SSE plc (LON:SSE) revealed on Wednesday that it is in talks with the competition watchdog over its plans to merge its UK energy supply business with that of rival Npower as it raised its full year earnings guidance.
The Scottish energy supplier said it was in “pre-notification discussions” with the Competition and Markets Authority after MPs called on the watchdog to investigate the proposed £3bn tie-up on concerns will reduce competition and hurt consumers.
READ: MPs call for full investigation of proposed SSE and npower merger
SSE said its plans to create a new independent energy supplier remain on track to be completed by the last quarter of 2018 or the first quarter of 2019.
In a trading update for the third quarter to 31 December, SSE said it now expects to report earnings per share of 116p to 120p, compared to a previous forecast of 116p.
It also expects to report an annual increase in the full year dividend that is in line with the retail price index – a higher measure of inflation than the consumer price index.
Shares rose 1.6% to 1,312p in morning trading.
Uncertain time for energy suppliers
Chief executive Alistair Philips-Davies said: "The energy sector continues to present a number of complex challenges to manage but, throughout this financial year, we have kept our focus on delivering the best possible service for our Networks and Retail customers and on delivering our programme of investment in the energy infrastructure on which all customers depend."
The energy sector is facing tightening regulation. Last October the government published draft legislation for a price cap on the most expensive standard variable tariffs - the most common energy deal on the market. Standard variable tariffs account for about 71% of SSE's customer accounts.
The so-called ‘Big Six’ energy suppliers, including SSE, are also grappling with competition from challenger firms with more consumers switching to cheaper deals.
SSE reports drop in customer accounts
In the first nine months of the year to December 31, SSE’s energy customer accounts in the UK and Ireland stood at 7.68mln, down from 8.08mln the same period a year earlier.
SSE supplied an average of 256 thermal units (th) in gas, compared to 262th the previous year, and supplied an average of 2,616 kilowatt hours (KwH), down from 2,664kWh.
The company said output of renewable energy was up 25% on 2016, thanks to wetter and windier weather conditions supporting its onshore windfarm operations.
SSE invests in renewable energy
In the nine months since 1 April, capital expenditure came to £1.1bn as the company invested in its offshore and onshore wind farms as well as improvements in its electricity distribution networks and smart meters for retail customers.
For this fiscal year, SSE expects capital and investment expenditure will total £1.6bn, down from a previous estimate of £1.7bn.
Capital expenditure is anticipated to be about £6bn in the four years to March 2020 with £5bn committed to economically-regulated electricity networks and government-mandated renewable energy projects.
"Solid delivery so far this year has helped the group upgrade profit forecasts, and there’s also good news on 2017/18 investing requirements," said George Salmon, senior analyst at Hargreaves Lansdown.
"Long-term capex guidance is unchanged, but for this year at least, more coming in and less going out is a nice combination."
What will SSE's dividend look like after npower merger?
However, Salmon said the main question is what SSE's dividend will look like once it spins off its cash generative UK retail business.
"Shareholders will have an interest in the new npower-SSE retail entity, but it remains to be seen if their dividend return from both groups will exceed what they’re currently getting," he said.
"In recent years, SSE’s dividend hasn’t always been covered by the cash it generates, so there’s a chance the group could use the deal as an opportunity to rebase the payment down."