How SSE PLC Is Changing

What does the future hold for investors in energy group SSE PLC (LON:SSE)?

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The UK’s energy companies have come under unprecedented political, regulatory and consumer pressure over the past 12 months.

Ed Miliband told his party conference last autumn that an incoming Labour government would freeze prices and break up the ‘Big Six’ energy firms. Regulator Ofgem announced just last week an investigation into the energy market by the Competition and Markets Authority (CMA) — expected to take 18 months — to consider “once and for all” whether there is effective competition in the market.

The heat is on for energy companies, and SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) has announced a number of significant changes that have implications for investors:

  • a freeze on household energy prices in Britain until at least January 2016
  • a separation of the group’s retail and wholesale businesses to be completed by March 2015
  • a programme of non-core asset and business disposals over two years that will reduce debt by around £1bn
  • operational efficiencies, including 500 job cuts, that will result in annual savings of around £100m by March 2016

The changes announced by SSE go some way towards addressing the political and regulatory pressures. Milliband welcomed the price freeze — but Labour’s pledge is for a freeze until 2017 compared with SSE’s January 2016. The separation of the company’s retail and wholesale businesses addresses one of the concerns of regulator Ofgem — whether the vertical integration of the energy companies is in consumers’ interests — but the CMA investigation may result in demands for more radical changes.

centrica / sseUncertainty and the potential for reduced profits — and dividends — are only compounded by the possibility of a ‘Yes’ vote to Scottish independence, and an assumed lower cost of capital for the new 2015-2023 price-control period; cost of capital determines the return a company can earn on its investment.

As things stand, SSE has said it expects earnings per share (EPS) for 2014/15 to be “around or slightly greater than in 2013/14 but to be subject to greater risks in the following two years”. The company is maintaining a policy of dividend increases at least in line with RPI inflation, but that could see cover by earnings falling to 1.2 times by 2016/17.

With so many potential exploding balls bouncing around SSE, the situation appears fraught with dividend danger. However, I still maintain that government simply can’t afford to make companies such as SSE uninvestable — which means being able to pay a decent dividend that at least paces inflation — and that common sense will ultimately prevail.

SSE is rated on a forward P/E of around 12 and a yield of 6%, which looks about fair for a company mired in uncertainty and political agendas.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester does not own any shares mentioned in this article.

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