MOODY’S DOWNGRADES ISSUER RATINGS OF SCOTTISH POWER UK HOLDINGS, SCOTTISH POWER GENERATION AND SCOTTISHPOWER ENERGY RETAIL TO Baa1, AND SCOTTISH POWER INVESTMENTS TO A3; AFFIRMS ISSUER AND DEBT RATINGS OF SCOTTISH POWER PLC AND SCOTTISH POWER UK PLC.
Moody’s Investors Service today downgraded the issuer ratings of Scottish Power UK Holdings (“SPUKH”), Scottish Power Generation (“Generation”) and ScottishPower Energy Retail (“Retail”) to Baa1 from A3. It also downgraded the issuer rating of Scottish Power Investments Ltd (“SPIL”) to A3 from A2.
Moody’s has also changed the outlook on the debt ratings of Scottish Power plc, SPUKH and all their rated UK subsidiaries to negative from stable. Moody’s rating actions stem from concerns that Scottish Power’s spending including capital expenditure will significantly exceed cash flow generation over the next few years; this will cause debt levels to increase for most members of this complicated UK family structure.
The downgrades of the issuer ratings of SPUKH, Generation and Retail to Baa1 from A3 reflect the impact of guarantees extended by SPUKH to Generation, Retail and ScottishPower Energy Trading (“Trading”, Baa1). SPUKH irrevocably and unconditionally guarantees monies and liabilities due, owing or incurred by these companies to any person with whom the company has transacted in the ordinary course of business. Whilst SPUKH may terminate the guarantees on 28 days notice, this will not release it from liability for obligations arising prior to the termination. The issuer ratings of Generation, Retail and Trading are therefore aligned to that of SPUKH, which has itself been downgraded by a notch reflecting the impact on its credit profile of extending the guarantees.
The downgrade of the issuer rating of SPIL from A2 to A3 reflects the high debt to RAB (around 150%) of the consolidated SPIL and Manweb group. SPIL’s principal asset is SP Manweb. Whilst SPIL has no external debt, it does have a high level of intercompany debt, and the single notch rating distinction with Manweb reflects likely difference in recovery levels for unsecured creditors.
The negative outlooks on the ratings of Scottish Power plc and its UK subsidiaries (including the debt ratings of SPUK) reflect primarily the possibility that the group will continue to have negative free cash flow in the medium term because of large capital expenditures relative to cash flow. The operational performance of Scottish Power plc continues to improve, led by recovery at Pacificorp, and the reduction in dividend expected from 2003/04 will improve retained cash flow. However this retained cash flow will still not cover capital expenditure, causing an increase in group net debt. A significant portion of the capital expenditure will be in businesses such as renewable energy that will not earn a regulated return. Moody’s also expects there to be greater pressure on the SPUK group to upstream dividends to Scottish Power plc, in order for the listed company to make its dividend payments.
A failure to reduce the capex burden, or further acquisitions could place negative pressure on the ratings of the UK family. Another future factor that we will consider is the impact of the next UK electricity regulatory review, due to come into effect in April 2005.
A summary of current ratings of Scottish Power plc and the UK group of companies is as follows:
Scottish Power plc - Issuer rating - Baa1, Negative outlook
Scottish Power UK Holdings Ltd - Issuer rating - Baa1, Negative outlook
Scottish Power UK plc - Debt ratings - A2, Negative outlook
Scottish Power UK plc - Issuer rating - A3, Negative outlook
Scottish Power Generation Ltd - Issuer rating Baa1, - Negative outlook
ScottishPower Energy Trading Ltd - Issuer rating - Baa1, Negative outlook
ScottishPower Energy Retail Ltd - Issuer rating - Baa1, Negative outlook
SP Distribution Ltd - Issuer rating - A2, Negative outlook
SP Transmission Ltd - Issuer rating - A2, Negative outlook
SP Manweb plc - Issuer rating - A2, Negative outlook
Scottish Power Investments Ltd - Issuer rating - A3, Negative outlook
Scottish Power plc is a diversified energy company based in Scotland, which reported group turnover of approximately GBP6.3 billion for the year ending 31 March 2002.
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