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Rating Action:

MOODY'S ASSIGNS RATINGS TO NEW SCOTTISH AND SOUTHERN ENERGY PLC GROUP ENTITIES AS A RESULT OF REGULATORY BUSINESS SEPARATION

28 Sep 2001
MOODY'S ASSIGNS RATINGS TO NEW SCOTTISH AND SOUTHERN ENERGY PLC GROUP ENTITIES AS A RESULT OF REGULATORY BUSINESS SEPARATION

Approximately GBP660 Million of Debt Securities Affected.

London, 28 September 2001 -- Moody's Investors Service has confirmed the Aa3/Prime-1 ratings for Scottish and Southern Energy plc ("SSE") and has assigned Aa3 long-term issuer ratings to the three new regulated electricity network subsidiaries of SSE. At the same time, the agency has assigned long-term issuer ratings of A1 to SSE Energy Supply Ltd and SSE Generation Ltd, the principal supply and generation subsidiaries of SSE. These rating actions are the result of the business separation required by the UK Utilities Act 2000, which will become effective on 1 October 2001. Fundamentally, there has been no change in the underlying credit risk and the outlook for the ratings is stable.

The requirement for business separation under the Utilities Act 2000 affects two entities within the SSE group of companies: Scottish and Southern Energy plc and Southern Electric plc. In addition, the company uses the occasion for a much wider corporate restructuring. Both SSE and SE will transfer their respective supply, distribution, transmission, generation and other activities to separate legal entities. SSE will become a pure investment holding and SE a facilities management company.

SSE's GBP 300m 2022 and GBP 150 2007 Eurobonds will remain with SSE but will benefit from up-stream guarantees from Scottish Hydro-Electric Distribution Ltd ("Distribution North", Aa3), which is the new ring-fenced entity that comprises the regulated electricity distribution activities of the former Scottish Hydro Electric. The GBP 150m 2002 bond issued by SE will stay at SE with an up-stream guarantee from Southern Electric Power Distribution Plc ("Distribution South", Aa3), the new regulated ring-fenced entity for SE's former electric distribution activities. SE's USD 100m 2007 bond will be directly transferred to Distribution South.

The asset transfers will create substantial intercompany loan stock obligations between the newly formed subsidiaries and SSE, which mitigate the effect of structural subordination at the SSE level for any debt that does not benefit from an upstream guarantee. Moody's also recognises that a majority of external group debt is currently raised at the SSE level. The Aa3 parent company rating is further underpinned by the cash flows from the regulated subsidiaries and also reflects the diversity of cash flows.

The Aa3 ratings of the regulated subsidiaries Distribution North, Distribution South, and Scottish Hydro Electric Transmission Ltd are based on the low business risk of their ring-fenced monopoly activities and superior financial profile compared to their peers. This is despite significant intercompany debt obligations, which are senior unsecured and rank pari-passu with external debt. Looking ahead, Moody's expects that Distribution South will be used as the external funding vehicle for new capital markets debt. Any replacement of intercompany loan stock by external debt is only likely to have any ratings effect to the extent that total group indebtedness increases as a result.

Moody's considers the generation and supply subsidiaries of SSE as one economic unit despite there being two separate legal entities. On a standalone basis, the business and financial profiles of these activities would lead to a rating in the low to mid A range. However, Moody's views these activities as an integral part of SSE's overall group strategy. The one notch differential to the ratings of the regulated entities and parent reflects the greater business risks of these unregulated activities and the fact that there are no formal support agreements in place.

SSE's consolidated business and financial profile continues to be the best in the industry. EBIT interest cover (net) is currently in the high 6x and in the Base Case is forecast to be in the 7x within the ratings horizon. Group EBITDA is generated c. 47% from regulated distribution and transmission businesses and c. 45% from competitive generation, supply and trading activities.

During the last few months, SSE often has been associated with possible acquisitions of other UK utilities and/or generation plants. This and other strategic goals announced in May 2001 are consistent with management's strategy communicated in the past, and therefore are not new. Moody's believes that SSE's primary focus remains the UK and that SSE's management continues to be unwilling to overpay for assets. The current rating level allows some room for acquiring UK power plants and/or for a limited share buy-back. Any more significant debt-financed acquisition or an all-share merger with a lower rated utility would likely put pressure on the rating, but this would have to be reviewed on the basis of a concrete proposition. The company has communicated that it has a floor EBIT cover of 4x.

Scottish and Southern Energy Ltd, headquartered in Perth/Scotland, is a vertically integrated electricity utility active in the UK. In addition to regulated distribution and transmission businesses in Scotland and South-East England, SSE is one of the largest UK electricity suppliers with approx. 4 million electricity customers, and also has 1 million gas customers. At FYE March 2001, SSE had a group turnover of GBP 3.6 billion and shareholders funds of GBP 1.8 million.

London
Stuart Lawton
Managing Director
Corporate Finance
Moody's Investors Service Ltd.
44 20 7772 5454

London
Ralf Wimmershoff
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
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