaker credit position for a stand-alone renewables unit, making it more difficult to fund large projects, and also pointed to "substantial dissynergies" resulting from a breakup.

Quantifiable dissynergies would have amounted to approximately £95 million per year, on top of approximately £200 million in one-off separation costs, SSE said. On top of that, it would have seen a wide range of intangible dissynergies such as loss of shared skills, natural hedges and liquidity benefits.

CEO Alistair Phillips-Davies told analysts that there will be no reconsideration of the decision. SSE is now focused on doubling its installed renewables capacity to 8 GW by 2026, dubbed its "net-zero acceleration program," which will be part-funded by selling minority stakes in its U.K. electric transmission and distribution networks.

"We need scale, we need a strong balance sheet, and we don't need to be distracted," Phillips-Davies said. "The opportunities in front of us are enormous."

Earnings boosted

The strategic plan was announced together with SSE's earnings for its fiscal half year to Sept. 30, in which it saw operating profit rise 15% year over year to £376.8 million. This was in part due to a low baseline because of last year's COVID-19 impacts, but also thanks to strong performance in regulated networks and noncore business areas such as gas storage.

Like its peers, SSE saw sluggish wind output in the period due to abnormally low wind speeds. Hydro and thermal assets boosted earnings, cashing in on surging wholesale power prices and volatile markets.

Looking ahead, the £12.5 billion capital expenditure plan targeting low-carbon infrastructure will see SSE add 4 GW of new renewables capacity in the next five years. This would allow the utility to provide a quarter of the U.K.'s 40-GW offshore wind capacity target by 2030 via flagship projects such as the 2.4-GW Dogger Bank A and B facility, the world's largest offshore wind project.

The new spending plan is a 65% increase from SSE's previous strategy. Forty percent of the capex budget will flow into renewables, 40% into networks and the remainder into thermal and carbon capture solutions and other units.

Planning disposals

To help fund the strategy, SSE said it will divest 25% stakes in Scottish Hydro Electric Transmission PLC, its electric transmission business, and Scottish and Southern Energy Power Distribution Ltd., its electric distribution unit, as part of a wider disposal program.

The utility is looking to financial players as potential buyers, and wants to maintain control of the operations given the "huge upsides" in grid networks, Phillips-Davies said. The move should also not be seen as a step toward an eventual breakup: "We don't see it as a halfway house to full separation," the CEO said.

The company expects networks investments to achieve a return on equity of between 7% and 9%. In the competitive offshore wind sector, which saw new entrants pay sky-high entry fees in February's U.K. seabed lease auction, SSE wants returns in excess of 10%, SSE CFO Gregor Alexander said. "In competitive markets, that target remains possible from the best sites and with strong project delivery," he said.

"While the options in front of us are immense, we'll only take them forward where we are clear that they are accretive," Alexander told analysts. Having been an early mover in the U.K.'s offshore wind market as well as in onshore wind, the company still has access to plenty of sites for development this decade.

SSE is branching its renewables activities out into other markets including Denmark, where it is partnering with Copenhagen Infrastructure Partners K/S in the tender process for the 800-MW Thor offshore wind farm. In Spain, SSE has struck a partnership with Acciona SA to enter the Iberian offshore wind market. It also wants to build offshore wind farms off the U.S. East Coast and in Japan.

The market seemed negatively surprised by the strategic update and dismissal of breakup proposals, with SSE's stock down 4% on the day at 10 a.m. in London. Elliott's arguments were shared by some observers, who suggested there were limited synergies between renewables and the rest of SSE and saw positives in targeting sustainability-minded investors with the green division.

SSE's existing power generation portfolio totals about 9.5 GW, with close to half from fossil fuel sources. The utility, a key sponsor of the recent COP26 climate conference, wants to develop "first of a kind" carbon capture and storage technology at its U.K. fossil-powered assets.