S&P lowers London Electricity credit ratings

29 October 202 – Standard & Poor’s Ratings Services said today it lowered its long-term corporate credit ratings on U.K.-based electricity utility London Electricity Group Holdings PLC and its main subsidiaries, including London Power Networks PLC, EPN Distribution Ltd., and related entities (collectively LE) to single-‘A’ from single-‘A’-plus. The short-term corporate credit ratings on these entities were affirmed at ‘A-1’. The outlook is negative.

At the same time, the long-term debt rating on the $300 million capital securities issued by EdF London Capital L.P. was lowered to triple-‘B’-plus from single-‘A’-minus. These ratings actions are a result of LE’s declining financial results and the potential weakening of support from its parent company.

At the same time, the long-term corporate credit ratings on SEEBOARD PLC and subsidiaries were raised to single-‘A’ from triple-‘B’-plus, the short-term corporate credit ratings were raised to ‘A-1’ from ‘A-2’, and they were removed from CreditWatch. The outlook on SEEBOARD is negative. The upgrade reflects London Electricity Group PLC’s acquisition of SEEBOARD and the company’s core activity within LE.

“The rating action on LE reflects the group’s weakened financial position after a significant acquisition phase over the past 12 months, the challenging conditions in the U.K. energy market, and Standard & Poor’s perception that support from its parent, Electricite de France, may have weakened somewhat,” said Standard & Poor’s Infrastructure Finance credit analyst Jean-FranAois VEron. “These factors are partially offset by LE’s balanced portfolio of businesses after its recent acquisitions and a good level of hedging between generation and supply activities.”

Through acquisitions, LE has developed into one of the UK’s leading energy companies. The company does face some challenges, however, to maintain its leading position. The U.K. energy market is facing low wholesale electricity prices and strong retail competition. The company is well placed to compete, but the impact of expensive power-purchase contracts and the ongoing risks of retail margin squeeze and customer churn remain. LE also faces some execution risk in the integration of its new businesses.

LE’s consolidated financial profile has weakened during the recent phase of acquisitions. Although Electricite de France (EdF; AA/Negative/A-1+) has contributed some equity to help finance the acquisitions, LE’s total debt has more than doubled since 2000, and its debt protection measures have weakened. LE’s significant proportion of regulated earnings, however, provides some underlying stability to its finances. LE has demonstrated good skills in integrating new businesses. Its financials may show improvement from 2004.

In Standard & Poor’s view, the credit benefit to LE of being owned by EdF has marginally diminished, owing to a combination of a recent downgrade of EdF, and some disquiet in France about its international expansion. Support is still evident and valuable, however, and Standard & Poor’s expects that LE will remain a key investment for EdF. The parent company has invested about à‚£1 billion ($1.6 billion) of equity in LE since December 2001.

“The negative outlook on LE reflects concerns about its ability to improve its financials while facing the challenges of integrating its newly acquired companies in a tough U.K. market environment,” said Mr. VEron. In addition, Standard & Poor’s will monitor EdF’s rating and the stance of the company regarding its foreign investments.

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