Domestic dual fuel profit margin grows to 6.9 per cent

SSE has reported a modest rise in profits in its preliminary results for the year to the end of March, owing to the improved performance of its networks and wholesale divisions.  

The increase came despite a pronounced decline in earnings from the company’s retail arm, which shed around 210,000 households and business customers. 

Adjusted operating profits were up 2.7 per cent to £1,874 million, whilst adjusted pre-tax profits grew by 2.1 per cent to £1,545.9 million.

The retail arm saw a 7.2 per cent fall in adjusted operating profits to £422.3 million which SSE pinned on “increases in non-energy costs, the impact of the household gas tariff reduction in March 2016 and falling customer numbers”.

Total customer numbers declined by 210,000 to eight million, as UK household electricity accounts dropped by 100,000 to 4.06 million and UK household gas accounts by 90,000 to 2.7 million. This compares to total customer losses of 370,000 in 2015/16

However, “reduced wholesale energy costs and slightly increased average consumption” meant there was in fact a “small overall increase” in the earnings from the UK household supply segment of the retail arm.

Most interestingly, given the current moves by politicians to introduce caps on energy tariffs, the operating profit margin for domestic dual fuel customers in Britain increased to 6.9 per cent from 6.2 per cent in 2015/16.

In March, the big six supplier raised its dual fuel energy tariff by 6.9 per cent – the equivalent of £73 per year on a typical bill. 

Adjusted operating profits from the networks division grew by 1.1 per cent to £936.5 million, reflecting the strong performance of its electricity distribution operations. Earnings from SSE’s electricity transmission operations were down, as were those from its gas distribution business, SGN, largely due to the partial sale of its stake in October 2016.

The wholesale division reported a 16.3 per cent increase in adjusted operating profits to £514.6 million due to improved earnings from SSE’s conventional generation portfolio and despite lower renewable output. Profits from gas production rose but fell from gas storage.

Pre-tax profits for the whole of SSE jumped from £593.3 million to £1,776.6 million. The company said this was because of exceptionally large write-downs on its wholesale generation, gas storage and production assets in 2015/16 as well as a one-off gain in 2016/17 from the SGN divestment.  

SSE invested a total of £1.7 billion over the year, of which 46 per cent went towards networks and 21 per cent towards renewable energy generation and government obligations. It expects to spend a similar amount in each of the next two years as part of a total investment programme of £6 billion over the four years to 2020.

The company increased its offshore wind capacity by just 34MW in 2016/17 but has further 992MW of onshore and offshore wind capacity under construction. It means the firm is on course to have a total 4.3GW of renewable generation by March 2020.

SSE warned that it expects to see a £150 million fall in profits from its networks division in 2017/18, or £100 million when accounting for the impact of the SGN sale.  

“We have been clear for some time that 2017/18 presents challenges, and the need to engage constructively with a new UK government as it takes forward energy policy will be a key priority for the year ahead and beyond, said SSE chief executive Alistair Phillips-Davies.

“SSE will continue to focus on securing maximum value from our portfolio of wholesale assets, achieving further efficiencies and customer service improvements in our networks businesses, responding positively to evolution and change in our retail markets and creating long-term value through investment of around £1.7 billion in new assets in 2017/18.”

Analysts at investment firm Jefferies commented: “Over the last few years, SSE has in effect been investing at record levels in order to stand still from a profit perspective. With headwinds growing in the retail business, along with low power prices, we see this strategy coming under increasing pressure.

“Today’s update suggests to us that SSE is unlikely to able to maintain its dividend cover target in case of further punitive regulatory intervention in the UK. This will likely bring the sustainability of SSE’s dividend increasingly into question.”