Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, DBVIC. My name is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce our next presentation will be from SSE from the UK. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box to the right of the slides. All of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Michael Livingston, Director of Investor Relations of SSE, which trades on the London Stock Exchange under the symbol SSE, and in the US on the OTC markets as SSEZY. Over to you, Michael.
Good morning, and thank you for joining me today at the Deutsche Bank ADR Virtual Investor Conference. My name is Michael Livingston, and I am the Director of Investor Relations at SSE PLC, and I would be delighted to give you a brief overview of the group, the role we play in the energy transition, before taking any questions you may have at the end. Over the past few years, SSE has worked to place itself at the heart of the energy transition, which is one of the great structural opportunities of our time. And we believe that the three key pillars of the future energy system will be across renewables, flexibility, and electricity networks, and have a premium portfolio of projects across these essential technologies.
The development of these projects gives us a wealth of options to deploy around GBP 20 billion worth of capital investment to 2027 in attractive markets and generate good returns. And the charts on these tables emphasize the options we have, with targets to more than double our installed renewables capacity over the five years to 2027, as well as expecting a 15% average annual growth rate in the network's asset base over the same period. And as the value of flexibility comes to the fore, we have an existing portfolio of flexible technologies, in addition to a pipeline of low-carbon options to harness that value stream. All of this means SSE is in the right place at the right time with the right business model to deliver strong earnings and asset-based growth, maintain a robust balance sheet, and create significant value for shareholders and society.
We're focused on delivery against this ambitious plan, and we've had some important developments over the last few months. Our Q1 trading statement has highlighted that our current fleet of assets is performing in line with expectations, and renewables output has returned to more normalized levels. From a construction perspective, we have recently completed the 443MW Viking Wind Farm and the associated Shetland HVDC subsea cable, both on time and on budget. With an expected load factor of around 48% and the security of a 15-year index-linked contract, we expect the Viking will be one of the most productive onshore wind farms in the U.K., and the Shetland HVDC link is a landmark project which connects the island of Shetland to the U.K. mainland energy system for the very first time.
Elsewhere, over the last six months, we've completed our Slough Multifuel 55MW joint venture project and received final approval from the regulator, Ofgem, for a GBP 4.3 billion EGL2 Transmission link, which is also a joint venture, this time with National Grid. And finally, just to note, whilst we have had well-publicized incidents in the construction of Dogger Bank offshore wind farm over the last few months, installation activity has resumed on the site as we continue to navigate the complexities of building the world's largest wind farm. Our next market update is scheduled for next week, the 3 October 2024, before we enter into our closed period with half year results on the 13 November 2024.
In financial year 2024, the group delivered a resilient financial performance despite the impact of reduced market volatility, inflationary pressure, and unfavorable weather in that year. While adjusted operating profit of GBP 4.2 billion was slightly lower than the previous year, the mix of profits continued to evolve with a higher quality contribution from networks and renewables in that total. This slide sets out some of the moving parts we expect for each business in financial year 2025. While we've given a lot of detail on this slide, the overall message I would give is similar. We expect a higher overall earnings contribution from our networks and renewables businesses. The drivers between the two, however, are slightly different.
For networks, the regulatory protection against higher costs of inflation will see a significant catch-up in tariff charges as the business recovers its cost base, which has increased over the last few years. And as for renewables, the increased capacity additions that we have delivered, combined with higher hedge prices, means that our earnings from this businesses, this business is also expected to grow. And as ever, final performance in the year will be dependent upon market conditions, plant availability, and weather, with the seasonality of earnings preventing more specific earnings guidance at present. And as with any long-term plan, the expectations and assumptions for each component over the medium term will change over time to reflect an ever-evolving market environment.
This slide highlights our current medium-term view for profitability for our businesses to 2027, which reflects the ongoing normalization of market prices, which started at the start of 2024, and the increased investment opportunities we have in our various businesses. What I would say is that while the profit guidance for individual businesses will naturally change over time, responding to market dynamics, our overall outlook reflects a diverse and resilient business mix, which has an increasingly high visibility of high-quality earnings, capable of evolving to deliver in a range of different market scenarios. Our main focus, though, is on delivering our 2027 target earnings growth of between 13%-16% annual growth rate, or between GBP 1.75-GBP 2.00 in FY 2027. This slide sets out our confidence in being able to achieve that target.
In networks, we've already secured with Ofgem, the regulator, capital programs, which would see SSE's annual CapEx more than triple compared to today, generating significant revenues upfront, alongside a significant long-term growth in our regulated asset base. And when combined with renewables growth, we've committed and taken final investment decision on to date. We are confident that these drivers will offset any impact on the merchant elements of our businesses from the prevailing energy commodity price environment. But first and foremost, I should always say, we will maintain our capital discipline, and while we've yet to take FID on around 2GW of our renewables capacity target, these projects are not required to meet our FY 2027 earnings targets. SSE has consistently reiterated that it will always choose value over volume.
So in summary, just before I come to any questions you may have, we do believe that SSE has put itself in the right place, with the right assets, at the right time. We have a GBP 20 billion investment plan, which is focused on the three pillars of the energy transition, providing high-quality earnings growth for years to come. And this investment provides us with the confidence to deliver between 13%-16% earnings per share growth to 2027. Dividend growth is expected between 5%-10% each year, helping shareholders also receive the benefits of that strong earnings growth.
Finally, with a wealth of organic options, capabilities in highly attractive markets, combined with the strong investment-grade credit rating and balance sheet that we have, we have the opportunity to make disciplined investment in future growth where those opportunities arise. Thank you very much. That's the end of my brief presentation, and I would be delighted to take any questions you may have through the chat function.
Thank you. I think we have a couple of questions in here. The first one is: how do you manage your exposure to fluctuations in energy prices and exchange rates?
What I'd probably say is, in terms of our business, the U.K. and Ireland, SSE's business is predominantly based in the U.K. and Ireland, with, you know, more than 95% of FY 2027 earnings expected to come from those jurisdictions.
We have a number of natural hedges in place to mitigate our exposure to the euro, both from I guess our various businesses that we have there, our hedging arrangements, including FX hedging and our debt capital markets debt-raising capacity, some of which we borrow and convert in euros, convert into sterling. Others we borrow in euros and leave in euros. So that's really how we manage our exposure to exchange rates, either through natural hedges or through taking out specific hedges that may be available. And in terms of our exposure to fluctuations in energy prices, we kind of break it down by business initially, and then take an overall group view. So our renewables business is obviously exposed to power prices.
We look to try to hedge those assets, a number of months in advance, with the intention of being fully hedged for the output from the merchant output from those assets at least 12 months in advance of the date of delivery, providing us with a certain level of visibility over the expected prices those assets will achieve.
In terms of our thermal business, it's obviously exposed to not only power prices, but also gas pricing, carbon prices, inputs, and we'll really look at the spark spread, so the difference between power price, gas price, and carbon price, in order to understand and hedge and lock in not only the power sale, but also the purchase of gas and the purchase of carbon, lock in that profit whenever there is, you know, a margin for our plant to do so. So we help mitigate our exposure to energy prices from that perspective.
But we should also note that, while we don't have a domestic retail business in the U.K., we do have a B2B business in the U.K., retail business, which provides an offtake and also provides us with a bit of certainty and stability in terms of the energy prices we can achieve. So between all of those, I'd say that is, that's how we manage our exposure to fluctuations in energy prices, with the context overall that we don't have, we aren't 100% exposed to energy prices across the group. 60% of our earnings come from regulated or index-linked sources, so that's predominantly networks, but also some of our renewables through fixed price index-linked contracts we have with the government. Hopefully, that answers that question.
The second question is elaborate-- could you please elaborate on the capital allocation strategy for SSE's infrastructure projects, particularly in renewable energy, and how we evaluate the return on investment for these projects?
So we have set out, and apologies, it wasn't on the slide, but we have set out committed investment criteria that we have. So the summary is, I guess, solar. For solar projects, we look for a 50-300 basis point spread over WACC. For onshore wind, we look at a 100-300 basis point spread. For offshore wind, which is normally entered into through a joint venture process, we look for targeted returns of more than 11%.
And for any emerging technology, opportunities that might arise, we look for a higher spread, 300-500 basis point spread over WACC. So, we, I guess, have those various hurdle rates in order to evaluate the expected return on investment that we have for those projects. And you know, those are committed investment criteria that we look to achieve and beat on all of the projects we enter into. In terms of the capital allocation strategy, I think, you know, it's currently under evaluation by the group, and this is part of the beauty of the group's structure. We have a number of opportunities across the three pillars, as I talked about, renewables, flexibility and networks.
And we have the ability to dial up or dial down capital investment in each one of those as we see risk-adjusted returns materialize. So in recent months and years, we have significantly upweighted our investment in the regulated network side, because from a just risk-adjusted returns perspective, that's clearly been the most attractive opportunity that has been presented to us across our businesses. That's not necessarily going to be the case throughout the next five years or ten years.
But you know, should renewables and the opportunities there, and some of the pricing pressure we have there, you know, start to decline, and the risk-adjusted returns are, you know, become more attractive, then we have the ability to dial up investment and take some of the attractive opportunities we have there, through to FID. So we do constantly look at it, we do constantly compare all the businesses, and we do dial up, or dial down investment, depending on the current level of risk-adjusted returns that we see.
The next question is, can you discuss your debt structure and how you manage refinancing risks and interest rate exposure?
So that's an excellent question. So I mentioned at the start that we have a very strong balance sheet in place.
So we have a target net debt to EBITDA ratio of between three and a half to four times. That is where we believe is a sensible range to keep us well within the strong investment-grade credit ratings from S&P and from Moody's. So for S&P, we're BB B + with positive outlook. For Moody's, we're Baa1 with a stable outlook. We do have the ability to push that all the way to 4.5 x and still stick within those strong investment-grade credit ratings, we believe. But at the moment, our plan is to stay within that 3.5-4 x net debt to EBITDA ratio. We do have, I guess, a number of long-term debt that's in place.
Our debt is predominantly held at fixed rates, so we typically have over 90% of debt held at fixed rates. We will make use of loans and hybrid equity as part of that, albeit we haven't actually increased our level of hybrids over the last eight years or so. I think they've remained relatively constant over that period of time. So we do have extra hybrid capacity, and we do try to take you know refinancing opportunities as and when they arise. So we've said there's around GBP 200 million of long-term debt refinancing required this financial year. But equally, we're aware that our investment program requires us to borrow to invest as well. And recently, you may have seen, we went out onto the...
We issued a seven-year green bond, EUR 850 million, which we swapped back to sterling at, you know, an all-in rate of 4.95%, which we think is very attractive in the current market. So, we do certainly look and take opportunities as and when we see them in the capital markets to refine and increase the stability of our long-term capital market profile. Hopefully, that answers some of those questions. Oh, and sorry, interest rate exposure. Hopefully, that covered as well. Typically, we do enter into fixed coupons, or we certainly enter into interest rate swaps to fix the interest rates on our debt. As I say, more than 90% of our debt is normally held at fixed rates.
Next one: How does SSE assess and mitigate risks associated with climate change and the transition to a low carbon economy?
I guess, there's probably a few ways in which we do look at this. I mean, we do always consider it from a weather perspective for our renewable suite. Our P50s are under constant review to ensure that they reflect, I guess, the long-term averages that we see for wind. So not just picking up kind of any short-term movements, but long-term movements, but most up-to-date analysis that we have. So we do keep that under review from a renewables perspective.
From a networks perspective, the resilience of the network is very much front and foremost of mind, not least in storm environments, when I guess, you know, a number of communities would be impacted by a loss of service or an interruption of their electricity power and quite dramatic weather conditions. So we're constantly looking at improving the resilience of our network and taking proactive steps, where possible, to replace, reinforce, or, you know, eliminate potential risks that might arise, as a result of climate change and storm damage, and the last one is probably our thermal business. So I guess we have a raft of unabated thermal generation fleet. Clearly, the...
We certainly took early action and shut our last coal plant a number of years ago now. So we have no coal. It's all gas. We are looking to at the future and the next generation of the flexible thermal fleet. So we do have a number of projects which are looking at carbon capture and storage. We do have a number of projects that are looking at hydrogen and hydrogen-fired generation, whilst recognizing that under, you know, the U.K. government scenarios, under Committee for Climate Change scenarios, it is expected that there will be needed on the U.K. system, a level of unabated gas as a strategic reserve, likely into the early 20, 30s , if not beyond.
We certainly are very aware of the risks associated with climate change across all our businesses. And I'd encourage you to have a look at the TCFD reporting and our annual report for more details on all of those.
The next question then is: What is your dividend policy, and do you have an active buyback plan?
I think, as mentioned on this slide, we recently rebased our dividend to GBP 0.60 for the 2024 financial year. From there to 2027, we have committed to a dividend growth, annual dividend growth rate of between 5% - 10% per year. We don't have an active buyback plan.
What we do have is we have committed that, we do have a scrip program, so that allows, shareholders to take their dividends in shares, rather than in cash. And but we have- we recognize that scrips can, you know, can be quite controversial with some, some investors. So we have limited, committed to limit the dilution impact from the, from the effect of scrips by buying back, should the level of scrip rate, go above 25%. So there will be, on occasion, technical buybacks, non-discretionary buybacks we will make in order to limit the effects of scrip, or the dilution effects of scrip for, for investors.
But there is no buyback plan aside from that, because, you know, of the sheer level of capital investment that we need to make over the coming years as part of the energy transition.
Next question is: Highlight more on hybrid strategy and any more hybrid capacity available.
I think I probably covered a lot of this in a previous question, in that we have about GBP 1.8-1.9 billion of hybrids at the moment. It has been at that level for the last eight or so years. We will have a look at. We certainly have set hybrid capacity levels based on the rating agencies that we're able to increase that capacity up to.
And, you know, I think whether or not we do it will depend on the relative attractiveness of the pricing we think we'd get on hybrids versus elsewhere in the capital markets. We don't have any particular commitment to hybrids, you know, to increase our level of hybrids. It's one of our funding options we always keep under review. We certainly don't have any hybrids coming up for renewal in the next couple of years, at least I think. April, I think, 2026 is the next time one of our hybrids comes up for review from memory. Apologies.
I've got the number somewhere, and yes, the first call date for a GBP 600 million hybrid bond is April 2026. So we've got a few years left before or some time left before we need to refinance that one. I think we've probably got about five minutes left, but I think we've probably reached the end of the questions, unless there are any more coming from the audience. I'll just double-check. I've answered all of the ones. No. I'm more than happy to answer any other questions if there are any available. Otherwise, I'm also more than happy to give people time back if that's best. Just pause for a second, see if any more come throug. No. No. Excellent. Well, on that note, I think I'll probably just call the meeting to a close.
What I'd probably say is, as I said, as mentioned on the slide, we certainly believe that we have a group which is structured in the right place with the right assets at the right time. We have a wealth of organic options and capabilities and a number of highly attractive markets, and the opportunity for disciplined investment in future growth. Hopefully, that's a compelling story and a number of you are attracted to that story. However, if you'd like any more details or if there are any more questions that you might have, please do contact myself or the team through ir@sse.com, or please do go and see sse.com investors for any recent publications, presentations, transcripts, and data books that we have on there.
But if there's nothing else, then I'm happy to close the call. Thank you very much for your time, and look forward to speaking soon.