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Rating Action:

Moody's upgrades Electricity Supply Board's ratings to Baa1; stable outlook

20 May 2014

London, 20 May 2014 -- Moody's Investors Service has today upgraded the long-term issuer and debt ratings of Electricity Supply Board (ESB) to Baa1 from Baa2. Moody's has concurrently upgraded to (P)Baa1 from (P)Baa2 the rating of the euro medium term note (EMTN) programme of ESB and its finance subsidiary ESB Finance Limited. ESB's Prime-2 short-term issuer rating remains unchanged. All ratings have a stable outlook.

Today's rating action follows Moody's upgrade of Ireland's government bond rating to Baa1 with a stable outlook from Baa3 with a positive outlook (please refer to Press Release, published on 16 May 2014 for more information https://www.moodys.com/research/PR_299549).

RATINGS RATIONALE

The upgrade reflects the fact that ESB's ratings are no longer constrained by Ireland's government bond rating. In recent years, ESB's ratings had been constrained by that of the government of Ireland due to the company's inability to disconnect itself from local economic and market circumstances. Following the improvement in the rating of the sovereign, the rating agency considers that the negative factors weighing on ESB's credit profile have reduced, resulting in a strengthening of ESB's credit profile.

ESB's Baa1 ratings reflect (1) the significant proportion of the company's earnings that it generates through its transmission and distribution operations; (2) the low business risk profile of these networks, and stable returns under well-established and transparent regulatory frameworks; and (3) the company's diversified funding sources and sound liquidity position.

However, the ratings also more negatively reflect (1) the relatively higher business risk profile of ESB's generation and supply business; (2) an increased level of uncertainty in the generation business resulting from a potential re-design of the Irish Single Electricity Market (SEM), which is required to enable market coupling with the UK; and (3) the challenges associated with a large capital investment programme.

Notwithstanding the deterioration in the macroeconomic environment in Ireland during recent years and an increased debt burden following the 2010 acquisition of Northern Ireland Electricity Limited (NIE), ESB has effectively managed the challenges associated with maintaining cash flow, key financial metrics and liquidity. Revenue has increased year-on-year since 2010 with cash flow generation supported by the effective management of costs. In addition, ESB has pursued a prudent financial strategy with careful management of its capital investment programme, distributions and funding. The company benefits from a solid liquidity position, with reported cash and available credit facilities of EUR1.9 billion as at 31 December 2013.

Moody's believes that despite budgetary pressures, the Irish government has had a balanced approach in its dealings with state-owned entities, including ESB. The planned sale of non-core generating capacity is expected to fund a special dividend payment of up to EUR400 million by end-2014, of which EUR208 million has been paid to-date. Dividend payments are expected to increase following the company's October 2013 announcement that the target payout ratio will increase to 40% of normalised profit after tax by 2017. However, Moody's notes that the current 30% ratio will apply for 2013 and 2014 and that the Irish government has further agreed that maintaining credit quality will be a key consideration in determining future payments.

RATIONALE FOR STABLE OUTLOOK

The stable outlook for ESB's rating takes into account the expectation that ratios will remain in line with our guidance for the Baa1 rating level of funds from operations (FFO) interest cover of 3.5x and FFO/net debt in the mid-teens or above. It also takes into account the company's plans to increase the share of its generation outside of the SEM in the Great Britain market through the construction of an 880MW CCGT at Carrington, near Manchester.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure could materialize if (1) no material negative consequences arise from the review of the SEM market design and/or ESB demonstrates its ability to reduce downside risks resulting from the changing dynamics in the generation market; and (2) ESB's credit metrics improve such that FFO interest cover and FFO/net debt are expected to be persistently above 4.5x and 20%, respectively.

Downward rating pressure could arise from (1) downward movement in the Government of Ireland's rating by more than one notch; (2) a material debt-funded acquisition or capital investment that eroded ESB's financial flexibility; (3) material unfavourable changes in the regulatory framework in Ireland; (4) an increase in the proportion of non-regulated activities within ESB's business mix; (5) a deterioration in the group's credit metrics such that they were expected to remain persistently below the guidance; or (6) a failure to refinance maturing debt well in advance of its schedule maturity date.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Regulated Electric and Gas Networks published in August 2009, and the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Dublin, Ireland, Electricity Supply Board (ESB) has evolved in recent years from being the integrated electricity utility in the Republic of Ireland to an energy provider operating across the country. The group reported revenues of EUR3.4 billion for 2013.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Matthew Huxham
Asst Vice President - 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

Monica Merli
MD - Infrastructure Finance
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 upgrades Electricity Supply Board's ratings to Baa1; stable outlook
No Related Data.
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