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Rating Action:

MOODY'S REVIEWS SCOTTISH AND SOUTHERN ENERGY'S Aa3 REGULATED NETWORK AND HOLDING COMPANY RATINGS FOR POSSIBLE DOWNGRADE, AFFIRMS P-1 SHORT TERM RATING AND AFFIRMS RATINGS OF GENERATION AND SUPPLY WITH STABLE OUTLOOK

07 Jun 2006
MOODY'S REVIEWS SCOTTISH AND SOUTHERN ENERGY'S Aa3 REGULATED NETWORK AND HOLDING COMPANY RATINGS FOR POSSIBLE DOWNGRADE, AFFIRMS P-1 SHORT TERM RATING AND AFFIRMS RATINGS OF GENERATION AND SUPPLY WITH STABLE OUTLOOK

London, 07 June 2006 -- Moody's Investors Service has today placed the Aa3 long term issuer and senior unsecured debt ratings of Southern Electric Power Distribution plc (SEPD) and the Aa3 long term issuer ratings of Scottish Hydro-Electric Power Distribution (SHEPD) and Scottish Hydro-Electric Transmission Ltd (SHET) under review for possible downgrade. Scottish and Southern Energy plc (SSE plc) 's Aa3 backed senior unsecured rating has also been placed under review for possible downgrade, reflecting the upstream guarantee from SHEPD. At the same time, the rating agency affirmed SSE plc's P-1 short term rating, SSE Generation's A2 long term issuer rating and SSE Supply's A3 long term issuer rating, the latter two with stable outlook. SSE plc has no issuer rating.

The review was prompted by expectations that an increase in the proportion of unregulated cash flows and higher dividend payouts over the medium term are likely to cause SSE's business risk to rise, (references to SSE mean the group as a whole) and its consolidated credit metrics to weaken. As previously indicated by Moody's, SSE's consolidated retained cash flow (RCF) to net adjusted debt ratio (which factors in dividend payments and constitutes an important measurement of credit quality for utility peers across Europe) should be at least 23% in order to remain in line with Aa3. While Moody's observes a wide range of financial ratios in its assessment of corporate issuers, it places particular attention on retained cash flow, particularly given that SSE's strategy includes a commitment to grow its dividend in real terms by 4% in each year to March 2008, which - in Moody's view - emphasises its fixed charge nature.

The review will focus on the expected evolution of the group's business risk over the rating time horizon taking into account the expected growth in unregulated earnings and the extent to which this is likely to be offset by growing dividends from SSE's investment in Scotia Gas Networks. The review will also focus on the group's medium-term investment plans and the associated impact on debt levels, while taking into account the average maturity and cost of the group's debt. A detailed review of the appropriate ratio levels taking into account the expected business risk will also be undertaken. Moody's expects to conclude the review within 6-8 weeks.

SEPD, SHEPD and SHET's ratings have been sustained at the current level until now despite the obligation to service holding company debt due to the fact that the consolidated financial profile has remained consistent with Aa3. The ratings of the regulated operating subsidiaries should therefore be expected to reflect the rating level implied by the consolidated financial profile of the group. Moody's would expect any potential downgrade to be limited to a single notch. Please refer to Moody's Credit Opinion for further information.

Moody's previous rating action on SSE was the confirmation of group ratings on 23 February 2005, which concluded the rating review initiated on 1 September 2004, as a result of the proposed acquisition of two UK gas distribution network companies.

Scottish and Southern Energy plc is a UK-listed holding company and one of the largest energy groups in the UK. SSE owns operating subsidiaries with activities in the generation, transmission, distribution and supply of electricity; energy trading; the storage, distribution and supply of gas; electrical and utility contracting; and telecoms. For the year ending 31 March 2006, it reported group turnover of about GBP 10.1 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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