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Rating Action:

MOODY'S CONFIRMS LONG-TERM RATINGS OF SCOTTISH AND SOUTHERN ENERGY GROUP; AFFIRMS P-1 SHORT-TERM RATING OF SCOTTISH AND SOUTHERN ENERGY PLC

23 Feb 2005
MOODY'S CONFIRMS LONG-TERM RATINGS OF SCOTTISH AND SOUTHERN ENERGY GROUP; AFFIRMS P-1 SHORT-TERM RATING OF SCOTTISH AND SOUTHERN ENERGY PLC

London, 23 February 2005 -- Moody's Investors Service has today confirmed the long-term ratings of Scottish and Southern Energy Group, and also affirmed the P-1 short-term rating of Scottish and Southern Energy plc. The ratings of the Group are as follows:

- Scottish and Southern Energy plc ("SSE") debt rating: Aa3, stable outlook.

- Southern Electric Power Distribution debt and issuer rating: Aa3, stable outlook.

- Scottish Hydro-Electric Power Distribution issuer rating; Aa3, stable outlook.

- Scottish Hydro-Electric Power Transmission issuer rating: Aa3, stable outlook.

- SSE Energy Supply Ltd issuer rating: A3, stable outlook.

- SSE Generation Ltd issuer rating: A2, stable outlook.

The confirmation of the ratings at their current level concludes the review initiated by Moody's on 1 September 2004 to examine (1) the fundamental factors supporting the ratings within the group, (2) certain specific areas relating to recent and planned acquisitions by the company as well as (3) the implications of the Electricity Distribution Price Control Review announced at the end of 2004.

The ratings reflect Moody's expectation that SSE will maintain a strong consolidated financial profile over the medium term, supported by the materially positive impact of the recent electricity distribution price control review, the favourable conditions in the UK wholesale electricity markets, the company's diversified generation portfolio, and its profitable supply business.

Moreover, Moody's expects the company to focus on the integration of the planned acquisition of the Regional Gas Networks (RGNs) in Scotland and the South of England from National Grid Transco over the medium term, and this expectation underpins the stable rating outlook. While the financial profile remains strong, Moody's cautions that execution risk relating to these two acquisitions constrains the potential for further acquisitions at the current rating level over the short term.

The ratings also reflect certain assumptions with regard to SSE's planned acquisition of the RGNs. Firstly, Moody's assumes that the financial profile of the RGNs will be managed conservatively, with good liquidity facilities at the operating companies and a well-spread debt maturity profile. Secondly, the ratings assume that SSE will be able to successfully transfer its expertise in managing regulated electricity assets to managing regulated gas distribution, subject to the constraints of operating as a 50% shareholder in the joint-venture.

Regardless of whether or not the acquisition goes ahead, Moody's expects SSE to exhibit a consolidated financial profile consistent with this rating category. If the acquisition were not to proceed, SSE would carry lower leverage, but would derive the bulk of operating cash flow from its higher-risk generation and supply business. The resulting increased business risk would require stronger credit metrics in order for SSE to maintain the rating at its current level. Assuming that the RGN acquisition does proceed, Moody's expects SSE's consolidated financial profile to weaken, but to remain in line with the current rating for a company which derives the majority of its operating cash flows from regulated electricity and gas distribution in the UK.

The joint venture vehicle for the purchase of the RGNs in which SSE will hold a 50% stake, will incur significant additional acquisition debt upon closing, expected in the second quarter of calendar year 2005. Moody's notes that RGN debtholders will not have recourse to SSE, and that SSE management will not indicate any support for these creditors. Furthermore, Moody's notes that the regulatory system under which the RGNs will operate will be similar to regulated electricity, a field in which SSE has considerable experience. The rating agency also notes that, under such price controls, companies are able to recover all operating costs including financing costs, and, assuming the capital structure and dividend policies do not aggressively exceed regulatory assumptions, the risk of the regulated entity being unable to service its debt is very low.

Scottish and Southern Energy is a vertically integrated UK electricity utility. For the year ending 31 March 2004, it reported group turnover of about GBP 5.2 billion.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Edward Palmer
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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