Investors in electricity generator and distributor SSE PLC (LON:SSE) breathed a sigh of relief today as the FTSE 100-listed firm rewarded them with a hike in the interim dividend even though first-half profits showed a well-flagged drop weighed by a big loss in its commodity trading operations.
The blue-chip company’s shares were 3.3% higher in afternoon trading at 1,169p each, recovering ground following a near 17% drop in the share price over the past six months, which included a sharp 8% drop in the wake of a profit warning in September.
READ: SSE looking to spin-off renewable energy assets in UK and Ireland as it confirms big drop in first-half profit
Back then, SSE said it expected its adjusted operating profit for the six months to 30 September to be around half of that delivered in the same period in 2017 due to the warm summer and high wholesale gas prices.
The company added that the relatively dry, still and warm weather had continued to impact on the group, as had persistently high gas prices, resulting in higher cost of energy than expected.
It also cited lower than expected output from renewable sources, lower volumes of energy being consumed, and a negative impact in relation to its Energy Portfolio Management.
The energy generator and distributor pointed out that adjusted operating profit for the first five months of the financial year has therefore been negatively affected by around £190mln compared with its plan.
READ: SSE warns of halving first-half adjusted operating profit due to warm summer, high gas prices
In the event, SSE reported a 41% drop in adjusted pre-tax profits to £246.4mln for the six months to September 30, down from £416.7mln a year earlier, slightly better than it had predicted.
The main relief though came as SSE raised its interim dividend by 3.2% to 29.3p per share and reconfirmed that it intends to recommend a full-year dividend of 97.5p and to deliver the five-year dividend plan it set out in May 2018.
Enviable dividend track record
George Salmon, equity analyst at Hargreaves Lansdown said: “SSE has an enviable track record of dividend increases, but investors might be worried about the group’s next five year plan. SSE needs to reinvest huge amounts back into running its energy network.”
He added: “That means there’s not always enough cash left over to cover the payout to shareholders. Taking on debt to pay the dividend can only tide you over so long, so if SSE is to make its dividend as sustainable as its energy generation, it needs to make improvements.”
Salmon pointed out: “That’ll start with changes to its hedging strategy, and after adverse price movements saw the division that includes commodity trading flip last year’s half year profit of £9mln into a loss of £86mln this time out, it’s easy to see why.
“The new strategy will try and smooth over those commodity-induced ups and downs, which feels like no bad thing to us.”
“However,” the analyst added, “that doesn’t mean it’s all plain sailing from here.
“Adverse commodity prices haven’t been the only thorn in the group’s side recently. SSE is increasingly focused on renewables, and as we’ve seen this year the unpredictability of the weather on and around these shores will impact profits.”
Renewables to separate
To that end, SEE also flagged up today that it is looking to create a new company that will include its renewable energy assets in the UK and Ireland.
The firm said the new company - to be known as SSE Renewables - will comprise around 4 gigawatts of SSE's existing renewable assets such as hydropower, onshore wind and several stakes in offshore wind projects.
It pointed out that the new entity will provide greater visibility of assets and future earnings for investors and improve its ability to raise finance for projects.
Retail merger doubts
The renewables separation isn’t the whole way that SSE is looking to hedge its risks, with the firm also in the midst of plans to merge its UK retail division, SSE Energy Services with Npower, which is owned by German utility Innogy SE.
However, earlier this month, the two companies said the tie-up would be delayed beyond the first quarter of 2019 due to market developments such as the looming implementation of a price cap by UK energy regulator Ofgem from January 1.
READ: SSE merger with Npower hangs in the balance as parties renegotiate terms
SSE announced after the market had closed last Thursday that it and Innogy are working together regarding potential changes to the commercial terms of the proposed combination.
The merger was cleared by the Competition and Markets Authority last month but since then, SSE said it had “become apparent that the impact of some recent market developments mean that the commercial terms associated with the proposed combination will need to be reconsidered”.
The UK firm said today: "There is now some uncertainty as to whether this transaction can be completed as originally contemplated."
But, it added: "The Board believes that the best future for SSE Energy Services ... will continue to lie outside the SSE group.”
All in all, investors needed to be reassured with the dividend hike as it still looks to be a rocky road for SSE as it attempts to shelter its earnings from the vagaries of the UK regulator and the UK weather.