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
