SSE announces increase in dividends…and prices

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by George Kerevan

SCOTLAND’S largest industrial company, Southern Energy (SSE), saw its pre-tax profits rise 1.6 per cent to £1,310m, according to the results for 2010-11 published on Friday.

The results are very much in line with what the Perth-based utility predicted in March this year though slightly above what market analysts had been suggesting. However, there was a drop in power use by the utility’s nine million domestic customers in Great Britain.

As a result, SSE has increased its dividend by 7.1 per cent to 75p, a shade above market expectations of a 74.8p.

“SSE is one of just six FTSE 100 companies to have delivered real dividend growth every year since 1999, when the company paid its first dividend,” claimed Lord Smith of Kelvin, the company’s chairman.

In line with rival Centrica, SSE warned that its domestic customers would facing further hikes in energy bills. It said that since posting a price rise in household gas prices of 9.4 per cent just before Christmas, annual wholesale prices for electricity and gas had risen by a quarter and one third respectively.

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SSE is what is known as a vertically-integrated utility, meaning it produces power, as well as buying and selling power on the wholesale market (i.e. trading with other utilities) markets. As such, it is often complicated to identify where SSE makes its profits.

According to the accounts, SSE’s own generation of power accounted for 93 per cent of its total revenue in 2010-11 (£27.2bn) but only half the profits. In fact, the profit from generation and supply to SSE’s own industrial and domestic customers actually fell by 1.5 per cent, to £882.8m.

The rest of SSE’s profits come from wholesale trading with other utilities – a risky business given the recent volatility in energy prices. The scale of its trading becomes clear when it is understood that only £8bn of SSE annual revenues come from sales of electricity and gas to its own industrial, commercial and domestic customers in the UK, but its revenue from trading was a huge £19bn.

Even more significant, revenues from ordinary generation and supply were down on the year, but revenues on trading had increased by £7bn – almost as much as the entire cash flow from what ordinary people would consider the firm’s core business.

In 2010-11, SSE’s own plants generated over 150 per cent of the electricity needed to supply its own household and small business customers. Any net balances were traded in the wholesale electricity market. In addition, SSE buys power from other companies. SSE also trades in coal and carbon as well as electricity and gas. If its traders buy or sell at the wrong price – i.e. if they bet the wrong way – SSE can lose money.

This means that domestic customers are not necessarily paying for power based on SSE’s own production costs, but on a price determined by market speculation.  

In March 2011, Ofgem (the independent regulator) published an investigation into how the domestic UK retail power market works. Ofgem said: “action is needed to make energy retail markets in Great Britain work more effectively in the interests of consumers”. Its proposals include actions to “improve further the transparency in vertically-integrated utilities” such as SSE.

In separate announcements, SSE has announced two new acquisitions. Wind Towers, a joint venture with Marsh Wind Technology, has completed the purchase of the Skykon wind turbine tower manufacturing plant at Machrihanish. SSE has also reached agreement on the acquisition of a wind farm in North Lincolnshire.

These moves are part of the company’s drive into renewables. SSE has been awarded extensive offshore development rights as part of the Crown Estate’s Round 3 offshore wind programme. SSE’s potential capacity share of these developments is a massive 6GW.

This policy is reflected in a rise in capital expenditure in 2010 by 9.8 per cent, to £1,444m. SSE’s net debt stood at £5.891bn on 31 March 2011.

However, power station online availability dropped markedly during the financial year. The availability rate for gas plants dropped from 94 per cent to 88 per cent, and coal-fired stations saw availability fall from 92 per cent to only 84. There was also disappointing output from renewable and hydro-electric schemes.