MOODY'S DOWNGRADES LONG-TERM DEBT RATINGS OF SEEBOARD TO Baa1 AND CSW INVESTMENTS TO Baa2
Moody's Investors Service has downgraded the senior long-term debt ratings of SEEBOARD plc from A3 to Baa1 and its UK parent company CSW Investments from Baa1 to Baa2. This rating action concludes a review prompted by the announcement that the UK regulator, OFGEM, would be recommending that SEEBOARD plc cuts its distribution revenues by 33%. SEEBOARD plc has accepted this recommendation which will be implemented from April 2000. Moody's downgrade is in light of the total UK debt which the reduced cashflows of SEEBOARD plc must service. The Prime-2 short-term rating of SEEBOARD plc was not under review. The outlook for all ratings is stable.
The ratings of SEEBOARD plc are underpinned by the cash which is generated from their regulated electricity distribution monopoly in the South East of England. SEEBOARD plc will cut its distribution revenues by 33% (21% after allowing for OFGEM's calculation of cost transfers between distribution and supply) in April 2000 and by a further 3% per annum in each of the remaining years of the current five year regulatory review period. This is the largest one-off cut that has been imposed on any of the Regional Electricity Companies ("REC") of England and Wales. SEEBOARD plc has also agreed to cut just over 6% off its average domestic supply business tariffs. While the cut in supply tariffs does not have such a marked effect on cashflows as the cut in distribution tariffs, Moody's believes SEEBOARD plc faces higher business risks from its supply business.
Notwithstanding these cuts in revenue, SEEBOARD plc remains a relatively debt-free company with reliable cashflow. Moody's believes that the management of SEEBOARD plc is taking the necessary cost-saving measures to reduce the net effect of the regulators review to a long-term sustainable level albeit with reduced cashflow. However, SEEBOARD plc must also service the considerable debt burden which its UK parent, CSW Investments, bears and it is the consideration of the total calls on the reduced cashflow of SEEBOARD plc which has led to the downgrade by Moody's. CSW Investments is not regulated and its main source of revenue is through its ownership of SEEBOARD plc and is therefore in a structurally weaker position than its regulated subsidiary which is reflected in the one notch difference in the ratings.
The ultimate owner of SEEBOARD plc and CSW Investments is the US company Central and South West Corporation ("CSW"). The debt which CSW Investments carries is part of the funding cost of CSW's acquisition of SEEBOARD plc which totalled œ1.6 billion when completed in January 1996. CSW's proposed merger with American Electric Power Company ("AEP") is expected to close within the next few months. AEP owns 50% of another UK REC, Yorkshire Electricity, and providing the CSW/AEP merger completes as planned and approval is received from the UK regulator and the Department of Trade and Industry, the US owners will then consider the extent to which synergy benefits may be obtained from merging SEEBOARD plc and Yorkshire Electricity's operations. Moody's believes that, whilst SEEBOARD plc will benefit significantly from such synergies, allowing duplicated cost to be avoided, a merged entity will still have considerable challenges to overcome given the nature of the UK's regulatory environment.
The following long-term ratings are effected by Moody's rating action:
SEEBOARD plc downgraded from A3 to Baa1 with stable outlook.
CSW Investments downgraded from Baa1 to Baa2 with stable outlook.
The short-term rating of SEEBOARD plc is affirmed as Prime-2 with stable outlook.
SEEBOARD plc is one of the twelve REC's of England and Wales and is headquartered in Crawley, West Sussex, England. It reported turnover of just over œ1 billion in the year ended 31 December 1998.
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