S&P affirms SSE debt rating BBB+ but lowers outlook

By Mark McSherry

S&P Global Ratings has reaffirmed its credit rating of Perth-based electricity infrastructure group SSE plc at BBB+ but has lowered its outlook from “positive” to “stable.”

S&P said SSE has entered an “investment super-cycle” which S&P expects will “gradually erode SSE’s financial flexibility by financial 2027, absent remedy measures.”

SSE said the S&P rating news followed recent reaffirmation from Moody’s of its Baa1 rating on SSE, with its “stable” outlook unchanged.

SSE is the biggest listed company run from Scotland, with a current stock market value of almost £18 billion. SSE directly employs about 14,000 staff and supports 56,000 jobs across the UK and Ireland.

In May, SSE reported adjusted net debt and hybrid capital at £9.4 billion for the year to March 31, 2024, “in line with pre-close guidance, with a net debt to EBITDA ratio of 3.0 times, well within a strong investment grade credit rating range.”

For the year to March 31, 2024, SSE swung to a pretax profit of £2.495 billion from a loss of £205.6 million in the prior year as revenue fell from £12.5 billion to £10.5 billion.

SSE maintained: “The news from both agencies is reflective of the strength of SSE’s balance sheet, the resilience of its business mix, an increase in group earnings coming from regulated electricity networks and its growing renewables portfolio.”

SSE chief financial officer Barry O’Regan said: “Reaffirmation of our strong investment grade credit ratings is welcome as we continue with our fully-funded plans to spend around £20bn out to FY27 on the renewables, electricity networks and system flexibility that is mission critical to government clean power ambitions.”

S&P Global Ratings said: “We think SSE PLC has entered an investment super-cycle, which will result in a significant increase in its capital intensity until at least the financial year ending March 31, 2027 (financial 2027), via its now £20 billion Net Zero Acceleration Programme Plus (NZAP Plus).

“SSE’s focus on regulated network investments will gradually strengthen its business risk profile.

“While we view this plan as aligned with the U.K.’s need for significant investments to decarbonize the grid and meet its net-zero electricity system goal by 2030, we consider this program to be particularly large compared to the group’s operating cash flows generation and expect it will gradually erode SSE’s financial flexibility by financial 2027, absent remedy measures.

“We now project average funds from operations (FFO) to debt of 18%-20% over financials 2025-2027, from 28.4% recorded in financial 2024. This reduction in headroom also reflects the decline in realized power prices compared to the exceptional levels recorded in financials 2023-2024.

“Nonetheless, the rating on SSE remains well-anchored within the ‘BBB+’ category.

“We therefore revised the outlook on SSE PLC and all of its subsidiaries to stable from positive and affirmed our ‘BBB+’ long-term issuer credit rating.

“The stable outlook on SSE reflects our expectation that the group will retain a sufficient buffer at the ‘BBB+’ rating level over financials 2025-2027, with an average adjusted FFO to debt sustainably above 18% on a consolidated basis.”

S&P added:SSE’s reduced financial flexibility in 2025-2027 reflects the consistent increase in planned ambitions over the past three years.  

“Since its initial announcement in November 2021, the group has significantly increased its ambitions, raising its capital program total to £20 billion from £12.5 billion.

“While we note management has taken supportive measures following the initial announcement of the program, including a large disposal program marked by the sale of a 25% minority stake in its transmission network for £1.5 billion, as well as a conservative financial dividend policy compared to many peers through a rebased dividend, we think these are no longer sufficient to support an upgrade given the significant acceleration in capital expenditures (capex).

“With our forecast of annual capex levels expected to reach above £7 billion by financial 2027 (assuming 100% ownership of SSE’s electricity transmission network) from £2.5 billion in financial 2024, we expect the group will post very negative free operating cash flows over this period, significantly eroding a currently comfortable buffer at the current ‘BBB+’ rating level, absent any additional remedy measures being implemented by management.

“While we view this plan as consistent with the U.K. government’s clean energy objectives and the significant investments needed to decarbonize the grid and meet its net zero electricity system goal by 2030, we view SSE’s capital intensity relatively aggressive with regards to available cash flows, which a relatively moderate level of dividend distributions only partially offsets.”