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Rating Action:

MOODY'S CHANGES OUTLOOK ON LONG-TERM RATINGS OF SCOTTISH POWER PLC, ITS UK SUBSIDIARIES AND PACIFICORP TO STABLE FROM NEGATIVE

03 Mar 2005
MOODY'S CHANGES OUTLOOK ON LONG-TERM RATINGS OF SCOTTISH POWER PLC, ITS UK SUBSIDIARIES AND PACIFICORP TO STABLE FROM NEGATIVE

London, 03 March 2005 -- Moody's Investors Service today changed the outlook on all of the long-term debt and issuer ratings of Scottish Power plc, its UK subsidiaries and PacifiCorp, its US subsidiary, to stable from negative (see detailed list below). The Prime-2 short-term ratings of Scottish Power UK plc and PacifiCorp remain unchanged.

The following ratings have been affected by the outlook change to stable from negative:

Scottish Power plc - Baa1

Scottish Power UK Holdings Ltd - Baa1

Scottish Power UK plc - A2 (guaranteed), A3 (unguaranteed)

Scottish Power Manweb plc - A2

Scottish Power Distribution Ltd - A2

Scottish Power Transmission Ltd - A2

Scottish Power Investments Ltd - A3

Scottish Power Generation Ltd - Baa1

Scottish Power Energy Retail Ltd - Baa1

Scottish Power Energy Management Ltd - Baa1

Scottish Power Finance (Jersey) Ltd - Baa2

PacifiCorp - A3 sr. secured, Baa1 sr. unsecured, Baa3 preferred stock

The change in outlook on Scottish Power's long-term ratings reflects two principal factors: firstly, Moody's expectation that the Scottish Power Group (the "SP Group") will be able to maintain a financial profile consistent with its current ratings despite increasing debt levels, and secondly, a significant reduction in regulatory risk following favourable recent developments in both the UK and the US. Although Moody's expects investment to exceed retained cash flow in coming years, the rating agency anticipates that the credit impact will be mitigated by improved operating performance from the UK side of the business in the short term, supplemented by higher revenues from PacifiCorp over the medium term as capital investment is recognised in the rate base.

In the UK, SP's two electricity distribution networks benefited from a favourable outcome at the fourth electricity distribution price control review, the Final Proposals of which were recently accepted by the company. The fourth price control runs from 1 April 2005 until 31 March 2010. The company's smaller electricity transmission business will now operate under an extended price control running until 31 March 2007, in order to mitigate the impact of the introduction of a UK-wide electricity transmission grid. These two regulatory outcomes have effectively eliminated regulatory risk from the UK businesses over the medium term, and as the second largest contributor to group operating profit, the significant visibility this offers with regard to future cash flow is a key driver behind the stable outlook.

SP's unregulated UK businesses in electricity generation, energy supply, storage and trading have exhibited improved operating performance as a result of a sustained increase in energy and wholesale electricity market prices, combined with strong growth in retail customer numbers. SP's exposure to volatile electricity and commodity prices is mitigated by its balanced generation/supply position, which, in addition to providing a natural hedge, also leaves the company with substantial operating flexibility regarding the management of its fuel and electricity positions.

PacifiCorp's ratings at the current level reflect a number of constructive regulatory actions that collectively help to provide stability to future cash flow, as the company's capital investment increases over the next several years. Specifically, the Utah Public Service Commission's decision to grant $51 million of additional revenues effective 1 March 2005 and to allow rates to be implemented based upon a future test year provides incremental permanent cash flows, reduces regulatory lag and increases the likelihood of future recovery of capital investment and operating expenses, Moody's noted. Similarly, PacifiCorp has made meaningful progress in reaching a consensus across the company's six state regulatory jurisdictions concerning a common cost allocation methodology. Moody's believes that, when fully adopted, this methodology should further reduce regulatory uncertainty and regulatory lag in each of the company's state jurisdictions. To date, the company has reached common cost allocation methodology agreements among state regulators with responsibility for approval of 90% of PacifiCorp's revenues.

The current ratings also consider the company's plan to finance an increasing capital expenditure programme over the next several years. Most of the planned investments relate to delivery and generation capital expenditures and are intended to increase system and supply reliability. PacifiCorp intends to finance this capital investment, which could reach over $1 billion each year in 2006 and 2007 from internally generated funds, external borrowings and the infusion of substantial additional equity from the indirect parent, SP plc. While regulatory challenges remain for PacifiCorp, the ratings incorporate an expectation that the company will be able to continue to maintain constructive regulatory relationships during this important period.

The change in outlook to stable reflects Moody's expectation that recent regulatory decisions will help to produce more predictable cash flows for PacifiCorp as it completes its capital investment programme. The stable outlook also incorporates the financial strength of SP plc, including an expectation that PacifiCorp's investment programme will be conservatively financed.

In light of PacifiCorp's sizeable capital programme and the need for continued support from all of its regulatory bodies, the prospect of a rating upgrade at PacifiCorp is limited in the short term. However, over the intermediate term, to the extent that the company is able to continue to garner constructive regulatory support and manage its cost and capital structure prudently in a way that improves its sustainable cash flow relative to its adjusted leverage, a positive rating action could result. Conversely, negative rating pressure could arise in the event that the company finances its capital expenditure programme more aggressively than anticipated, or if timely regulatory support were to begin to wane.

Scottish Power plc is a diversified energy company based in Scotland, which reported group turnover of approximately GBP5.8 billion for the year ending 31 March 2004. PacifiCorp is vertically integrated and an indirect wholly owned subsidiary of Scottish Power, plc.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Edward Palmer
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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