Wednesday, 16 May 2012

Portfolio Review: SSE (LSE:SSE)

Source
The portfolio review now turns (finally) to SSE plc - previously Scottish and Southern Energy, a  Scottish-based power utility operating mainly in the UK and Ireland - it is the second largest supplier of energy (electricity and gas) in the UK  and the largest UK generator of sustainable energy.

The current historic yield is approaching 6% - which is impressive for a company in a highly regulated industry. How do they do? And is this level of income sustainable?
As it happens, the 2011/12 Annual Report came out today...painting a mixed picture.

The company was formed in 1998 following a merger between Scottish Hydro-Electric and Southern Electric and has subsequently been snapping up a range of energy-related companies.

SSE is one of the broadest-based energy companies in the UK, with interests in electricity and gas production, electricity and gas distribution, electricity and gas supply and electricity and gas services. It is also - unexpectedly perhaps - the UK's fourth largest telecoms network company.

Wisely perhaps (in my view at least), SSE is staying away from nuclear, although it has flirted (and then withdrawn) with the development of a new nuclear power station at Sellafield.

Their mission statement is reassuring (for dividend-oriented income investors): "Our core purpose is to provide the energy people need in a reliable and sustainable way. Our strategy is to deliver sustained growth in the dividend payable to shareholders through the efficient operation of, and investment in, a balanced range of regulated and non-regulated businesses."

Annual Report

The 'headlines' of the 2011/12 Annual Report are:
DIVIDEND
  • Full-year dividend up 6.8% to 80.1p per share
  • Dividend covered 1.41 times by adjusted earnings per share*
  • Thirteenth successive full-year dividend increase
  • Targeting full-year dividend increase of at least RPI inflation +2% in 2012/13
  • Targeting annual dividend increases above RPI inflation in 2013/14 and beyond
FINANCE
  •  Adjusted profit before tax up 2.0% to £1,335.7m
  •  Thirteenth successive increase in adjusted profit before tax
  •  Capital and investment expenditure up 18.2% to £1,706.9m
  •  Adjusted net debt and hybrid capital up 14.7% to £6.76bn
  •  Average debt maturity of 9.3 years
NETWORKS
  • Operating profit up 6.7% to £737.1m
  • Capital investment in electricity networks up 48.5% to £489.0m
  • Electricity transmission Regulated Asset Value up 37.5% to £770m
  • Total network RAV (inc share of SGN) up 9.3% to £5.86bn
 RETAIL
  • Operating profit down 19.7% to £321.6m
  • Total energy customer accounts (GB and Ire) down 100,000 to 9.55 million
  • Agreement to acquire 130,000 customers in NI from Phoenix Holdings Limited
  • GB gas consumption (ave) down 19.9%; electricity consumption (ave) down 6.9%
 WHOLESALE
  • Operating profit up 6.4% to £607.9m
  • 570MW (net) of additional capacity for renewable energy operational  
  • Output from gas-fired power stations down 26%; from coal-fired stations up 24%
  • Output of renewable energy (hydro and wind) up 73%
  • £42.6m operating profit from Gas Production (£4.6m from two months in 2010/11)
The most worrying aspect of the results is the fall in retail operating profit - surely at the core of what SSE is about. We need to 'watch this space'.
Dividends
Providing consistently attractive dividends is one of the key corporate objectives: to quote from the commentary to the report:
"The recommended full-year dividend increase of 6.8% represents the thirteenth successive above-inflation dividend increase since SSE paid its first full-year dividend in 1999. SSE is now one of just five continuing FTSE 100 companies to have delivered better-than-inflation dividend growth every year during this period, and ranks third amongst that group in terms of compound annual growth rate. Of the 48 companies which have been FTSE 100 constituents since 1998, when SSE joined the Index, SSE is ranked 10th for Total Shareholder Return."

Conclusions

As might be expected, the Annual Report contains a lot of detail on power generation and the market conditions facing SSE. I can't pretend to have digested all of this. However, despite the disappointing result in the retail market, the overall financial result is acceptable and the continuing commitment to paying attractive dividends helps (for the time being) to keep me happy about continuing to hold SSE shares, which are showing a capital gain equivalent to nearly two years' dividends.

[Purchase price: £11.82]


I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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