SSE has made a "solid start" to the 2015/16 financial year. Adjusted earnings per share increased by 47.6% to 45.9 pence, with all SSE's business segments - Wholesale, Networks and Retail - being profitable. The interim dividend was increased by 1.1% to 26.9 pence per share. The shares rose by around 1% in early morning trading.
Wholesale operating profit rose to £159.6 million (HY15: £26.7m). The increase reflects in particular, higher output of electricity from renewable sources due to higher rainfall and wind speeds than the same period last year. Very difficult market conditions affecting thermal plant, such as low 'spark' spreads, have persisted.
Networks operating profit fell slightly to £451.6m (HY15: £458.4m). While investment in the asset base supported an increase in operating profit in Electricity Transmission, operating profit in Electricity Distribution fell, due to the introduction of price controls.
Retail operating profit increased to £101.5m (HY15: £37.3m). This reflects a return to profitability in Energy Supply compared to the first six months of last year. However, SSE's energy customer accounts in Great Britain and Ireland have fallen from 8.89m to 8.41m over the past twelve months, reflecting highly competitive market conditions.
Investment and capital expenditure increased by 11.5% to £757.3m.
Adjusted net debt and hybrid capital increased by 4.9% since 31 March 15 to £7,936.8m.
SSE aims to deliver a full-year dividend that at least keeps pace with RPI inflation in 2015/16 and in subsequent years. SSE is continuing to target adjusted earnings per share for 2015/16 of at least 115 pence and will update its outlook towards the end of the financial year.
SSE has one of the best dividend track records around. Its dividend has grown every year since 1992, at a compound annual rate of 10% per annum. However, in order to sustain dividend growth in the long run, we feel the group's earnings and cash flows must improve.
SSE aims to grow the dividend at least in-line with RPI inflation (RPI was 0.8% in September 2015), replacing the previous target of above-inflation increases. Dividend cover has dropped below the group's long run target of 1.5x. And last year's free cash flow (cash available after interest costs and capital expenditure) didn't cover dividend payments.
The situation does not look likely to improve in the near term. Conditions in SSE's non-regulated wholesale and retail divisions are challenging. The company is guiding for EPS of at least 115p this year, compared with 124.1p achieved in 2014/15. Free cash flow is likely to remain weak as SSE continues to invest heavily in the UK's energy infrastructure.
The regulated Networks division provides a stable source of cash flow, helping to support the dividend. SSE can also sell off assets and exploit efficiency savings (both of which it is doing), cut back on capital expenditure and let net debt go a bit higher if needs be. But in the long run, this isn't sustainable. The prospective yield of 6.0% (variable and not guaranteed)is an undeniable attraction, but its sustainability will depend on the group improving those all-important earnings and cash flows.
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