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Rating Action:

Moody's affirms ESB's ratings, stable outlook

27 Apr 2021

London, 27 April 2021 -- Moody's Investors Service (Moody's) has today affirmed the A3 long-term issuer rating of Electricity Supply Board (ESB) and the A3 backed senior unsecured debt ratings of its financing subsidiary, ESB Finance Designated Activity Company (ESB Finance DAC). The outlook remains stable.

Today's rating action follows the Commission for Regulation of Utilities' (CRU) final determination for Price Review 5 (PR5), published on 18 December 2020, which sets ESB's allowed revenues as Transmission Asset Owner and Distribution System Operator for the 2021-25 regulatory period in the Republic of Ireland.[1] The CRU's decision confirms the stability and predictability of the regulatory framework underpinning around 60% of ESB's earnings.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

ESB's A3 rating is based on the company's standalone credit strength, as represented by a baseline credit assessment (BCA) of baa1, and Moody's assessment of a moderate likelihood that its 96% shareholder, the Government of Ireland (A2 stable), would provide extraordinary support should this become necessary. This results in a one-notch rating uplift under Moody's methodology for government-related issuers.

The baa1 BCA in turn reflects, as positives, (1) the large contribution of regulated transmission and distribution to group EBITDA, (2) the low business risk profile of these networks and their stable returns under well-established and transparent regulatory frameworks, and (3) capacity revenues and renewable supports that give good visibility on a significant portion of the group's generation earnings.

PR5 is the fifth consecutive price control under the CRU's current regulatory principles, covering a period of 25 years. The PR5 process included an extensive discussion paper in December 2019, followed by a draft determination in July 2020. The draft determination included a cost allowance 13% below the company's request, but most of these costs were allowed in the regulator's final determination following engagement that the CRU described as "constructive and co-operative."

The final determination is supportive of ESB's credit quality, in Moody's view, with the CRU providing a pre-tax real allowed return of 3.80%, materially higher than recent decisions in Great Britain, and cost allowances that are around 45% higher than in the previous PR4 period and only 6% below the company's proposals, reflecting significant investments required to delivery Ireland's Climate Action Plan. The determination allows ESB to earn greater rewards or penalties based on its operational performance during the period.

Following the determination, Moody's has increased the "Stability and Predictability of the Regulatory Regime" sub-factor score under the rating agency's Regulated Electric and Gas Networks methodology to Aaa from Aa. The change in score reflects the factors described above, in particular the transparency of decision-making. It takes into account the CRU's track record of stable and predictable regulation since 1999, with little political interference in regulatory proceedings and the consistent application of well-established principles that clearly define risk allocation between companies and customers. The transparency of the regime is demonstrated by extensive public consultation and the publication of regulatory parameters and models. Regulatory determinations have contributed to ESB's robust credit quality.

ESB's rating is constrained by (1) the high proportion of earnings, relative to most European energy network operators, from unregulated generation and supply businesses, (2) the group's substantial capital investment programme, which for ESB Networks is 70% larger than in PR5 compared to PR4, and (3) increasingly material additional debt in the group's joint ventures.

Moody's estimates that ESB's proportional share of the external debt at its joint ventures was over EUR900 million as of December 2019, in addition to EUR91 million guaranteed by ESB as of December 2020. As ESB expands its renewable capacity through joint ventures to develop wind farms, including the planned 1 gigawatt Inch Cape offshore project, these liabilities are likely to grow. Although the unguaranteed project debts are non-recourse to ESB, and not consolidated in the company's accounts or reflected in Moody's-adjusted net debt, they will weigh on the group's consolidated credit quality because they have a senior claim on the cash flows of these assets.

RATINGS OUTLOOK

The stable outlook reflects Moody's expectation that ESB will achieve FFO/net debt around 20% over the next 18-24 months. This includes around EUR100 million of customer contributions associated with new connections. Excluding this, ESB's FFO/debt would be around 18%. These metrics are consistent with a baa1 BCA.

The stable outlook also reflects the stable outlook on the rating of the Government of Ireland.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating could be upgraded if ESB achieved FFO/net debt consistently above the low 20s, in percentage terms, excluding customer contributions.

The rating could be downgraded if (1) ESB's FFO/net debt, excluding customer contributions, fell persistently below the mid-to-high teens, in percentage terms, (2) the proportion of non-regulated activities in ESB's business mix increased, or (3) the rating of the Government of Ireland was downgraded.

The methodologies used in these ratings were Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATNGS

Affirmations:

..Issuer: Electricity Supply Board (ESB)

....LT Issuer Rating, Affirmed A3

...ST Issuer Rating, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

..Issuer: ESB Finance Designated Activity Company

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

Outlook Actions:

..Issuer: Electricity Supply Board (ESB)

....Outlook, Remains Stable

..Issuer: ESB Finance Designated Activity Company

....Outlook, Remains Stable

Electricity Supply Board (ESB) is the former incumbent vertically integrated electric utility in the Republic of Ireland (RoI). It holds leading market positions in power generation and electricity supply and is the monopoly owner of electricity distribution and transmission networks across RoI and Northern Ireland.

The group's regulated businesses contribute the most of its earnings. Across RoI and Northern Ireland, ESB's network assets had a Regulatory Asset Base (RAB) of EUR8.4 billion in RoI and GBP1.6 billion in NI as of December 2020. In addition, the group had a generation market share of 29% across the all-island Irish Single Electricity Market, and generation capacity of 5.5 GW across Ireland and the United Kingdom.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Commission for Regulation of Utilities, Price Review 5 Electricity Networks, 18-Dec-2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Graham Taylor
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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