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Rating Action:

Moody's affirms ratings of SSE plc

13 Feb 2016

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
No Related Data.
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