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Rating Action:

Moody's changes outlook on Iberdrola's Baa1 ratings to positive from stable; affirms ratings

25 Apr 2016

NOTE: On February 6, 2017, the press release was corrected as follows: in the list of affected ratings for Scottish Power UK plc, removed “Other Short Term, Affirmed P-2”. Revised release follows.

London, 25 April 2016 -- Moody's Investors Service has today changed to positive from stable the outlook on the Baa1 senior unsecured ratings of Iberdrola S.A. (Iberdrola or "the group").

At the same time, Moody's changed to positive from stable the outlook on the Baa1 senior unsecured ratings of guaranteed subsidiaries Iberdrola International B.V., Iberdrola Finance Ireland Limited and Iberdrola Finanzas, S.A.U., and Iberdrola International B.V.'s backed Baa3 subordinated debt rating.

Moody's also changed to positive from stable the outlook on the Baa1 ratings of Iberdrola-owned Scottish Power Limited (Scottish Power) and its subsidiaries.

At the same time, Moody's has affirmed all of these ratings.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION AND OUTLOOK CHANGE

"Our decision to change the outlook on Iberdrola's ratings to positive is based upon the progress of the group over 2015, which enabled it to meet its 2014-16 financial targets a year early, and the outlook for further growth and consolidation of its financial profile. The outlook change also factors in the more settled regulatory backdrop in Spain, and takes account of the group's new 2016-20 strategy plan. Although the group's strategy provides for a significant increase in capital investment and higher returns to shareholders, Moody's estimates that Iberdrola could over time be in a position to deliver its plan while achieving funds from operations (FFO)/net debt sustainably in the 20s in percentage terms, which Moody's sees as consistent with an A3 rating given the prospective development of its business mix towards more regulated and contracted earnings, and broader geographical diversification," says Niel Bisset, a Moody's Senior Vice President and lead analyst for Iberdrola.

The group's EBITDA increased by 4.9% in 2015 to EUR7.3 billion, with steady contributions from networks and stronger performances in renewables and contracted generation offsetting weaker profitability in liberalised generation and supply, which was adversely affected by lower output in Spain and higher taxes in the UK. Reported net financial debt increased to EUR28.1 billion at end-2015 from EUR25.6 billion at end-2014, mainly because of the EUR2.4 billion additional debt associated with the acquisition of UIL, which completed in December 2015. On a reported basis funds from operations (FFO)/net debt weakened slightly to 19.2% in 2015, from 19.6% in 2014, although adjusted for UIL-linked financial debt, Moody's estimates that the FFO/net debt ratio strengthened a little to more than 20%.

The outlook change balances a more settled regulatory backdrop in Spain (where Iberdrola generated 45% of group EBITDA in 2015) against the political risk stemming from the ongoing delay in forming a government following elections last December. Overall, Moody's considers the group's visibility on domestic earnings has improved given that: (1) the electricity system's annual tariff deficit has been eliminated, with a surplus of €550 million reported for 2014, and another surplus estimated in 2015; and (2) the electricity distribution regulatory framework moved a step closer to completion in December 2015 with the publication of the investment, operational and maintenance benchmark unit costs for electricity distribution activities.

The positive outlook takes account of Iberdrola's new strategic plan 2016-20 which provides for (1) a capex programme of €24.1 billion net over the five year period. Average annual investment will rise by at least 50% to €4.8 billion, of which growth capex is €3.4 billion; and (2) a rising dividend pay-out in the range 65%-75% of net income. Overall, we expect Iberdrola's business risk profile to develop favourably over the plan period, notwithstanding some increase in execution risk, and to continue the shift towards geographical diversification and a lower dependence on commodity-linked earnings. The group estimates that the share of EBITDA contributed by networks, renewables and regulated generation will rise to 81% in 2020, from 75% in 2015; and that it will become more geographically diversified with the contribution from Spain expected to reduce to around a third in 2020, from 45% in 2015. On the downside, the plan implies some increased execution risk in Moody's view, because: (1) the bulk of the investment is in the early years of the plan and could present operational challenges; and (2) €3.5 billion in aggregate is directed at offshore wind, which is relatively risky to build. Although Moody's notes that risk is moderated by the regulated nature of investment into networks, and by the sequential approach to its off-shore wind projects.

Moody's estimates that the group will be free cash flow negative in the early years of the plan because of increasing investment and a rising dividend pay-out, with debt expected to rise gradually from €28.1 billion at end-2015, before declining towards the end of the plan period. The positive outlook reflects that the group may nevertheless, in Moody's view, be able to sustain a financial profile aligned with an A3 rating if it is able to grow earnings sufficiently quickly.

The positive outlook reflects Moody's view that Iberdrola's capital investment plan and dividend policy could be compatible with a financial profile which is sustainably consistent with minimum ratio guidance for an A3 rating: including FFO/net debt above 20%, and retained cash flow (adjusted for the annual share buyback) (RCF)/net debt in the mid-teens in percentage terms.

RATIONALE FOR AFFIRMATION AND OUTLOOK CHANGE OF SCOTTISH POWER

The affirmation of Scottish Power's (SP's) ratings and outlook change to positive follow those of Iberdrola's, its 100% parent. Scottish Power's ratings are based on its stand-alone credit positioning and some parent company support to reflect its core position within the Iberdrola group. SP's underlying credit strength is based upon (i) its position as a vertically integrated utility in the UK, whose operations include regulated networks, generation, trading and supply activities, and as the UK arm of Iberdrola's renewables businesses; as well as (ii) its solid financial profile.

Scottish Power's ratings are aligned with those of Iberdrola, reflecting both its stand-alone creditworthiness, and some ratings uplift to reflect its core position within Iberdrola's growth and diversification strategy and its close integration within the larger group, as evidenced by (i) a centralised cash management system through Iberdrola group treasury, and (ii) Iberdrola's ability to determine the debt structure of subsidiaries and move cash around the group.

WHAT COULD MOVE THE RATINGS UP/DOWN

Iberdrola's ratings could be upgraded if the company continues to progress on delivery of its strategy while consolidating its financial profile. Resolution of domestic political uncertainty, successful integration of UIL and refinancing of subsidiary debt would also contribute to positive momentum. A sustainable, solid financial profile -- including FFO/net debt of more than 20%, and retained cash flow (adjusted for the annual share buyback) (RCF)/net debt in the mid-teens in percentage terms - would support an upgrade to A3.

The ratings outlook could be stabilised if recent deleveraging momentum were to be reversed whether because of a downturn in the company's operating environment and performance, or higher than expected debt-funded investment. Although not expected, ratings could be downgraded if the group's financial profile were to deteriorate such that FFO/net debt and RCF/net debt weakened to the mid-teens and low double digits in percentage terms respectively.

Any change in outlook or ratings for Iberdrola would likely be reflected in an equivalent change for Scottish Power.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Iberdrola S.A.

.... LT Issuer Rating, Affirmed Baa1

.... ST Issuer Rating, Affirmed P-2

.... Senior Unsecured MTN, Affirmed (P)Baa1

..Issuer: Iberdrola Finance Ireland Limited

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

.... BACKED Senior Unsecured MTN, Affirmed (P)Baa1

..Issuer: Iberdrola Finanzas, S.A.U.

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Iberdrola International B.V.

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

.... BACKED Junior Subordinated Regular Bond/Debenture, Affirmed Baa3

.... BACKED Senior Unsecured MTN, Affirmed (P)Baa1

.... BACKED Commercial Paper, Affirmed P-2

..Issuer: Scottish Power Limited

.... LT Issuer Rating, Affirmed Baa1

.... Senior Unsecured MTN, Affirmed (P)Baa1

..Issuer: Scottish Power UK Holdings Ltd.

.... LT Issuer Rating, Affirmed Baa1

..Issuer: Scottish Power UK plc

.... LT Issuer Rating, Affirmed Baa1

.... ST Issuer Rating, Affirmed P-2

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

.... Other Short Term, Affirmed (P)P-2

.... BACKED Senior Unsecured MTN, Affirmed (P)Baa1

.... Senior Unsecured MTN, Affirmed (P)Baa1

..Issuer: ScottishPower Energy Management Limited

.... LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Energy Retail Ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Finance (US), Inc.

.... BACKED LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Generation Ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: ScottishPower Investments ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: SP Distribution plc

.... LT Issuer Rating, Affirmed Baa1

..Issuer: SP Manweb plc

.... LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: SP Transmission Ltd

.... LT Issuer Rating, Affirmed Baa1

..Issuer: SPD Finance UK plc

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Iberdrola S.A.

....Outlook, Changed To Positive From Stable

..Issuer: Iberdrola Finance Ireland Limited

....Outlook, Changed To Positive From Stable

..Issuer: Iberdrola Finanzas, S.A.U.

....Outlook, Changed To Positive From Stable

..Issuer: Iberdrola International B.V.

....Outlook, Changed To Positive From Stable

..Issuer: Scottish Power Limited

....Outlook, Changed To Positive From Stable

..Issuer: Scottish Power UK Holdings Ltd.

....Outlook, Changed To Positive From Stable

..Issuer: Scottish Power UK plc

....Outlook, Changed To Positive From Stable

..Issuer: ScottishPower Energy Management Limited

....Outlook, Changed To Positive From Stable

..Issuer: ScottishPower Energy Retail Ltd

....Outlook, Changed To Positive From Stable

..Issuer: ScottishPower Finance (US), Inc.

....Outlook, Changed To Positive From Stable

..Issuer: ScottishPower Generation Ltd

....Outlook, Changed To Positive From Stable

..Issuer: ScottishPower Investments ltd

....Outlook, Changed To Positive From Stable

..Issuer: SP Distribution plc

....Outlook, Changed To Positive From Stable

..Issuer: SP Manweb plc

....Outlook, Changed To Positive From Stable

..Issuer: SP Transmission Ltd

....Outlook, Changed To Positive From Stable

..Issuer: SPD Finance UK plc

....Outlook, Changed To Positive From Stable

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Madrid, Spain, Iberdrola SA, is one of the world's leading energy providers. It reported group EBITDA of approximately EUR7.3 billion in 2015.

Headquartered in Glasgow, the UK, Scottish Power Limited, a 100% subsidiary of Iberdrola SA, is one of the leading energy companies in the UK. It reported group turnover of approximately GBP7.1 billion in 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Niel Bisset
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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