RPT-Fitch Affirms SSE PLC at 'A-'; Stable Outlook
Sept 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed SSE PLC's Long-term Issuer Default Rating (IDR) at 'A-'with a Stable Outlook. Fitch has also affirmed SSE's senior unsecured debt at 'A-', the Short-term IDR at 'F2' and subordinated notes at 'BBB'.
The ratings affirmation reflects SSE's largely regulated and resilient cash flow profile as well as stability and visibility for the remainder of the electricity distribution, electricity transmission & gas distribution price controls, though the former may change after April 2015. While SSE utilises all its gearing headroom, a third of capex is uncommitted and scrip dividends alleviate cash flow pressure supporting the Stable Outlook despite pressures in thermal generation. SSE is well funded for FY14.
KEY RATINGS DRIVERS
Regulated Base, Resilient Business
With 41% of EBITDA from regulated networks and 25% from quasi-regulated renewables in FY13, SSE has a substantial regulated earnings base, offsetting earnings volatility in generation that faces structural pressures on margins. SSE also faces commodity risk as a major player in the UK & Irish power supply markets, though this is partly hedged by renewables.
Regulatory Change Due
Under the new price control for electricity distribution, starting in April 2015, new asset depreciation lives will be lengthened to 45 years on a straight-line basis, with negative cash flow implications. There may be an impact on cash flows in the segment depending on transitional arrangements. We also expect tougher outputs compared to the previous price control and a lower allowed return, offset by additional incentives. However, with electricity transmission and gas distribution, SSE regulatory risk is diversified.
Uncertain UK Government Energy Policy
Aspects of UK Government's Energy Market Reform remain uncertain, effectively deferring capex in generation & renewables. Recent Government capacity market proposals would not take effect before 2018 and thus do not offer support to existing thermal generators at the time of weak spark spreads, including for SSE. Market balancing proposals may alleviate the issue only modestly. Likewise, although the Government has issued proposals for remuneration of new renewables by contracts for difference (CFD), the level of detail underpinning the contracts is not yet sufficient to make final investment decisions. Overall increases in household energy bills may affect political risk and operating environment for UK utilities.
High Dividend Policy & Credit Metrics
SSE's strategy includes sustained real growth in the dividend payable to shareholders. SSE is targeting annual above RPI increases in the dividend from 2013-14 onwards and it appears that this strategy is unlikely to change. This is partly offset by a regular scrip take-up (2012-13 was 33%), but still means that SSE utilises all gearing headroom. Fitch's projections of around 4.0x funds from operations (FFO) adjusted net leverage and minimum FFO adjusted fixed charge cover of around 3.5x are commensurate with ratings guidelines.
At March 2013, the group held GBP538.7m in cash & equivalents and had available an undrawn revolver of GBP1.3bn. SSE has also secured additional bank facilities of GBP650m, which have been drawn as term loans, and issued bonds after year end for GBP520m equivalent. Considering a forecast financing need of around GBP550m in FY14 plus debt maturities of GBP1.5bn, the company is well funded. In FY15 Fitch projects negative free cash flow at around GBP350m but there are no significant debt maturities. However, the company may access further funding in order to keep with the board's policy to have committed borrowings and facilities equal to at least 105% of forecast borrowings on a rolling six month basis.
Positive: Future developments that could lead to positive rating actions include:
-Although currently unlikely, FFO adjusted net leverage of 3.0x and FFO fixed charge cover of 4.5x, on a sustainable basis.
Negative: Future developments that could lead to negative rating action include:
-Following recent mid-sized acquisitions of Endesa Ireland & the Sean gas field, larger sized acquisitions, if debt funded, could lead to negative rating action.
-FFO adjusted net leverage of more than 4.0x and FFO fixed charge cover below 3.0x, on a sustainable basis.
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