Moody’s downgrades SSE

Rating agency Moody’s has downgraded SSE’s rating from A3 to Baa1. It has also downgraded SSE’s hybrid notes (from Baa2 to Baa3).

The rating agency began a review in September, after SSE’s announced  losses in its energy trading division, and took into account the cancellation of plans to spin off its retail business with Npower .

“We expect a sustained period of higher debt and lower cash flows as a result of difficult trading conditions across several divisions, including recent gas trading losses, acute competitive and regulatory pressures in retail energy supply and suspension of the capacity market, as well as the likelihood of falling returns in regulated networks,” said Graham Taylor, a Moody’s vice president and lead analyst for SSE.

“In addition, termination of the planned demerger of SSE Energy Services shows that there is no easy solution to the challenges posed by re-regulation of energy supply in Great Britain,” Taylor added.

Moody’s expects weaker cash flows from gas trading, retail energy supply and generation, and correspondingly higher net debt. It believes that improving the company’s position will depend on factors beyond the company’s control, including restarting payments in the Capacity Market and the extent to which expected returns are cut for regulated energy networks (although SSE’s stake in such networks is nevertheless seen as positive and expected to result in stable returns)However, Moody’s thought capacity markets will be restored in some form by October 2019. 

If SSE succeeds in finding a buyer for its domestic supply business the terms “could cause metrics to weaken further”, it said. That has generated consistent operating profits of around £260 million annually (around 15% of group operating profit), but will be “modestly profitable” with Ofgem’s price cap in place.

The downgrade in the ratings of SSE Energy Supply Ltd and SSE Generation Ltd follows that of SSE plc. 

Gregor Alexander, finance director, SSE plc, said:“We have had constructive discussions with both Moody’s and S&P and understand why they have taken these decisions.  A Baa1/ BBB+ credit rating is one of the strongest held by private sector utilities across Europe and it should not have a significant impact on our ability to secure funding at competitive rates.

“As a company with an increasing focus on regulated energy networks and renewable energy we remain committed to a strong balance sheet, supported by financial discipline and a commitment to taking the right decisions for the long term.”

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