Profits under the microscope

SSE is a profitable business. That is, it brings in more income than it pays out in costs. For most companies, that is the accepted goal – after all, you can’t run a business at a loss, or at least not for long.

But it’s not quite as straightforward when a company makes its money from providing something that people cannot live without.

We understand that the profit we make selling energy to households must be fair and sustainable. And today, as we publish our full-year results, our profits will be under the microscope once more.

This morning we announced that, as a Group, SSE’s adjusted profit before tax was just over £1.4bn for the 2012/13 financial year. It is a very large number, and will no doubt generate further media and perhaps political debate about what constitutes an appropriate level of profit. However, it does not tell the whole story and I would like to point out a few things that may not feature in the headlines but will help put the numbers into context.

• Our Retail business accounted for just 22.8% of our operating profit.

SSE is a very big company – the 30th largest in the FTSE 100 by market capitalisation. We own and operate power stations, gas fields and energy transportation networks serving much of the south of England and 70% of the land mass of Scotland, as well as operating and maintaining 1.5m street lights, among other things. Retail represents a relatively small part of the company as a whole.

Although the amount of profit we made in our energy supply business increased from £271.7m last year to £364.2m, this was largely because of the unprecedentedly cold winter, which meant people used more energy. Again, this sounds like a large number, but it is within 5% of where it was two years ago. It reflects the exceptional conditions and is the result of serving around 9.5 million customer accounts to the highest standard of all the major suppliers – this year we were ranked number one for customer service by uSwitch for the seventh consecutive year.

• We made a profit margin of just 4.2% supplying energy to customers.

Considering that our customer numbers and the amount of energy they use can vary from year to year, we believe the most important measure to keep tabs on is our profit margin in energy supply, or the amount we make per customer once all our costs have been subtracted. We have said on a number of occasions that we expect this to be in the region of 5% over the medium term, and last year it was 4.2%. We feel that this is fair and sustainable, and it is necessary in order for us to keep making a valuable contribution to the economic wellbeing of the country. If you look at other sectors that provide similarly vital products, like food retailers, you’ll see that the 5% margin we expect to make over the medium term is in line with, or lower than, the profits of many other companies.

• Energy price rises reflect increasing costs of supply.

I understand why many people make the simple connection between increasing profits and increasing prices. But energy price rises are actually a result of increasing costs. We operate in a competitive market and our aim at all times is therefore to keep our prices as low as we can to give ourselves the best chance of attracting new customers and retaining the ones we have.

However, as a UK-listed company, we need to make a sustainable profit margin in order to keep supplying energy and excellent service to our 9.5 million customer accounts. Domestic prices have gone up in the past because of increases in the cost of buying energy on wholesale markets, the rising costs of government-mandated social and environmental schemes, and the much needed investment in the pipes and wires that transport energy around the country to homes and businesses. At the same time, the proportion of a customer’s bill made up by our profit has remained relatively flat.

We too have concerns about the affordability of energy, especially for the most vulnerable in society, but making reasonable profits is not the cause of the problem. In fact, while profits continue to help fund investment, they are actually part of the solution.

• We invest more than we make in profit.

We will be investing around £1.5bn in the coming year – that’s more than we’ve made in profit and equates to over £4m every single day being invested back into vital infrastructure in the UK and Ireland. Without sufficient return on our investment, in the form of profits which can be used to give a return to shareholders, we would not be able to do this. With the UK Government saying it needs to attract over £100bn of private sector investment in the energy sector by 2020, it is more important than ever that we continue to invest on a large scale. And it’s not just our investors who benefit – our investment provides a much-needed boost to local economies and supply chains, creates jobs, stimulates growth and maintains the country’s energy security.

• These are profits made in the UK and Ireland – and that’s where they stay.

Unlike many of the major energy suppliers, SSE is proud to be a UK company – investing, employing people and paying taxes in the UK and Ireland. Last year alone, our companies contributed £369m in UK taxes and employed around 20,000 people, including 2,100 aged under 25 and 360 apprentices and trainees. We have no overseas parent company; these profits are made, invested and reinvested in the UK and Ireland. Nor do we use clever accounting tricks to hide our profits; as a UK-listed company, we are open and transparent and our segmental accounts are there for all to see.

• Our shareholders are real people.

Some people may also question why we commit to deliver a real increase in the dividend paid to shareholders. Let’s be clear about this, SSE shareholders are real people, and they deserve a reasonable return on their investment. Our shareholders include the pension funds and investments of people up and down the country who are saving for their retirement and other long-term plans. Their money is hard-earned and the steady, reliable returns they receive from investing in SSE help give them security for the future. Their continued support is what enables us to keep investing in the future of this country.

At SSE, we are not complacent, however. We know that – with household budgets squeezed – we need to earn the right to make a profit by continually improving standards, rebuilding trust and keeping prices as low as we can.

This infographic helps to illustrate how SSE is making a valuable contribution to UK society.

About the author

Sally Fairbairn Director of Investor Relations and Analysis

Sally is SSE’s Head of Investor Relations and Analysis. She is a qualified chartered accountant, and joined SSE in 1997. She works in SSE’s Finance Department and works with Gregor Alexander and Alistair Phillips-Davies to help the investment community understand SSE’s business, strategy and operations and to help SSE understand the investment community’s requirements and priorities.

Read more articles by Sally Fairbairn