Southern Connecticut Bancorp Earnings Call Insights: Spending Breakdown, Revenue & Renewables

On Wednesday, Southern Connecticut Bancorp (AMEX:SSE) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Spending Breakdown

Lord Smith of Kelvin – Chairman: Read the statement because we have been very clear; This year 1.6, still in the range of 1.5 to 1.7 to March 2015.

Edmund Reid – JPMorgan Cazenove: Then a follow-up question which is what would you expect to spend that on given the uncertainty, would you be looking at gas renewable et cetera?

Lord Smith of Kelvin – Chairman: As we went through, we gave for this current year, we gave very clear view, roughly for this around 45% will be in networks, over 350% in transmission, 275% in distribution and a bit in Other Networks, around 45% in networks, just on the 50% in wholesale or less on renewable you have seen in the last couple of years, more on the fossil plant because of the upgrade at Keadby and Medway and the multi-fuel plant and then the last 5% is if you like retail and other, IT systems get ready for smart metering, so we are very clear about the breakdown for this year and we will give indicative breakdowns on the slide for the following year, but actually I think this current year is a good guide to that broad split over the next couple of years too.

Edmund Reid – JPMorgan Cazenove: Now my third question which is FFO to debt ratio for March ’12, do you have the details of what it was?

Gregor Alexander – Finance Director: We are still working on. It’s a quite complex formula that we do for Standard & Poor’s. We reckon it would be around the 20% level, we have got our annual meetings with the rating agencies in the summer, we’ll go through them in detail, agree the ratios, because they do various adjustments and then we will announce the ratios after that. But as I said, we would expect to be around the 20%.

Lakis Athanasiou: Lakis Athanasiou, independent analyst. Three sets of questions. First, could I comment on your views on the impressive collective auctioning on residential supply markets? Second, Ofgem’s on-off approach to competition in onshore transmission, electricity transmission, what your views are on that and what potential impacts that could be? Third, I am just a little concerned about operational issues in thermal generation. Fiddler’s Ferry II you have announced that it’s coming off for six months and that doesn’t seem to be lined or planned out, and at a time when coal spreads…

Ian Marchant – Chief Executive: Let me deal with the last one. No it is a planned outage. Every four years you have to do a major (indiscernible) vessels completely planned, absolutely.

Lakis Athanasiou: So no issue..

Ian Marchant – Chief Executive: No issue there at all. (Throw the) easy question or at least go to the harder ones.

Lakis Athanasiou: Can I ask on operation on Marchwood. Marchwood seems to be running at very low load factors so far this year, around 20% mark compared to say a peer like (Langeje) around 40% to 45% again I wonder if there is a commercial or operational issues there?

Ian Marchant – Chief Executive: Absolutely commercial, we’re taking a more of balancing market strategy which means you get a higher achieve sparks with absolute commercial. So do you want to cover the…

Alistair Phillips-Davies – Generation and Supply Director: Yes sure. I’ll do collective switching for you. It’s clearly something that’s on David’s radar. We’ve got a meeting with him next Wednesday to talk about it. There is obviously been a relatively high profile campaign by which on that only two of the big six companies participated in that as far as I’m aware and we didn’t because I think the structure of the auction is quite right. I don’t think it is necessary fair to people. We’re happy to make the products that we have there on offer to people available to them but we recently don’t get bidding down and offer special prices to people who happen to read which or happen to have access to the Internet so that was a critical part about that. We are engaging with companies who get involved in this. The key thing for us I think is to actually start engaging with people who aren’t totally engaged with the market. Some of those groups are perhaps more vulnerable or disadvantaged and those are the areas that I think people should be focusing on relevant people who have access to the Internet, who regularly surf, switching sites or regularly surf the energy sites and look for advice and what we also want to see from people who are going to get involved in collective switching is people put a focus on service and the values of the companies to the companies that they actually hold to. So therefore I think there are a number of factors or balance of factors it need to be put into that, but we are fundamentally supportive and we’ll certainly be going to be engage with Dave and his team next week.

Lord Smith of Kelvin – Chairman: Offshore transmission, you have fair competition on existing projects, so onshore transmission and as part of the price control, Ofgen have the option.

Alistair Phillips-Davies – Generation and Supply Director: He is giving you the play off.

Ian Marchant – Chief Executive: Have the option to put out the competition for some projects, but we Mark and his team has done a good job that we don’t expect them to do that.

Revenue & Renewables

Bobby Chada – Morgan Stanley: It’s Bobby Chada from Morgan Stanley. Question about the weather you mentioned, it was turning into a bit of hedge where if you had warm weather, you tend to have wet and windy weather, can you give us a feel for the weather impact on the supply business in ’11-’12 and the offsetting upside in the renewable and hydro business?

Gregor Alexander – Finance Director: The supply business we said volumes were down 20% in domestic gas and 7% in electricity underlying the weather adjusted it was down 4% in each. If you take that and you do various assumptions on years consumed and you compare that to the additional renewable rate we got for weather, new plant before weather, broadly kind of almost kind of even day, but I would say the volume impact was higher than what we gained on the renewable business, so few tens of millions difference.

Lord Smith of Kelvin – Chairman: Booby, I man the hydro was an all-time record, I mean it was 9% higher than the previous highest records, so we’re not expecting to see that again, so I think that’s a biggest fall in consumption, so on a (stack). Last year it was pretty extreme and it’s therefore harder to work out while the normalized position is from it.

Bobby Chada – Morgan Stanley: Question two, I am not sure if you meant to have a question tone when you talked about the market expecting capacity to tighten in generation, you sounded like you were perhaps not fully of that view, so perhaps you could flash your view and also give us some help as to how you can make investment decisions and things like Abernedd or the other CCGTs given the policy backdrop?

Ian Marchant – Chief Executive: The questioning tone was not – is it going to happen? It is going to happen. It’s quiet when we think by March ’13 more capacity will have been withdrawn that has been built out since (indiscernible). More has come off than gone, but we have also have the demand destruction. There is still more to come off between you still got some of the old coal left this time next year. You still got the oil, when does that come off, how hard does that last remaining 3 or 4 gigawatts of coal run. What is the after schedule from the old plants? Linking in Lakis’s point, you get these six month outages that happen periodically for insurance and safety reasons and the timing of an outage could mean a plant shuts maybe a little early than you might think. So what we are saying is we think the market looks quite tight, come 2015. We think it won’t be tight this winter, so the question in term is when do you get that reversal but also more interest to me when does the market see the perception of time, since it start reflecting that in prices. That is even more uncertain. Then if you come to your question, it is absolutely right in terms of the future investment program, the most variability about do we or don’t we is absolutely around Abernedd and there are effectively will be two – there are three things that we will need to assess, probably one of which we will know which is the price from the OEM so as we do our procurement, we will get back, we don’t have that today that’s one. The second then is this market assessment of when does it tighten, and the third is the regulatory environment where the government has created a known-unknown. It has said there will be a capacity mechanism and it has not clarified all that would be. At a moment, sitting here today I would want absolute clarity on that before we made the investment decision. We’re talking about later this year so there is tie. These should all come together leaving us just with the assessment of – is this the right investment to make based on the fundamental economics of what we see the marked would be in three years time. So it is very much still an option.

John Musk – Royal Bank of Canada: John Musk from Royal Bank of Canada. Two questions as well. On biomass options at FFF, I get a sense that you’ve perhaps not fully committed to that and it is very much an option for you. Can you just go through what preparations what you may have done there and what you’ll need outside of the rock to make that decision because it appears obviously that’s an easier way to add renewables or a quicker way to add renewables volumes rather than wind? Then secondly, on your retail services, the margins there seem to be around about 10%, is that the sort of number we should be looking at going forward. It seems lower than another large well-know supplier is …

Gregor Alexander – Finance Director: I think it was around 10%, but I wasn’t sure whether – to be excluding internal or external revenue on that, so you can put me right on that, is that a mix or just a volume thing as to why you think you might be lower than…?

John Musk – Royal Bank of Canada: I am not sure I understand the margin question, (indiscernible) also the biomass question.

Ian Marchant – Chief Executive: I think there were two things. We’re not just a 4,000 megawatt coal-fired generation, so enhanced coal-fired is not the be all and end all of our existence, it is a very small part of the investment story. So it’s not from (indiscernible) and it never well be. However, the economic enhanced coal-firing are entirely dependent on the ROC banding review. That is not finalized until we think later this month, so we have not made a decision. We’ve done the FEED work, we know what we’re able to do, but we’re waiting, it’s a big (indiscernible) but a much small, we’re waiting till we get that known-unknown to be a known-known, what is the banding, then we will announce our plans, but you’re talking of GBP 30 million to GBP 40 million of investment at Fiddler’s to get it to the enhanced coal-firing if the economic stack up. Ferrybridge is a little behind because is it’s only on half a plant and the engineering issues are different, so that’s in a sense why it’s a sentence because we haven’t made a decision and I have talked for long enough that they now understand your margin question.

John Musk – Royal Bank of Canada: Greg, you understand the question.

Gregor Alexander – Finance Director: We can’t give the total revenue because that includes about GBP 184 million relating to metering business, that’s all internal, if you take out the metering business and you look at the various business regarding that segment, telecoms, retail telecoms will be making a margin of 10% plus just to run on that level and home services will be making negative margins and for this…

Ian Marchant – Chief Executive: That made a loss in case you want to know what negative margins. It’s still in ground phase.

Gregor Alexander – Finance Director: Principally that metering is inflating the turnover.

John Musk – Royal Bank of Canada: When would it be back in process, or when it will go to….

Gregor Alexander – Finance Director: Home services. I’d like to see them profit as soon as possible but we need to grow the customer numbers and it’s probably…

Ian Marchant – Chief Executive: (At least obviously two years)

Gregor Alexander – Finance Director: It’s very close to breakeven, but that market is incredibly competitive and it’s all around getting customer density, obviously BG benefit from – they get eight or nine visits per day per engineer, we are at five or six per day per engineer, because of customer density.

Robert Chantry – Berenberg: Rob Chantry at Berenberg. Just two questions. Firstly, is there any clarity on the 2012-13 growth and adjusted PBT other than just an increase moderate or modest or whatever?

Ian Marchant – Chief Executive: That’s easy no.

Robert Chantry – Berenberg: Secondly, is there any split between gas and electricity margins? It is very helpful to see 3.5% I think you disclosed that sort of number in the past, so is it only split on fuel or on B2B, B2C, any more color around the margins?

Alistair Phillips-Davies – Generation and Supply Director: If you are willing to wait a few months, I will comment exactly what I done now. For slightly earlier last year, you will see our regulatory accounts and you will get a split there between domestic business, electricity and gas. So you will get that.