Shares in utilities giant SSE (SSE) fell 2 per cent on Thursday after a pre-close trading statement revealed two of its three divisions were struggling for profit growth. While its wholesale business is expected to deliver higher profits in the year to March 2017, the networks division is due to be flat for the year, and retail profit is expected to be lower. The retail segment is suffering due to falling customer numbers, which dropped from 8.21m in March 2016 to 8.08m in December. Networks was broadly flat, with higher distribution profits offset by lower electricity transmission contribution and the partial sale of Scotia Gas Networks in 2016.
As announced in its third-quarter update, following submission of its final 2017-18 tariff position to National Grid, the company will face electricity transmission revenue reductions of around £40m in the 2018 financial year. This and other factors are expected to reduce operating profit by around £100m on a like-for-like basis.
The group also secured a lower-than-expected clearing price in the capacity market year-ahead auction, where pricing is agreed for times of future system stress. As a result of all this, the dividend cover for the 2018 financial year will now be “within, but towards the bottom of” its expected three-year target range of 1.2-1.4.
John Musk, analyst for RBC Capital Markets, said: “It’s going to be tight next year with dividend cover going down to the bottom end of the range, [and] that’s before you consider possible intervention from the government.”
The Department for Business, Energy and Industrial Strategy is expected to publish in the spring a green paper on protecting consumers, which could include an energy price cap. Of the big six energy suppliers, all but Centrica’s (CNA) British Gas have raised prices already this year, with Centrica imposing a price freeze until August. SSE announced in March it would raise prices on electricity, equating to a roughly 6.9 per cent increase for a typical dual fuel customer.
Government action could have a big impact on SSE - as recent figures from Ofgem demonstrate standard variable tariffs account for 91 per cent of its customer base, compared with 74 per cent for British Gas. Further pressure on earnings could threaten the inflation linkage on the former's dividend: it has already reined in capital and investment expenditure.
