MOODY'S ISSUES NEW RATINGS FOR SCOTTISH POWER GROUP COMPANIES AHEAD OF REGULATORY BUSINESS SEPARATION OF SCOTTISH POWER UK GROUP
Moody's Investors Service is assigning new issuer ratings to the new subsidiary companies that are emerging from the restructuring of Scottish Power UK plc ("SPUK") by its parent Scottish Power plc ("SP"). The restructuring process is occurring in parallel with SPUK's ongoing separation of its electricity supply business from its distribution activities, which will come into effect on 1st October 2001 and is in accordance with the Utilities Act 2000. As a consequence of these changes, Moody's will also downgrade SPUK's short-term rating from Prime-1 to Prime-2.
Moody's notes that the resulting new companies will be wholly-owned subsidiaries of SPUK. SP Transmission Ltd (new issuer rating A2) will own the Scottish transmission business. SP Distribution Ltd (new issuer rating A2) will own the Scottish distribution business. Scottish Power Investments Ltd (new issuer rating A2) will be the holding company for SP Manweb plc (new issuer rating A2), which has the Manweb distribution business. Scottish Power Generation Ltd (new issuer rating A3) will own all SPUK generation in the UK. ScottishPower Energy Retail Ltd (new issuer rating A3) will be the domestic supply business for the UK. Scottish Power Energy Trading Ltd (new issuer rating Baa1) will be the trading arm for Scottish Power as well as the principal counterparty to trading obligations.
Most of the existing SPUK debt will be kept at SPUK, and the new subsidiaries will generally be debt-free. However, a GBP137 million EIB loan, which is co-borrowed by Southern Water plc, will be passed down to Southern Water plc. Additionally, a GBP149 million EIB loan will be passed down to SP Distribution Ltd (GBP99 million) and SP Transmission Ltd (GBP50 million).
Existing SPUK debt (in place prior to 1st October 2001) will benefit from guarantees from SP Transmission Ltd, SP Distribution Ltd, and Scottish Power Generation Ltd. SP Transmission Ltd and SP Distribution Ltd will be guaranteed by Scottish Power Investments Ltd. On the basis of this guarantee structure, the long-term ratings of the existing SPUK debt will be maintained at A2.
However, due to regulatory requirements, any long-term debt issued by SPUK after 1st October 2001 will not benefit from these guarantees and will therefore be legally subordinated to guaranteed SPUK debt. Moody's will therefore rate this unguaranteed debt A3, and the issuer rating of SPUK will also move to A3. As a consequence, the short-term rating of SPUK will be downgraded from Prime-1 to Prime-2.
Moody's is assigning new issuer ratings of A2 to each of SP Transmission Ltd, SP Distribution Ltd, Scottish Power Investments Ltd and SP Manweb plc. These companies comprise the regulated UK wires businesses, and underpin the current A2 rating of SPUK. Although they have relatively little debt, they guarantee existing SPUK debt and so the A2 rating has been assigned to them, with no ratings differentiation as they are managed as a single group within SPUK.
Moody's is also assigning new issuer ratings of A3 to Scottish Power Generation Ltd ("Generation") and ScottishPower Energy Retail Ltd ("Retail"), and Baa1 to Scottish Power Energy Trading Ltd ("Energy Trading"). Commercially, these three companies are interlinked, with Energy Trading sitting between Generation and Retail. None of these companies has any external debt, although Energy Trading may incur significant trading liabilities through its trading operations (which are funded through intercompany loans from SPUK). Nor do any of these companies benefit from any guarantees or formal support from any Scottish Power group companies, although they are an integral part of SPUK's activities and overall strategy.
Moody's has set the A3 issuer rating of Generation and Retail a notch below that of the regulated subsidiaries to reflect the greater business risks of the unregulated business. The Baa1 rating of Energy Trading reflects the greater volatility of cashflows in this company, which will be the entity directly exposed to external trading risks, plus the lack of any significant assets (as opposed to Generation and Retail).
Moody's has also assigned a new issuer rating of Baa1 to SP. This rating reflects the consolidated position of the SP group, which includes the operations of Pacificorp (Senior Secured A2, on review for downgrade) in the United States. In addition, the rating indicates structural subordination to the Pacificorp and SPUK groups, in the expectation that potential future debt raised at SP will need to be serviced by cashflow from SPUK and Pacificorp.
Moody's rating outlook for SPUK is currently negative, reflecting the uncertainty over SP's plans regarding Southern Water plc and the use of any proceeds to be received from a sale or restructuring. Moody's extends this negative outlook to all the new SPUK subsidiaries. In addition, a negative outlook is assigned to SP, based on the uncertainties in both SPUK and Pacificorp.
Moody's placed the debt securities of Pacificorp on review for downgrade in May 2001, with the outcome to be based on an assessment of the likelihood and timing of cost recovery, particularly in Utah and Oregon, from the high electricity prices incurred in the Western USA. Moody's notes the recent announcements on this matter by the Oregon and Utah Public Utility Commissions, as well as SP's recent announcement regarding Pacificorp's additional potential exposure to out-of-market power purchases. Whilst the Pacificorp ratings remain under review, Moody's does not expect the outcome of this review to have an impact on the ratings of any SPUK group company or the SP issuer rating.
Scottish Power UK plc is a diversified energy company based in Scotland and is wholly owned by Scottish Power plc, which reported group turnover of approximately GBP6.3 billion for the year ending 31 March 2001.
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