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SSE expects challenging year ahead as it merges UK energy supply arm with npower

SSE said it lost 430,000 customer accounts in its retail division while the government's energy price caps for vulnerable customers also hit profits
The company raised its full year dividend by 3.7% to 94.7p

SSE plc (LON:SSE) posted a 38.9% drop in 2018 profits as it tackled a “number of complex challenges” that are expected to continue this year as it merges its UK energy supply arm with npower. 

Profit before tax fell to £1.09bn in the year to 31 March 2018 from £1.78bn a year ago, mainly due to exceptional charges of £213.3mln.

Exceptional items included a £63.0mln impairment resulting from SSE’s decision to spin off the UK energy supply business and a £104.7mln hit stemming from gas production assets.

SSE’s merger with Innogy's npower to create a new energy supply giant on the London Stock Exchange is expected to be completed by the end of this year, subject to approvals.

READ: Competition and Markets Authority refers SSE and Npower merger for full investigation

Excluding items, adjusted pre-tax profit fell 6% to £1.45bn from £1.54bn, reflecting declines in the retail and energy networks divisions.

Energy price cap and customer account losses hit profits

Retail profits were dragged lower by costs from its planned npower merger as well as the impact of 430,000 customer account losses and the government's introduction of energy price caps for vulnerable customers.

SSE also pointed to the government's plans to limit how much energy companies can charge customers for their standard variable tariffs. The new legislation, which aims to protect 11mln homes, is expected to be in place by next winter. 

Profits in the electricity distribution and transmission networks business, which includes the Scottish and Southern Electricity Networks (SSEN), were lower due to regulatory price controls and the disposal of a 16.7% stake in Scotia Gas Networks Limited (SGN) in 2016. 

"As expected, 2017/18 presented a number of complex challenges to manage, but SSE's operational performance was generally very robust and significant progress was achieved in key aspects of the company's capital investment programme,” said chairman Richard Gilllingwater.

"The challenges will continue in 2018/19, which is also expected to be a year of major transition for SSE.  A strong operational and investment focus on meeting the current and future needs of energy customers is essential, as is preparing the businesses in the SSE group for the changes that lie ahead.”

Dividend lifted with more hikes to come 

The company raised its dividend by 3.7% to 94.7p and intends to increase the payout to 97.5p for 2019 before rebasing it down to 80p in 2020.

For the following three fiscal years, SSE is targeting annual increases in line with retail price inflation.

George Salmon, equity analyst at Hargreaves Lansdown, said while the plans to rebase the dividend lower in 2020 may seem like bad news investors should remember the group recently announced it’ll be splitting off the retail business.

"A smaller dividend is fair enough when you’re a smaller business," he said.

"All that remains to be seen now is whether the new customer-focused operation will be making up the 17.5p shortfall. It should be a strongly cash generative business, and a sole focus on retail will be a positive, but customer account losses and the introduction of price caps bring headwinds.”

In the five years to March 2023, SSE expects its capital and investment expenditure to total £6bn, including £350mln towards a 840MW gas-fired power station at Keadby in Lincolnshire.

In early morning trading, shares rose 0.5% to 1,423p. 

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