18th May 2016 09:26
LONDON (Alliance News) - SSE PLC on Wednesday said its earnings and profits fell during the last financial year as all three of its key divisions reported year-on-year declines, but the results still came in ahead of expectations and the Perth, Scotland-based utility stuck to its dividend policy.
SSE said it intends to return to earnings growth this year, albeit at a slow rate, and also plans to offload a stake in its gas distribution business which could lead to a substantial chunk of money being returned to shareholders.
The FTSE 100 constituent was mainly hit by the fall in commodity prices during the year and the negative impact that had on its wholesale division. The division produces and stores gas and then uses it to generate electricity, which in turn is distributed by SSE's network division and sold through its retail business.
Adjusted earnings before interest and tax fell 3.2% in the year to GBP1.82 billion from GBP1.88 billion, mainly driven by falls in the wholesale division.
The fall in oil prices, which in turn drives gas prices, caused adjusted earnings before interest and tax from gas production to plummet 94% in the year, causing the overall adjusted Ebit from the wholesale division to decline 6.6% to GBP442.5 million from GBP473.8 million.
The retail division, which sells power to UK households, was hit by further declines to SSE's customers numbers, losing a further 370,000 customers during the year - meaning SSE has lost over 1.0 million customers since 2013 alone due to increased competition and the rise of independent suppliers.
The retail unit saw adjusted Ebit fall 1.1% in the year to GBP455.2 million from GBP456.8 million, with earnings from energy supply rising thanks to growth in the industrial and commercial sectors, but offset by falls in earnings from its energy-related services and its enterprise unit which provides contracting, lighting and other services to businesses.
The network unit which transmits electricity and distributes SSE's gas around the country is still by far the most profitable part of the business and continued to deliver earnings that are almost larger than the retail and wholesale units combined.
Fortunately for SSE, adjusted Ebit from the networks division fell at a slower rate of 0.4% in the year to GBP926.6 million from GBP936.8 million, as profit from transmitting energy rose by 56% but was offset by a 21% fall for the distribution arm and a 6% decline at its gas distribution unit.
SSE's key financial metric, adjusted earnings per share, came in at 119.5 pence in the year. Although that is a 3.7% fall from 124.1 pence a year ago, it is higher than analysts forecasts and the company's guidance range of 117.0 to 119.0 pence for the year.
Importantly, SSE had increased that guidance range from its original target of 115.0 pence, meaning adjusted earnings were 4.0% higher than its original target.
The fall in earnings across the group was tied to a decline in revenue to GBP28.78 billion from GBP31.65 billion.
That caused SSE's adjusted profit before tax, which excludes certain exceptional items, to fall 3.2% to GBP1.51 billion from GBP1.56 billion.
Prior to the results, SSE had not guided that any exceptional items would be booked during the year, but sprung a surprise on Wednesday by revealing it has booked GBP889.8 million worth of items during the year - mainly against its wholesale assets in response to falling commodity prices.
The level of exceptional items booked is considerably higher than in recent years, with SSE writing down an average of GBP500.0 million to GBP700.0 million annually over the past five years.
As a result, reported pretax profit fell at a much steeper rate than adjusted earnings, down 20% to GBP593.3 million from GBP735.2 million.
More importantly, SSE stuck to its dividend policy as guided by increasing its payout by 1.1%, in line with inflation. The payout will total 89.4 pence per share compared to the 88.4 pence paid last year, which is a smidgen higher than the analyst consensus that estimated a dividend of 89.3 pence.
SSE previously warned that the uncertainties within the market will cause its dividend cover to range from 1.2 to 1.4 times over the next three years, and reiterated that call on Wednesday.
Capital expenditure in the year totalled GBP1.60 billion, but will rise to GBP1.75 billion this year. SSE is investing a total of GBP5.50 billion to GBP6.00 billion across four years to March 2020.
SSE said it still has a "small amount" of work to complete as part of its asset sale programme, which has so far generated over GBP1.00 billion in proceeds, meaning any further proceeds that are generated will be seen as a bonus.
Importantly, SSE said it has decided to sell up to one-third of its 50% stake in SGN Ltd, with the plan of either creating value with the proceeds or returning the proceeds to shareholders - raising the possibility of a special dividend in the short term.
That means it will be looking to sell up to a 17% stake in SGN, the UK's second largest gas distribution network company with networks in Scotland and Southern England, following a fall in profits from SGN in the year.
SSE paid GBP505.0 million for its 50% stake in SGN back in 2005, and its regulated net asset value reached GBP5.40 billion at the end of March this year, breaking the GBP5.00 billion threshold.
"SSE has decided to consider options to crystallise some value for shareholders from its long-term investment in SGN and is considering the sale of up to one third of its 50% equity stake in SGN Ltd. In considering whether to take forward the disposal of part of its equity in SGN, SSE will be very mindful of the need to ensure that SGN itself is in a good position build to on its track record of success in the future," the company said.
"Should a sale be completed, SSE would expect to use the proceeds to return value to its shareholders, or to invest to create value for shareholders should there be the right opportunity, in a way that would be determined at the time," SSE added.
Moving forward, SSE said it plans to stick to its policy of increasing dividends in line with inflation and will focus on returning growth to its adjusted earnings - targeting 120.0 pence per share this year. If delivered, that would represent a small rise of around 0.4%.
SSE shares were down 0.3% to 1,542.0 pence per share on Wednesday morning.
By Joshua Warner; [email protected]; @JoshAlliance
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