London, 13 February 2016 -- Moody's Investors Service (Moody's) has today affirmed the
A3 issuer rating of SSE plc (SSE) and the Baa2 rating of its hybrid notes.
Concurrently, Moody's has affirmed SSE's P-2
short-term rating and the A3 issuer ratings of subsidiaries SSE
Energy Supply Ltd, SSE Generation Ltd, Scottish Hydro Electric
Power Distribution, Scottish Hydro Electric Transmission plc and
Southern Electric Power Distribution plc. The outlook for all of
the ratings remains negative.
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The assigned rating reflects SSE's well-balanced, vertically
integrated business profile, which includes a strong and growing
contribution from regulated networks. In affirming the rating,
Moody's acknowledges that SSE will be negatively affected by the
recent sharp drop in gas and electricity prices, but notes the diversification
of SSE's business model and the relatively low exposure of SSE to
these commodities.
Power prices in Great Britain have declined by 11% in the past
three months, reflecting a 17% decline in gas prices over
the same period. Current one-year forward baseload electricity
prices of around GBP35/MWh are below Moody's previous expectation,
published in June 2015, of a GBP42-46/MWh range. As
SSE's existing hedges expire, lower prices will likely result
in a reduction in operating cash flow. However, SSE has limited
exposure to upstream gas production, despite a recent acquisition,
and less than 30% of generation volumes are provided by wind and
conventional hydro, where the impact of lower electricity prices
is most directly felt. Although coal generation margins have continued
to weaken, the impact will be mitigated if SSE decides to close
the majority of its remaining units, the subject of a current consultation.
The rating affirmation reflects Moody's expectation that pressure
from weak commodity prices will be offset by continued growth in SSE's
regulated electricity transmission and distribution activities,
which provided over 40% of operating profit in 2014-15,
and in its gas distribution joint venture. Moody's notes
that SSE's metrics have strengthened in recent years, reaching
funds from operation (FFO) to net debt of 22.7% and retained
cash flow (RCF) to net debt of 14.8% in 2014-15,
and that these should improve further in 2015-16. Although
credit metrics are likely to weaken in 2016-17, Moody's
expects that SSE will take action, if required, to maintain
credit metrics in line with our guidance for the A3 rating, FFO/net
debt of at least 20% and RCF/net debt of at least 13%.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the continuing downward pressure on commodity
prices, the increasingly competitive market for retail energy supply,
and the uncertain impact of the Competition and Markets Authority's
investigation of the energy market, which is expected to result
in provisional remedies in March 2016.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the negative outlook, upwards rating pressure is unlikely
to develop in the near term.
The ratings could be downgraded if (1) SSE appears unable to offset the
impact of lower commodity prices by mitigating measures that would create
adequate financial headroom; or (2) the CMA's provisional remedies
significantly reduce credit metrics or increase business risk.
LIST OF AFFECTED RATINGS
Issuer: Scottish Hydro Electric Power Distribution
..Affirmations:
....LT Issuer Rating , Affirmed A3
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Senior Unsecured MTN, Affirmed (P)A3
....Outlook, Remains Negative
Issuer: Scottish Hydro Electric Transmission plc
..Affirmations:
....LT Issuer Rating , Affirmed A3
....Senior Unsecured MTN, Affirmed (P)A3
....Outlook, Remains Negative
Issuer: Southern Electric Power Distribution plc
..Affirmations:
....LT Issuer Rating, Affirmed A3
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Senior Unsecured MTN, Affirmed (P)A3
....Outlook, Remains Negative
Issuer: SSE Energy Supply Ltd
..Affirmations:
....LT Issuer Rating , Affirmed A3
....Outlook, Remains Negative
Issuer: SSE Generation Ltd
..Affirmations:
....LT Issuer Rating, Affirmed A3
....Outlook, Remains Negative
Issuer: SSE plc
..Affirmations:
....LT Issuer Rating, Affirmed A3
....BACKED Senior Unsecured, Affirmed
A3
....Senior Unsecured Regular Bond/Debenture,
Affirmed A3
....Pref. Stock, Affirmed Baa2
....Senior Unsecured MTN, Affirmed (P)A3
....Commercial Paper, Affirmed P-2
....Other Short-Term, Affirmed
P-2
....Outlook, Remains Negative
The principal methodology used in SSE plc, SSE Generation Ltd and
SSE Energy Supply Ltd ratings was Unregulated Utilities and Unregulated
Power Companies published in October 2014.
The principal methodology used in Scottish Hydro Electric Power Distribution,
Scottish Hydro Electric Transmission plc and Southern Electric Power Distribution
plc ratings was Regulated Electric and Gas Networks published in November
2014.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodologies.
SSE is the second-largest energy supplier in the UK. SSE
owns operating subsidiaries with activities in the generation, transmission,
distribution and supply of electricity; energy portfolio management;
the storage, production, distribution and supply of gas;
electrical and utility contracting; and telecoms. SSE also
has a 50% stake in the joint venture Scotia Gas Networks,
which is the holding company of two regulated gas distribution networks.
For the 12-month period to 30 September 2014, the group reported
consolidated revenues of GBP29.4 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454
Moody's affirms ratings of SSE plc