SSE preliminary results

  • Overall pre-tax profits of £1,551.1m, up 9.6%, following significant investment in gas production and electricity networks.
  • SSE announces profit in Retail down 28.6% after mild winter.
  • Renews call that a Competition Market Authority investigation must be broad enough if it is to restore trust.

SSE plc has today announced its preliminary results for the year to 31 March, during which pre-tax profits across the group rose 9.6% to £1,551.1m mainly due to returns on significant investments in upstream gas production and major network upgrades.

However, SSE reported a reduction in operating profit of 28.6% in Retail, the part of the company that includes domestic energy sales.  The profit margin from supplying gas and electricity to customers was 2.9%.  This is due to a very competitive market and a mild winter.

On 26 March SSE announced that, in order to protect its customers from rising costs, it will freeze its standard household energy prices until at least January 2016 – the longest ever energy price freeze in Great Britain.  This is designed to provide customers with peace of mind and, although it had no impact on the financial result being reported today, is likely to mean SSE’s profits in Retail will be around £100m lower over the price freeze period than they would otherwise have been.

The economically-regulated Networks business posted an increase in operating profit of 9.3% while operating profit in the Wholesale business increased by 24.8%, largely due to an extra £90m profit from the newly-acquired Sean gas field.  With the impact of the Sean acquisition removed, on a like-for-like basis profit in the Wholesale business was flat, year on year.

For the sixth year in a row, SSE invested more than it made in profit - £1.58bn - building the power generation assets and electricity networks required to ensure customers have secure and affordable energy supplies in future years. The company has also set out plans to invest a further £1.6bn building more energy infrastructure in Great Britain and Ireland in the current financial year.

Earlier this week a report by PwC found that SSE delivered a £9.1bn contribution to the UK economy in 2012/13, comparable in scale to the 2012 Olympic Games, which gave a one-off £9.9bn boost to the economy.  The report also highlighted that SSE supported 112,000 jobs in the UK both directly and indirectly.

Alistair Phillips-Davies, Chief Executive of SSE, said:“We introduced our price freeze right at the end of the last financial year and it has been hugely popular. It remains the only such commitment available to all customers and will mean we take a hit on Retail profits over the next couple of years. However, to keep bills lower for longer we should be funding the £100 of environmental and social levies on bills, which will pass £200 by 2020, through taxation.”

Lord Smith of Kelvin, Chairman of SSE, said: “SSE is listening to and helping customers with the longest ever household energy price freeze in the Great Britain market; we have well-defined plans to invest over £5.5bn in the next four years in maintaining, upgrading and building the electricity assets customers depend on; and we are committed to giving investors a fair return through an annual dividend that keeps pace with inflation.

“The issues facing the energy sector are very challenging.  Nevertheless, customers, investors, regulators, politicians and SSE all want the same thing: an energy market that works on behalf of the customer and is trusted by them to do so.  We believe SSE is not part of the problem but part of the solution to meeting the energy needs of customers in Great Britain and Ireland.”

SSE has also published its response to the consultation on a Competition Markets Authority investigation into energy supply, and today renews its call for any investigation to have a broad enough scope if it is to reach a new, lasting settlement on the energy market for the benefit of customers and investors. In a cover letter to Dermot Nolan, Chief Executive of Ofgem, Alistair Phillips-Davies said:

“SSE has consistently demonstrated its appetite for reform to the competitive market that is in the interests of customers and competition generally.  Should a market investigation reference be considered necessary, we will engage in a positive and constructive way as we believe that it can provide a platform for achieving greater political and regulatory stability for the competitive energy market across Great Britain, for the benefit of customers and to help support the investment in the country’s energy system that is needed.”

In the consultation SSE defines five principles for a successful inquiry:

  1. Focus on all energy customers – so what they pay for is defined and transparent
  2. Get  the scope  right – so it is broad enough to restore trust in the competitive markets
  3. Create simple markets - which encourage new entrants and give the opportunity for different business models to thrive
  4. Establish clear measures of success in advance - so people can see objectively how the market is performing
  5. Achieve lasting results - so there is a clear and enduring framework that gives customers confidence, allows regulators to regulate and encourages investors to invest in the GB energy market    

In its preliminary results SSE provides updates on operations and investments in the company’s three reporting segments: Retail, Networks and Wholesale.

In Retail

  • Profits fell by 28.6% to £292m due to tough competition and a mild winter.
  • Customer numbers fell by 3.9% to 9.1m.  This decline in customer numbers was before SSE’s price reduction and price freeze came into effect.
  • Energy Supply profit margins are unlikely to recover to their 2013 level for at least another two years as costs rise but SSE’s prices do not.
  • SSE’s price freeze announced on 26 March has had no impact on the operating profit figures announced today.

In Networks

  • Operating profit increased by 9.3% to £955.4m, driven largely by significant ongoing investment in Transmission.
  • Despite five major storms in the Southern Electric Power Distribution area, including the wettest two months since 1910, power was restored to 99% of customers within two days.

In Wholesale

  • Operating profit increased 24.8% to £634.6m
  • The newly-acquired Sean gas production assets contributed £90m of additional profit, with the further increase due to renewables output.
  • On a like-for-like basis (with Sean removed) profits in Wholesale were flat, year on year.

In the year to 31 March SSE invested £1.58bn capital in the power generation facilities and electricity networks required to ensure customers get the energy they need in a reliable and sustainable way.  Capital investment in the new financial year is expected to be around £1.6bn.

Over the next four years capital and investment spend is expected to total £5.5bn, making SSE one of the biggest investors in Great Britain. Despite this significant capital investment net debt and hybrid capital is up just £311.5m to £7.7bn.  On this basis SSE expects to remain consistent with the current criteria for a single A credit rating.

SSE believes that shareholders should be fairly rewarded for helping to support the company’s investment and that is why it has today announced an increase in the dividend payable to shareholders of 3.0% to 86.7 pence per share.  This means that shareholders’ return on their investment has risen in real terms, ie after inflation.

Although challenges lie ahead, SSE believes it can continue to deliver a fair real terms return for investors that is sustainable over the long term, based on the quality of our operations, assets and investment opportunities.

SSE uses Earnings per Share (EPS) to monitor financial performance over the medium term.  In the year to 31 March EPS was up 4.1% to 123.4p.  A number of issues facing the energy sector, including difficult market conditions for thermal generation and a potential Labour price freeze could place a greater risk on future increases to EPS.

On 26 March, as well as a price freeze, SSE also announced a package of measures to simplify the company and focus on what’s important.  These included the disposal of non-core assets and some onshore wind farms over the next two years, which is expected to raise £1bn.  Some of these, such as the disposal of SSE’s street lighting contracts, are already underway.

It was also announced that 600 jobs would be lost through a voluntary early release programme.  Since the announcement SSE has received sufficient applications from employees wishing to leave the company and successful applicants will leave in the coming weeks.

For the full preliminary results statement click here