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Rating Action:

MOODY'S DOWNGRADES SCOTTISH POWER UK PLC TO A1

14 Mar 2000
MOODY'S DOWNGRADES SCOTTISH POWER UK PLC TO A1 Moody's Investors Service has downgraded the long-term debt of Scottish Power UK plc from Aa3 to A1. This concludes a ratings review instigated by the announcement that ScottishPower was buying the US company PacifiCorp in an all share transaction but one which has significantly increased the Group's debt burden through the consolidation of existing debt in PacifiCorp. Although the cashflows of Scottish Power UK plc are not supporting the debt in PacifiCorp, the increased level of group debt and the effects of five separate regulatory reviews in the UK have led to lower interest cover within Scottish Power UK plc. The group has a publicly stated policy of maintaining a long-term single-A debt rating and a minimum interest cover ratio of 3X. The short-term Prime-1 rating of Scottish Power UK plc, the long-term A2 rating of Southern Water Services Limited and the ratings within the PacifiCorp group were not under review. Moody's has also assigned an A1 long-term rating to a œ2.6 billion bank loan in the name of Scottish Power UK plc. The outlook for the ratings is stable.


ScottishPower completed their acquisition of PacifiCorp at the end of November 1999 with an all-share transaction. However, Scottish Power plc, the parent company of both Scottish Power UK plc and of the PacifiCorp group will now consolidate increased debt of over œ3 billion - up to around œ5.3 billion - as a result of the acquisition. To reduce the debt burden, ScottishPower has announced the intended sale of PacifiCorp's Australian assets which could realise as much as œ1 billion. PacifiCorp, rated A3 for senior unsecured debt, is an Oregon based electric utility operating in six western States and serving 1.5 million customers. ScottishPower has a team of 70 people working on the transition plan for PacifiCorp which, when announced in May 2000, is expected to recommend a significant overhaul of the way the company is structured and managed.


In the UK, the ScottishPower group has seen the completion of five separate regulatory reviews in recent months. These reviews have led to reductions in revenues in Southern Water, the water and waste water company serving approximately 1.8 million customers in the south eastern corner of England; in Manweb, the Regional Electricity Company serving 1.1 million customers in north-west England and northern Wales; and in electricity transmission and distribution activities in Scotland where they serve 1.8 million customers. ScottishPower have accepted the outcome of all of these reviews which are expected to reduce operating profits by œ127 million per annum. At the request of the regulator OFGEM, ScottishPower must also "unbundle" its electricity activities to provide greater clarity on costs and revenues. In particular, the Scottish transmission activities will be legally separated from the generation and distribution activities. At present all of the cashflows of the group's UK electricity and water businesses flow up to or are contained directly within Scottish Power UK plc. Moody's would expect that ScottishPower will complete this corporate restructuring in such a way as to ensure no material deterioration in cashflow protection for the bondholders of Scottish Power UK plc.


Although the group has assumed a greater ongoing level of debt, as stated above, Moody's notes the remaining value which ScottishPower has in its 50.1% holding in Thus, the telecommunications network company it formed. At current market prices this investment is worth over œ2.5 billion which, if needed, could be realised to reduce debt. ScottishPower has already recorded exceptional profits of œ700 million from the flotation of 49.9% of Thus. This cashflow will help alleviate the effects of the regulatory reviews on the company's core businesses. ScottishPower has also formed a new joint venture with the Royal Bank of Scotland aimed at offering financial services and other products to an existing utility customer base of over 5 million.


Moody's has reviewed the documentation of a syndicated bank loan for œ2.6 billion which was originally provided by a group of banks in June 1996 to Scottish Power UK plc. The group of banks has been expanded and changes made to the facility but it remains unsecured and pari passu with other debt in Scottish Power UK plc. The bank loan has therefore been assigned a rating of A1 with stable outlook in line with the rating of the bonds. Barring any further changes to the terms and conditions of the bank loan facility the rating of this bank loan will move in line with the rating of the bonds.


Scottish Power plc is a multi-utility business headquartered in Glasgow, Scotland and reported turnover of approximately œ3.2 billion for the year ended 31 March 1999.


No Related Data.
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