Energy Company Attractive for Income Seekers

SSE's performance will hinge on three major factors: demand for renewables, electricity prices, and SSE's ability to earn its allowed returns at its regulated networks business

Andrew Bischof 17 December, 2014 | 4:37PM
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SSE's (SSE) core business is its unregulated wholesale and retail segments, which together have historically accounted for about 60% of operating profits. The company's regulated networks segment, which makes up electric and gas distribution and transmission services, provides more stable earnings. Rounding out the company's earnings profile are its smaller noncore operations.

The company's wholesale generation unit operates roughly 12 gigawatts of primarily thermal capacity in the U.K., though its portfolio of hydro, wind, and other renewable-generation assets is expanding because of aggressive U.K. renewable portfolio standards to be implemented by 2020.

SSE projects renewable generation will account for 40% of its portfolio by 2025. The growth of its wind portfolio would improve returns dramatically if power prices were to recover, though at present the economics of wind power generation are largely supported by the government's incentive program.

SSE's regulated electric and gas networks operate under a high-quality regulatory regime that we believe allows the company to generate value for shareholders. Capital-investment programs and rate structures are moving to eight-year rate cycles starting in 2015 that allow utilities to earn incentives for efficiency, reliability, and safety. Regulatory risk is still an issue that investors should heed. The company's regulated networks historically have earned at or near their allowed returns, and we don't expect this to change. Growth could come from the company's plans to bid for transmission projects connecting new wind projects, especially offshore. It could also drive growth through required upgrades to its existing systems.

This company's performance will hinge on three major factors: demand for renewables, electricity prices, and SSE's ability to earn its allowed returns at its regulated networks business. Although we believe that higher demand and prices may provide additional upside for some of the company's peers, the company's dividend, its exposure to power markets, and its regulated growth profile could combine for an appealing total return proposition for income-oriented investors.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
SSE PLC1,831.50 GBX-1.72Rating

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Andrew Bischof  

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