Hot, dry summer burns £190M hole in SSE’s profits

by Nathaniel Melican, City, University of London

Brief: Write a 400-word story about a trading statement issued by SSE. Information on this article is based on actual documents, statements, and data, which were accurate as of 20 October 2018. Submitted for the Reporting Business module at City, University of London.

A severely hot and dry summer dragged SSE’s five-month profit down by as much as £190 million, sending the company’s stock into a tailspin.

Shares in the UK’s second-largest electricity provider sagged nearly 10 percent to 1130p at around 8:42 a.m., before recovering to 1152p at noon, still down eight percent from yesterday’s close. Prices fell as the company warned that its profit from operations for the first half of the year could plummet by as much as half compared to the £586.2 billion it earned in the same period last year.

Energy companies are reeling from an extreme summer where temperatures reached as high as 35.3 C in Faversham, Kent. The heat and the lack of rain lowered water levels in hydroelectric dams, while the lack of wind literally ground wind farms to a halt, lowering energy production. This, together with high gas prices, contributed to higher energy production costs, which, in turn, short-circuited profit margins.

Alistair Phillips-Davies, chief executive of SSE, lamented the impact this caused on the company’s bottom line. “Lower than expected output of renewable energy and higher than expected gas prices mean that SSE’s financial performance in the first five months has been disappointing and regrettable,” he said in a statement.

British energy stocks, such as Centrica, which owns the UK’s largest energy supplier, British Gas, also retreated nearly four percent in early morning trading.

SSE warned of “significantly lower” full-year profits as it expected losses of over £300 million from its energy trading arm. Profits of its retail business could also be dented if industry watchdog Ofgem pushes through with a cap on fees that customers pay for staying with providers after their contracts expire.

Offsetting this is a predicted modest profit from SSE’s energy distribution segment, on the back of recovered income as well as higher contributions from SGN, where SSE has a 33-percent share.

Despite the expected losses, Davies assured that “SSE’s businesses remains strong, with regulated networks and renewables providing the core of what will be an infrastructure-focused SSE group in the years ahead.”

SSE is in talks to spin off its retail business and merge it with npower to form a new business that could potentially overtake British Gas’s 20-percent market share. Ofgem estimates that SSE currently provides power for 14 percent of the UK while npower serves nine percent.#####