SSE Sees ‘Significant Challenges’ as U.K. Price Cap Looms

SSE Plc is preparing for “significant challenges” this financial year as the U.K. government prepares to cap energy tariffs, threatening profit margins at the nation’s biggest utilities.

Under the governing Conservative Party plan, the “Big Six” suppliers — SSE, Centrica Plc, Electricite de France SA, E.ON SE, Innogy SE’s Npower and Scottish Power — will need to set their standard tariffs under a limit fixed by the energy regulator Ofgem every six months. This will cover about two thirds of those companies’ customers.

The Perth, Scotland-based company hasn’t seen anything yet in the government’s price-cap plan that requires it to change its policy of boosting dividends each year, but there are risks, Alistair Phillips-Davies, chief executive officer, said Wednesday on a conference call with investors. “I wouldn’t expect margins to go up. It could be a very different market if you have the cap there,” he said.

The government’s policy is similar to one proposed in 2013 by the opposition Labour Party and it’s being flagged ahead of the June 8 general election to win over voters as Brexit negotiations begin. The idea has been attacked by Centrica, the biggest supplier, which argues it could decrease the chance utilities will offer highly discounted fixed tariffs, lowering the level of competition.

Political risks may impact SSE’s profitability and the company forecasts dividend cover in the year through March 2018 toward the bottom of its expected range of 1.2 to 1.4 times. Adjusted earnings per share will also probably be lower.

“It’s going to be bad, but it’s not going to be the worst-case scenario in terms of government intervention,” said Elchin Mammadov, an analyst in London for Bloomberg Intelligence. The U.K. will probably introduce a relative price cap that stops companies from offering low fixed tariffs and high standard tariffs simultaneously, he said.

Variable Tariffs

SSE is more profitable than other utilities because about 91 percent of its customers are on the standard variable tariffs targeted by the government, compared with about 74 percent for Centrica and half for Scottish Power, according to Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co. in London.

Adjusted pretax profit rose 2.1 percent to 1.55 billion pounds ($1.9 billion) in the 12 months through March. That matched the average estimate of eight analysts compiled by Bloomberg.

Profit from energy trading and production helped counter weaker earnings in the company’s retail supply and services business. The company booked an 83.1 million-pound charge after abandoning a plan to replace its billing system, avoiding potential costs of more than 500 million pounds, SSE said on the investor call.

Adjusted earnings per share rose 5.2 percent to 125.7 pence. That compares with a forecast of 122-125 pence that the company made in March.

The full-year dividend increased 2.1 percent to 91.3 pence a share.

SSE rose as much as 1.2 percent to 1,468 pence, the highest in a month, before trading at 1,464 pence at 10:45 a.m. in London. The U.K. benchmark FTSE-100 index was little changed. The stock has fallen 5.7 percent this year, compared with an 8 percent gain in the Stoxx 600 utilities index.

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