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Rating Action:

Moody's downgrades to Baa1 ratings of UK Power Networks (formerly EDF Energy Networks)

10 Nov 2010

London, 10 November 2010 -- Moody's Investors Service today downgraded to Baa1 the senior unsecured ratings of Eastern Power Networks PLC (formerly known as EDF Energy Networks (EPN) PLC) from A2, of London Power Networks PLC (formerly known as EDF Energy Networks (LPN) PLC) from A2, and of South Eastern Power Networks PLC (formerly known as EDF Energy Networks (SPN) PLC) from A3. The Prime-1 short-term ratings of Eastern Power Networks PLC and London Power Networks PLC were lowered to Prime-2. The Prime-2 short-term rating of South Eastern Power Networks PLC, which was not on review, was affirmed. The outlook on all ratings is stable. These rating actions conclude the rating review initiated in October 2009.

The following ratings were downgraded:

Eastern Power Networks PLC -- the senior unsecured debt ratings to Baa1/Prime-2, from A2/Prime-1

London Power Networks PLC - the senior unsecured debt and issuer ratings to Baa1/Prime-2, from A2/Prime-1

South Eastern Power Networks PLC - the senior unsecured debt and issuer ratings to Baa1, from A3

The following rating was affirmed:

South Eastern Power Networks PLC - the Prime-2 short-term rating

RATINGS RATIONALE

The rating downgrades follow the recent completion of the acquisition of the three distribution network operators (DNOs), together known as UK Power Networks (UKPN), plus certain non-regulated assets, by UK Power Networks Holdings Ltd (UKPNH), a bid vehicle owned by a consortium led by the Cheung Kong Infrastructure Group (CKI) in a transaction valued at approximately GBP5.8 billion. Moody's says that the downgrades reflect the impact of the additional leverage at the three DNOs following their acquisition by UKPNH, and that their ratings no longer incorporate an element of support from membership of the EDF Group.

The Baa1 ratings primarily reflect the very low business risk profile of the companies as monopoly providers of electricity distribution services in their licensed areas. The utilities' business is conducted within a regulatory framework that Moody's regards as well-established and generally transparent, thus providing a good degree of stability and predictability of cash flows. The ratings take account of the three networks' relatively weak operating performance during the latest price control review period, as well as management's plans for improving this. At the same time, UKPN's financial flexibility is constrained by relatively high debt levels, which include GBP475 million of acquisition debt.

The ratings factor in the DNOs' membership of the UKPNH group -- which includes certain non-regulated assets and liabilities, and which is in part capitalised by a shareholder loan from consortium members. However, these factors are offset by the regulatory ring-fencing that applies to UKPN, as well as limitations on borrowing in favour of the pension trustee, which in Moody's view partly insulate its credit quality from that of its parent at the current rating level. In line with the approach adopted by Northern Gas Networks (rated Baa1 by Moody's), which is also owned by a CKI-led consortium, Moody's assumes that management will aim to maintain a degree of financial flexibility with respect to leverage, and will accordingly calibrate net debt/regulated asset value (RAV) to remain comfortably less than 75%. In that connection Moody's notes the limited flexibility that Eastern Power Networks PLC will have initially with respect to its PMICR covenant within the acquisition bank facility, but expects that management action to reduce operating and interest costs should ensure that early progress is made on expanding headroom.

The stable outlook reflects Moody's expectation that UKPN will maintain its leverage as measured by net debt/RAV in the low-70%s. Upward pressure on ratings is unlikely to arise given the networks' recent relatively weak operating performance and leverage. Conversely, deterioration in operating performance versus plan and/or a change in financial policy resulting in a stand-alone leverage trending towards the mid-70%s would exert downward pressure on the Baa1 ratings, at least until a track record of improved operating performance has been established.

The principal methodology used in this rating was Regulated Electric and Gas Networks published in August 2009.

Headquartered in London, UK, UK Power Networks owns and operates three electricity distribution networks serving more than eight million customers in London, the East of England and the South East, through a network of 170,000 kilometres of underground cables and overhead lines, and more than 130,000 substations.

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London
Niel Bisset
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's downgrades to Baa1 ratings of UK Power Networks (formerly EDF Energy Networks)
No Related Data.
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