SSE Turns Focus on Renewables as Retail Supply Margins Suffer

(Bloomberg) -- SSE Plc is to split off its green generation into a separate business known as SSE Renewables under the U.K. utility’s increased focus on low-carbon generation.

• The new company will have 4 gigawatts of capacity by March including onshore and offshore wind, flexible hydro, run-of-river hydro and pumped storage. That compares with 7.3 gigawatts of conventional assets.

Key Insights

• We’re starting to get a better sense of the shape of SSE after it hives off its U.K. retail power arm in a deal with RWE AG’s Npower. After that transaction completes, SSE will focus on renewables and remove itself from the U.K. retail power business where margins are slimming rapidly with the government price cap.
• Adjusted earnings per share fell 40 percent, which isn’t a surprise after SSE warned on Sept. 12 that natural gas prices coupled with persistent hot weather over the summer would cut earnings for the year. The company said it will keep its full-year dividend.
• Efforts to limit utility earnings in the U.K. are starting to bite and will keep falling next year. Margins at SSE’s household energy supply business may be less than half what they were a year ago at 2 percent to 3 percent for the year through March 31 compared with 6.8 percent in the previous period. SSE said the margin will narrow again in the next fiscal year.
• There was no further detail on SSE’s ominous comments that it will “carefully review the details” of energy regulator Ofgem’s price cap that will begin in January. The utility said the cap wasn’t cost-reflective or sustainable.

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• Innogy SE announced a 748 million-euro ($841 million) writedown of its U.K. retail arm Npower on Tuesday, casting an ever-lengthening shadow over the planned merger with SSE’s supply business, coming only a week after the pair said the deal will be delayed and need more cash.
• The renewables company split is the “latest step in our strategic goal to give greater focus to renewable energy, give investors greater visibility of assets and earnings in the future,” SSE Chief Executive Officer Alistair Phillips-Davies said in a statement.
• The new company will be led by Jim Smith as managing director.
• Work on splitting off the business is expected to be largely complete by the end of the current financial year.
• For a link to the earnings statement, click here

Market Reaction:

• SSE rose 1 percent to 11.42 pounds at 8:08 a.m. in London. The stock is still down 13 percent this year, making it the second-worst performer on the Stoxx 600 Utilities index.

To contact the reporter on this story: Rachel Morison in London at rmorison@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Andrew Reierson

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