Unfavorable weather in SSE's first quarter led to a shortfall equivalent to 5% of annual planned renewables output.
So far in the current quarter, the Group notes a return to more normal weather. Full year guidance of underlying earnings per share of over 150p remains in-tact. This is subject to continuing normalized weather conditions and power plant performance.
SSE continues to expand its renewables network, noting several development milestones in the quarter that underpin its growth plans out to 2027. Today's update suggested that the pipeline could require investment of up to £40bn over the next decade.
The shares were trading flat following the announcement.
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Our view
Following a year of exceptional earnings growth, power utility SSE is expecting its bottom line to remain relatively stable in 2023. But with renewable energy generation struggling in the first quarter, there's little room for further slippage this year.
Looking ahead, SSE's announced it's staying the course with its pivot towards renewable energy. Turbo-charging efforts to renewables is a bold and admirable move. But the shift comes with a hefty dose of risk - they're not always reliable. To some degree, it's at the mercy of mother nature.
That reality hit home last year as unfavorable weather left the group's renewable output lower than planned. Fortunately, the Thermal division's flexible gas-fired plants helped to plug the energy shortfall. These assets are still part of SSE's offering and helped to majorly boost profits last year - allowing the group to surpass its recently upgraded earnings per share (EPS) guidance.
On the Networks side of things, SSE delivers electricity across Scotland and Southern England. This is classic utility territory - with revenues predictable and profits closely regulated. Because of this, utilities have historically been able to pay attractive dividends, and SSE has been no exception.
However, in a bid to free up cash for growth and further renewables investment, the group confirmed it will rebase its dividend down from 96.7p down to 60p, beginning this financial year. This is a stark reminder that dividends are variable and not guaranteed. The group needs to strike a delicate balance between positioning itself for future growth and keeping the cash coffers from running dry.
These investment plans look achievable in our eyes but they're set to stretch the balance sheet, with the ratio of net debt to cash profits (EBITDA) likely to rise from 2.7x to between 3.5-4x. While a moderate amount of debt isn't a bad thing, especially for a business with such reliable revenues, it does add pressure to keep delivering.
There are external threats as well. Regulatory challenges loom, particularly as high energy prices compound the cost-of-living squeeze. Last year, SSE's financial performance was actually buoyed by these high energy prices, but it's unlikely that prices will remain at such high levels over the long term. That means other areas of the business will have to step up to pay the investment bill.
We don't think the ambitious growth plans are fully reflected in the valuation, suggesting that investors still need some assurance that SSE can deliver on its promises. Long term, we're optimistic about the group's prospects, but in the near-to-medium term, volatility should be expected as SSE makes the transition.
SSE key facts
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