(Alliance News) - Moody's Investors Service late Tuesday changed its outlook for SSE PLC to negative from stable, but confirmed its Baa1 issuer and senior unsecured ratings.
The changed outlook reflects the FTSE 100 energy firm's increased financial leverage, and the risk that even after its planned GBP2 billion in disposals, the group metrics will not recover to levels in line with the current rating over the next two to three years.
For the year to the end of March, SSE's financial leverage has risen, with its ratio of funds from operations to net debt at 14% and retained cash flow to net debt at 7.9%, which is below Moody's guidance.
"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," the credit agency said.
Other headwinds for SSE includes Ofgem's determinations for the forthcoming price control for electricity transmission and gas distribution networks with effect from April 2021.
In July, the UK energy regulator proposed to cut allowed equity returns by around half on a like-for-like basis and has 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," Moody's added.
Finally, there is the impact of the coronavirus outbreak, with SSE indicating that the effect of reduced demand, losses on hedges and rise in bad debt could reach GBP150 million to GBP250 million for the year, before any mitigating measures.
However, SSE's Baa1 rating is said to be supported by its diversified business mix, high share of earnings from regulated network under a transparent regulatory framework and a rising portfolio of renewables under long-term contracts.
By Dayo Laniyan; dayolaniyan@alliancenews.com
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