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Rating Action:

Moody's changes outlook on SSE to negative, affirms ratings

08 Sep 2020

London, 08 September 2020 -- Moody's Investors Service (Moody's) has today changed the outlook to negative from stable on SSE plc (SSE) and its subsidiaries. Concurrently, Moody's has affirmed SSE's Baa1 issuer and senior unsecured ratings and the Baa3 rating on the company's hybrid instruments. The Prime-2 short-term rating has been also affirmed.

Moody's has also affirmed the Baa1 ratings of SSE's wholly-owned subsidiaries -- Scottish Hydro Electric Transmission Plc (SHET), Scottish Hydro Electric Power Distribution (SHEPD), Southern Electric Power Distribution Plc (SEPD), SSE Generation Ltd. (SSE Generation) and SSE Energy Supply Ltd (SSE Energy Supply).

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

RATINGS RATIONALE

The change in outlook to negative takes account of SSE's higher than previously anticipated financial leverage and the risk that, even after the GBP2 billion disposals targeted as part of the company's corporate plan, the group's metrics will not recover to levels consistent with the current rating over the next 2-3 years.

In the year ended March 2020, SSE's financial leverage increased, with the company's ratio of funds from operations (FFO)/net debt at 14.4% and retained cash flow (RCF)/net debt at 7.9%, which is below Moody's guidance for the current ratings. While some of the deterioration in the company's financial profile is temporary, the improvement in SSE's credit metrics over the medium term will be constrained by a likely tough regulatory determinations for its networks, high capital expenditure, fixed dividend policy, and the weaker operating environment because of the coronavirus outbreak.

In July 2020, Ofgem published its draft determinations for the forthcoming price control (RIIO-2) for electricity transmission and gas distribution networks effective from April 2021. The regulator proposed to cut allowed equity returns by around half on a like-for-like basis and materially reduced the scope for financial outperformance compared to the current price control. While the final determination, which is due in December 2020, may be different from the draft determination, Moody's expects these settlements will weaken key credit metrics of the regulated subsidiaries and consequently the wider SSE group.

Further headwinds to SSE's earnings stem from the impact of the coronavirus outbreak. SSE indicated that the impact of reduced demand, losses on hedges and increase in bad debt could reach GBP150-250 million this year, before any mitigating measures. In this regard, Moody's positively considers that, given the regulatory protections around recovery, some of the earnings impact associated with regulated networks will be recovered with a two-year time lag.

Against the more difficult operating environment and in the context of the group's strategy to support energy transition to net zero through investments of GBP7.5 billion over the 2021-25 period, SSE has committed to an asset disposal programme, with targeted proceeds of at least GBP2 billion until the autumn of 2021. While there is execution risk associated with divestments, Moody's positively considers SSE's planned steps to bolster its balance sheet strength in the context of weak metrics. Nevertheless, these may not be sufficient to result in a materially improved financial profile, given the group's investment plans and financial policy of increasing dividends by inflation.

Overall, SSE's Baa1 rating continues to be supported by (1) its diversified business mix; (2) the high share of earnings from regulated networks under a well-established and transparent regulatory framework; (3) a growing portfolio of renewables under long-term contracts, with limited exposure to merchant risk; and (4) the group's track record of rotating assets to alleviate financing needs. These factors are balanced against (1) a degree of exposure to commodity markets and weather patterns; (2) the execution risks associated with a significant capital spending; (3) an increasing use of joint ventures, which result in a greater share of cash flows over which SSE does not have full control and may be structurally subordinated to project finance debt; (4) its relatively high financial leverage; and (5) track record of shareholder-supportive financial policies.

The Baa3 long-term rating on the hybrid securities, which is two notches below the issuer rating of Baa1 for SSE, reflects the features of the hybrids that receive basked 'C' treatment, i.e. 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes.

-- SCOTTISH HYDRO ELECTRIC TRANSMISSION PLC, SCOTTISH HYDRO ELECTRIC POWER DISTRIBUTION AND SOUTHERN ELECTRIC POWER DISTRIBUTION PLC --

The change in outlook to negative and the Baa1 ratings affirmation follows that of SSE, the parent company of SHET, SHEPD and SEPD.

The ratings of SSE's network subsidiaries are underpinned by (1) their monopoly position as the licenced providers of electricity distribution and transmission activities in their appointed regions; (2) the well-established and transparent regulatory regime in Great Britain, which underpins very low business risk; and (3) their solid financial profile, with fairly low leverage on a standalone basis. The ratings are aligned with those of SSE taking account of the companies' close integration within the SSE group, as evidenced by common funding and SSE's ability to determine the debt structure of subsidiaries and move cash around the group. Moody's views the standalone credit quality of SSE's networks as stronger than the group, but the regulatory restrictions and ring-fencing provisions that apply in their licence do not provide sufficient credit insulation to de-link the ratings at present.

-- SSE GENERATION LTD AND SSE ENERGY SUPPLY LTD--

The change in outlook to negative and the Baa1 ratings affirmation follows that of SSE, the parent company of SSE Generation and SSE Energy Supply.

The ratings of SSE Generation and SSE Energy Supply recognise their close integration into the SSE group, as evidenced by a common brand name, a single treasury function and significant inter-company lending, with substantially all of the subsidiaries' financing provided by other entities within the SSE group. The subsidiaries also benefit from parent company guarantees which, although limited, indicate a very high likelihood that SSE would provide support to the subsidiaries, if it were to become necessary.

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

Given the negative outlook, upward pressure on SSE's ratings is not currently anticipated. The outlook could be stabilised if SSE demonstrates a clear path towards achieving, on a sustainable basis, guidance for the current ratings of FFO/net debt of around 20% and RCF/net debt trending toward the low teens in percentage terms.

Over the longer term, a rating upgrade would require a material improvement in the credit metrics, with FFO/net debt sustainably above the low 20s and RCF/net debt above the mid-teens, both in percentage terms.

SSE's ratings could be downgraded if, taking into account such measures as the company may implement, credit metrics appear likely to fall persistently below the guidance for the Baa1 ratings. Downward rating pressure could also occur if off-balance sheet liabilities (including net debt at unconsolidated joint ventures) were to increase materially.

With regard to SHET, SHEPD and SEPD, the outlook could be stabilised, if the companies' standalone credit strength remained consistent with at least Baa1 rating and there appeared to be a greater insulation from potentially weaker credit quality of the SSE group. The ratings could be downgraded, if SSE's ratings were downgraded and there was not sufficient de-linkage between the credit quality of the companies from the wider SSE group.

Any change in outlook or ratings for SSE would likely be reflected in an equivalent change for SSE Generation and SSE Energy Supply.

The principal methodology used in rating SSE plc, SSE Energy Supply Ltd and SSE Generation Ltd was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389. The principal methodology used in rating Scottish Hydro Electric Power Distribution, Scottish Hydro Electric Transmission plc and Southern Electric Power Distribution plc was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

SSE plc, headquartered in Perth, is a holding company for a group whose main operations are power generation, electricity and gas networks, and supply. Its other activities include storage and gas production, as well as energy portfolio management.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Scottish Hydro Electric Power Distribution

.... LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Scottish Hydro Electric Transmission plc

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Southern Electric Power Distribution plc

.... LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: SSE Energy Supply Ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: SSE Generation Ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: SSE plc

.... LT Issuer Rating, Affirmed Baa1

....Other Short-Term Rating, Affirmed P-2

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

....Pref. Stock Preferred Stock , Affirmed Baa3

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Scottish Hydro Electric Power Distribution

....Outlook, Changed To Negative From Stable

..Issuer: Scottish Hydro Electric Transmission plc

....Outlook, Changed To Negative From Stable

..Issuer: Southern Electric Power Distribution plc

....Outlook, Changed To Negative From Stable

..Issuer: SSE Energy Supply Ltd

....Outlook, Changed To Negative From Stable

..Issuer: SSE Generation Ltd

....Outlook, Changed To Negative From Stable

..Issuer: SSE plc

....Outlook, Changed To Negative From Stable

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

Joanna Fic
Senior Vice President
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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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