9th Nov 2016 11:56
LONDON (Alliance News) - SSE PLC on Wednesday reaffirmed its financial targets for its full financial year and beyond despite reporting a drop in adjusted operating profit in the first half due to lower renewables output, margin pressure in the retail business, and the loss of customer accounts.
However, with the power utility confident of delivering earnings growth this year, SSE upped its interim dividend payout and also confirmed it will launch a GBP500.0 million share buyback following the part-sale of its stake in UK gas distribution network SGN earlier this year.
SSE operates in three main divisions: a network unit distributing electricity to millions of customers through overhead lines and underground cables; a wholesale unit producing gas and generating electricity; and the retail unit that supplies energy to about 9.0 million households and businesses across the UK and Ireland.
SSE shares were down 2.7% to 1,534.0 pence per share on Wednesday, one of the worst performers on the FTSE 100. The stock trading 0.7% higher than the start of 2016 and 4.7% higher than one year ago.
SSE is aiming to deliver adjusted earnings, the favoured metric to judge the underlying performance of the business, of "at least" 120.0 pence per share in the financial year to the end of March 2017, as it aims to grow EPS from the 119.5p reported in the last financial year.
Its dividend will rise at least in line with inflation this year, supported by the 1.9% year-on-year lift made to the interim dividend. Sticking to that policy in the medium term, SSE expects its dividend cover to range from around 1.2 times to around 1.4 times over the three years to the end of March 2019.
SSE's full-year earnings target is ambitious based on the first half performance. Adjusted EPS in the six months to the end of September was 34.2p, down almost one-quarter from the 45.9p reported a year ago.
That means SSE will have to deliver adjusted EPS of at least 85.8p in the second half, which would mean 72% of full-year earnings are anticipated to come in the winter half of its financial year. In the previous year, SSE generated 62% of full year adjusted EPS in the second half.
Total adjusted operating profit in the first half fell to GBP637.2 million from GBP701.9 million a year before, driven by declines from both the wholesale unit that generates power and the retail unit that sells it, with only the networks division reporting a lift, albeit a minor one.
Adjusted operating profit from the wholesale unit fell to GBP121.0 million from GBP159.6 million, retail profit dropped to GBP60.5 million from GBP101.5 million, and the networks division reported a rise in adjusted operating profit to GBP455.9 million from GBP451.6 million.
That caused a large drop in adjusted pretax profit for the first half to GBP475.8 million from the GBP548.8 million reported a year ago.
The wholesale division experienced a 21% decline in electricity output from renewable energy sources, such as wind, compared to the previous year, partly offset by a better performance from the thermal generation assets. Gas production delivered lower profit due to weak prices, and the gas storage unit continued to face "challenges in operating conditions".
Further losses of household customer accounts was the root of the problem for the retail division in the first half, despite supplying more energy and delivering more adjusted profit from non-domestic customers in the period.
SSE has lost roughly around 160,000 domestic electricity customers over the past year, with 4.1 million accounts on its books at the end of September versus 4.3 million a year earlier. Domestic gas customer numbers have fallen by about 120,000 over the past year to 2.8 million accounts from 2.9 million.
The number of non-domestic energy customers, however, rose to stand at 470,000 at the end of September from 460,000 a year earlier. Customer numbers in Ireland dipped slightly year-on-year to 790,000 from 800,000.
Although SSE has continued to lose customers - in line with the trend of customers moving away from the Big Six energy suppliers in favour of smaller, more independent suppliers - the rate of losses seems to have slowed, to about 1.0% in the first half compared to a 2.0% fall last year.
On a statutory basis, including exceptional items, SSE's financial performance improved significantly from last year due to positive mark-to-market valuations on commodity and financial derivatives, which boosted pretax profit by GBP165.7 million.
Reported pretax profit in the first half of the current year rose to GBP615.9 million from GBP230.8 million a year ago, despite revenue declining to GBP11.26 billion from GBP13.83 billion.
The wholesale division also performed much better on a reported basis, turning to an operating profit of GBP266.5 million from a GBP129.1 million loss last year. The Retail unit's profit remains unchanged on a statutory basis, while the networks division reported a similar lift in operating profit to GBP409.7 million from GBP381.5 million.
The total operating profit on a statutory basis in the first half was GBP736.5 million, a huge rise from GBP343.1 million.
SSE's dividend for the first half was raised to 27.4 pence from 26.9 pence and, in addition, SSE confirmed it will launch a share buyback before December 2017 to return the majority of funds raised from the sale of part of its stake in SGN, completed earlier this year.
Of the GBP600.0 million of net proceeds from the sale, GBP500.0 million will be returned via the share buyback while the other GBP100.0 million will be invested in the Stronelairg wind farm in Scotland. Thereafter, the ongoing adjusted EPS impact of the sale and the use of the proceeds should be "broadly neutral," SSE said.
Capital investment has also been stepped up, totalling GBP782.4 million in the first half, 3.3% higher than last year. Full-year expenditure will be about GBP1.85 billion - "the highest annual investment and capital expenditure by the company to date" - driven by the additional investment in the Stronelairg wind farm.
Total spending over the four years to the end of March 2020 will be GBP6.00 billion, SSE said, averaging GBP1.50 billion per year.
"The operating environment presents some challenges, notably with changes to the UK government and macro-economic uncertainty, with the added issue of Brexit. There have, however, been some welcome developments, particularly the UK government's recent reforms to the capacity market in Great Britain. SSE continues to engage constructively with governments and regulators to help them achieve their aims for the energy market," said Chairman Richard Gillingwater.
"Whilst there should always be a degree of caution about interpreting half-year results, especially against a background of volatile market conditions, we have made a satisfactory start to this financial year. Looking to the challenges that lie ahead, our long-term focus will continue to be on operating our balanced range of energy businesses safely and efficiently and maintaining disciplined financial management," he added.
By Joshua Warner; [email protected]; @JoshAlliance
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