Utility Week

Utility Week 13th October 2017

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UTILITY WEEK | 13TH - 19TH OCTOBER 2017 | 13 Finance & Investment Analysis I n preparation for entering its close period on 1 October, SSE released a statement about its financial prospects for the first half of its 2017/18 financial year. In truth, there was no major news. However, the com- pany did reaffirm that its adjusted operating profit from its various energy network busi- nesses would fall by around £150 million this year following the part disposal of its stake in SGN, a leading gas distribution business. This figure was no surprise since SSE had warned the market of the expected shortfall previously. On the wholesale and retail front, the news was mildly positive, with a slightly better performance expected in the Energy Portfolio Management (EPM) and generation business. Much investor focus will be on earnings per share (EPS), now expected to be between 30p and 32p for the first half of 2017/18, com- pared with 34p previously. The dividend is expected to rise by at least RPI-based infla- tion, although dividend cover does remain low at around 1.3x. Q1 Comparisons Previously, SSE had updated the market when it released details of its Q1 results back in July, which also coincided with its AGM in Perth. Relatively little seems to have changed in the intervening period, although weather patterns during the coming winter months will be crucial for SSE's full-year 2017/18 outturn. In July, SSE confirmed that it anticipated investment of around £1.7 billion for 2017/18, much of which will be spent on its extensive networks operations. In this statement, too, there were carefully craed commitments on both future dividend payments and dividend cover levels – both are very price sensitive issues for SSE and were reiterated in the pre- close period statement. Attractions to investors SSE holds many attractions for discern- ing investors. In part, this is due to its wide range of UK and Ireland-based utility assets. In particular, SSE's returns from its network operations are highly prized by investors, although this year's figures will be substan- tially reduced by the part disposal of the SGN gas business. On the generation front, SSE owns portfo- lios of both thermal and renewable plant. In the latter case, it was very much in the van- guard in espousing renewable generation, a sub-sector that is now rated more highly by investors. And, of course, SSE's mightily impressive dividend payment profile – with payments up from 25.7p in 1998/99 to 91.3p in 2016/17 – has unquestionably boosted its standing with investors. Inevitably, any major devel- opments on the dividend will impact its share price, which has barely changed over a five-year period – it is now close to £14. It did fluctuate quite markedly, though, in the period covered by the independent refer- endum in Scotland. Nonetheless, compared with some of the biggest names in EU energy, such as EDF, whose shares have plunged in recent years, SSE's shares have been very resilient. Offshore wind As an undoubted pioneer in offshore wind investment, SSE will be very pleased that this technology seems to have come of age – and that its strong advocacy of the ben- efits of offshore wind generation have been roundly vindicated. The recent offshore wind auction, which saw prices as low as £57.50 per megawatt- hour for a 15-year contract for difference, (CfD) underpins SSE's confidence in the technology and its place in the generation mainstream. For the cost base to have fallen so quickly is remarkable, albeit some special factors do exaggerate the extent of the cost efficiencies that operators have found. Of course, such low prices adversely impact operators' projected margins but, given such competitive prices, far more off- shore windfarms will assuredly be built – SSE will play a key role in this investment. In fact, SSE has already participated in several well-known offshore wind projects in recent years, such as Dogger Bank. And, for the next two years, delivering the 588MW Beatrice offshore windfarm off Caithness will be a high priority. SSE is the largest share- holder in this challenging project. Response to Helm Given its exposure to renewable genera- tion – and, as such, a major beneficiary of CfD-backed subsidies – SSE chief execu- tive Alistair Phillips-Davies has expressed concerns about the conclusions that may emanate from the energy cost review being undertaken by professor Dieter Helm, a lead- ing energy academic. Helm's robust views on renewable gen- eration costs are well known and Phillips- Davies is anxious that this issue will not dominate his eventual report. Nonetheless, the SSE chief executive has emphasised his hope that Helm's focus will be on ensuring that continuing investment in energy infra- structure takes place. He also points out the need for the ongo- ing transformation to a low-carbon economy to continue. To what extent, Helm's report subsequently triggers any significant gov- ernment action remains to be seen – past experience suggests it is unlikely to do so. Nonetheless, his price comparison analysis of varying generation sources will be rigorously studied by the major players, including SSE. Nigel Hawkins, director, Nigel Hawkins Associates SSE set for solid performance Despite taking a hit to its revenues with the sale of a stake in SGN, SSE is well placed to deliver a solid set of financial results when it reports its full-year figures for 2017, says Nigel Hawkins. SSE SHARE PRICE (PENCE) 1,700 1,600 1,500 1,400 1,300 2013 2014 2015 2016 2017

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