The Shareholder Circular and Notice of General Meeting referred to in the RNS are available from
http://sse.com/investors/shareholderser ... eting2018/. I've done a very quick look for stuff about dividends and taxation in the Circular (not by any means a comprehensive check - it's over 200 pages long!). Page numbers in what follows are those on the actual pages in the Circular pdf, which has a cover page before its page 1, so pdf readers are liable to want a number 1 greater to be entered to go to the page.
The most relevant bits I've found on dividends are firstly a warning (page 44) in the "Risk Factors" part of the Circular, at the end of a 14-page list of risk factors:
MergeCo may not pay dividends
MergeCo is expected to have its own premium listing and its own board and management team able to determine and pursue its own strategy. This means, as was described in the announcement of the Transaction on 8 November 2017, MergeCo’s policy on dividends will be determined by its board in due course and will be based on the earnings generated by its business. There can be no assurances that MergeCo will pay dividends. MergeCo will be incorporated under the laws of England and Wales and will therefore be subject to English law. Under English law, a company can only pay cash dividends to the extent that it has distributable reserves and cash available for this purpose. As a holding company, MergeCo’s ability to pay dividends in the future, should it seek to do so, will be affected by a number of factors, including having sufficient distributable reserves and its ability to receive sufficient dividends from subsidiaries. If MergeCo does not pay dividends, SSE Shareholders will receive a lower aggregate dividend than they do currently.
Note that neither the appearance of a risk factor in such a list nor where it appears in the list is a comment on how likely the risk is to actually occur. Basically, it's the company's job to identify everything they can think of that might go wrong for the investor, more-or-less no matter how likely or unlikely they think it is; it's the investor's job to decide how much weight (if any!) to give each risk factor in their own investment decisions.
Secondly, what they say on page 10 about "MergeCo's" dividend policy:
Remuneration of MergeCo Shareholders
MergeCo is expected to have its own premium listing and its own board and management team able to determine and pursue its own strategy, including with regard to remunerating shareholders for their investment. This means, as was described in the announcement of the Transaction on 8 November 2017, MergeCo’s policy on dividends will be determined by its board in due course and will be based on the earnings directly generated by the supply business. MergeCo’s dividend policy is expected to be included in the prospectus relating to the MergeCo Shares, which is anticipated to be published shortly prior to Admission in the first quarter of 2019.
So it's expected to be another 7-9 months before we have a good idea what dividends to expect from the company formed from Innogy and the demerged part of SSE. That's disappointing - I was hoping for at least some guidance as to what "MergeCo" is expected to pay - but not too surprising, given that its earnings are going to come from some businesses currently controlled by SSE and some not, that how well separate businesses can be integrated with each other is always a difficult-to-resolve-in-advance question, and that the business area "MergeCo" will operate in is highly subject to political risk.
And thirdly, their repeated statement (pages 13-14) of SSE's dividend policy (as it has become since this deal was announced):
Remunerating SSE Shareholders’ investment through payment of dividends
The financial objective of this strategy is to remunerate shareholders’ investment through the payment of dividends. SSE believes that its dividends should be sustainable, based on the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook.
In line with this, taking account of the impact of the expected key developments in 2018/19, and reflecting the underlying quality and value of its assets and earnings and the cash flows they deliver, SSE’s plan for the dividend for the five years to 2023 is as follows:
• for 2018/19, SSE is intending to recommend a full-year dividend of 97.5 pence per share, an increase of three per cent. on 2017/18, which is broadly in line with expectations for RPI inflation. This provides clarity in a year of transition and is not subject to the timing of either the Transaction or the Domestic Gas and Electricity (Tariff Cap) Bill.
• for 2019/20, SSE is planning to set the first post-transaction dividend at 80 pence per share, which reflects the impact of the changes in the SSE Group expected to take effect by then. This provides a sustainable basis for future dividend growth.
• for 2020/21, 2021/22 and 2022/23 SSE is targeting annual increases in the full-year dividend that at least keep pace with RPI inflation. This reflects SSE’s confidence in the quality and value of its assets and earnings and cash flows they deliver.
This plan for the dividend for the five years to March 2023, when the current electricity distribution price control comes to an end, supersedes SSE’s previous reference to a dividend cover range and is a plan which:
• aims to provide shareholders with certainty in 2018/19, a year of transition for SSE;
• reflects the changes in the SSE Group expected to take effect by the start of the 2019/20 financial year; and
• sets the dividend on a path for sustainable growth for the three years from 2020.
SSE intends to retain a scrip dividend scheme but where take-up of the full year dividend exceeds 20 per cent., SSE now intends to buy back shares so the dilutive effect of the scrip is limited.
In addition to the dividend plan above, subject to the necessary approvals being secured, the Transaction means SSE Shareholders will receive one share in MergeCo for every one SSE share they hold at the relevant record date. This will entitle SSE Shareholders who continue to hold the shares they receive as a result of the Transaction to receive any future dividend distributions from MergeCo.
I haven't checked whether everything in that was announced previously - some details might have been added. But the main features - especially the reduction of the dividend when "MergeCo" is split off - have not been changed.
On taxation, I was rather concerned when I saw that the demerger was being done by distributing the "MergeCo" shares as a dividend - taken at face value, that would mean that they were counted for Income Tax purposes as dividend income equal to their value, which could easily dump a large tax bill on a shareholder who held outside tax shelters, both by giving them more income to pay tax on and possibly by propelling them into a higher tax band. Fortunately, however, that fear was quickly allayed by looking at the "Taxation" part of the circular - most importantly the following extract from page 66:
Demerger
Income
SSE has received clearance under section 1091 of the Corporation Tax Act 2010 (CTA 2010) confirming that the distribution of the entire issued share capital of MergeCo to the SSE Shareholders will qualify as an “exempt distribution” within the meaning of section 1075 CTA 2010.
As a result, a SSE Shareholder who is resident in the United Kingdom for UK tax purposes should not incur any liability to tax on income in respect of the receipt of their MergeCo Shares.
Chargeable gains
SSE Shareholders who are resident in the United Kingdom for UK tax purposes should not be treated, by virtue of the receipt of MergeCo Shares under the Demerger, as making a disposal or part disposal of their SSE Shares for the purposes of the taxation of chargeable gains.
The MergeCo Shares distributed to SSE Shareholders pursuant to the Demerger should be treated as the same asset, and as having been acquired at the same time, as the SSE Shares already held by SSE Shareholders. The aggregate base cost of the SSE Shares and MergeCo Shares immediately after the Demerger should be the same as the base cost of the SSE Shares immediately before the Demerger. Such base cost should be apportioned between the SSE Shares and the MergeCo Shares by reference to their respective market values on the first day on which the market values or prices are quoted or published for such shares.
SSE Shareholders who hold more than five per cent. of the SSE Shares should note that clearance has been obtained from HMRC that section 137(1) of the Taxation of Chargeable Gains Act 1992 should not have effect in respect of the Demerger.
I.e. basically, no Income Tax effect, and the CGT effect is just the normal one on a demerger that the base cost of the original holding has to be split between the two resulting holdings in proportion to their market values just after the demerger takes effect. Which is a bit of a pain, admittedly, but no worse than many other corporate actions, and at least they haven't made a deal that produces no cash for the shareholder produce a large tax bill!
All in all, I'm mildly reassured. The company's dividend might effectively be cut, but given the political uncertainty, that was the case anyway. And it does mean that political measures against the company have to be extensive enough to affect what's left of SSE to make the effective cut any worse than one from 97.5p to 80p. At about 18%, that's pretty mild as dividend cuts go... That's no guarantee that Labour won't make them that extensive should they get into power with their present policies unchanged, of course, but it will be more difficult for them to make a case that SSE's remaining businesses should be nationalised (or otherwise penalised) than that their retail business should be.
Gengulphus