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Rating Action:

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

14 Mar 2018

London, 14 March 2018 -- Moody's Investors Service has today changed to stable from positive the outlook on the Baa1 issuer and (P)Baa1 senior unsecured ratings of Iberdrola S.A. (Iberdrola or "the group").

At the same time, Moody's changed to stable from positive the outlook on the Baa1/(P)Baa1 senior unsecured debt and programme ratings of guaranteed subsidiaries Iberdrola International B.V., Iberdrola Finance Ireland Limited and Iberdrola Finanzas SAU, and Iberdrola International B.V.'s backed Baa3 junior subordinated debt rating.

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

Moody's has also affirmed all other ratings. A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION AND OUTLOOK CHANGE OF IBERDROLA

"The decision to change the outlook on Iberdrola's ratings to stable follows weaker profitability in 2017 and reflects our view that the group is unlikely to achieve a financial profile consistent with our guidance for an upgrade within the next two years. The group's recently updated strategy plan 2018-22 will continue to develop favourably the group's business risk profile. However, we see potential headwinds to earnings recovery from 2018 onwards and estimate that rising debt from the investment programme will be reflected in FFO/net debt positioned in the upper teens in the next 2-3 years, consistent with a Baa1 rating given Iberdrola's scale, strategy and business mix," says Niel Bisset, a Moody's Senior Vice President and lead analyst for Iberdrola.

The group's EBITDA declined by 7.8% in 2017 to EUR7.3 billion, with weaker profitability in liberalised generation and supply, adversely affected by much lower than average hydro output in Spain and weaker margins in the UK, outweighing steadier underlying contributions from networks, renewables contracted generation. Reported net financial debt increased to EUR32.9 billion at end-2017 up 12% from EUR29.4 billion at end-2016, mainly because of the EUR2.8 billion additional debt associated with the first time consolidation of Neoenergia, which completed in August 2017, but also reflecting higher investment partly offset by favourable foreign currency effects. Estimated funds from operations (FFO)/net debt weakened to approximately 14.5% in 2017, from 18.2% in 2016, although adjusted for the Neoenergia consolidation and average hydro conditions, Moody's estimates that the FFO/net debt was in the 16%-17% range. The stable outlook factors in our expectation that EBITDA should rebound substantially in 2018, notwithstanding risks from a potential continuation of weak hydro conditions in Iberia, and some indications of resurfacing political risk in Spain and the UK, and that the group will be successful in its capital rotation targets, which we estimate should be reflected in a strengthening in FFO/net debt to over 18% in 2018.

The affirmation of the Baa1 ratings takes account of Iberdrola's consistent strategic direction, as reflected in its updated EUR32 billion plan for 2018-22, which places renewed emphasis on the customer, and targets a rise in EBITDA to between EUR11.5 -- 12 billion by 2022. It provides for (1) a capex programme of EUR32 billion over the five year period, implying a 14% rise in average annual investment of EUR6.4 billion; (2) efficiency measures designed to generate EUR1 billion over the plan period; (3) targeted asset disposals of EUR3 billion; and (4) a consistent shareholder remuneration structure, including a rising dividend pay-out in the range 65%-75% of net income. Overall, we expect Iberdrola's business risk profile will continue to develop favourably over the plan period, notwithstanding some increase in execution risk, and to continue the shift towards geographical diversification and a rising contribution from regulated and contracted earnings. The group estimates that the share of EBITDA contributed by networks, renewables and contracted generation will rise to more than 80% in 2022, from approximately three quarters on an underlying basis in 2017; and that it will become more geographically diversified with the contribution from Spain expected to reduce to around a third in 2022, from 39% in 2017.

On the downside, the plan implies some additional risk in Moody's view, because: (1) the increased scale of the investment, focused in the early years of the plan could present operational challenges. The plan includes EUR3.7 billion in offshore wind, which is relatively risky to build, although Moody's notes that execution risk is moderated by the regulated nature of investment into networks, and the group's successful track record of delivery of off-shore wind projects, including Wikinger, to date; and (2) the long-term nature of the group's investments and the large size of individual projects can delay the pace at which additional cash flow is generated, as reflected in the expected rise in capital-in-progress to EUR8.8 billion in 2022, from EUR7.2 billion in 2017.

Moody's estimates that the group will be free cash flow negative throughout the plan period. The front end loaded investment profile will cause debt to rise more sharply in the early years of the plan from EUR32.9 billion at end-2017, before growing more slowly towards the end of the plan period. The group should nevertheless, in Moody's view, be able to grow earnings sufficiently quickly to sustain a financial profile aligned with a Baa1 rating.

The stable outlook reflects Moody's view that Iberdrola's capital investment plan and dividend policy will be consistent with ratio guidance for a Baa1 rating: including FFO/net debt in the upper teens, and retained cash flow (adjusted for the annual share buyback) (RCF)/net debt in the low-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 stable follow that of Iberdrola, 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, renewables, and liberalised generation and supply; 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 progresses on delivery of its strategy and investments while recovering deleveraging 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.

Negative pressure would develop on the ratings (1) if its financial profile were to weaken whether because of a downturn in the company's operating/regulatory environment and performance, or because cashflow generation was not to keep pace with debt-funded investment; or (2) if structural subordination were to increase and weaken the position of parent company senior unsecured creditors. Ratings could be downgraded if the group's financial profile were to deteriorate such that FFO/net debt and RCF/net debt weakened sustainably 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

Issuer: Iberdrola S.A.

....LT Issuer Rating, Affirmed Baa1

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

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: Iberdrola Finance Ireland Limited

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

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: Iberdrola Finanzas, S.A.U.

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

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: Iberdrola International B.V.

....BACKED Junior Subordinate, Affirmed Baa3

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

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

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: Scottish Power Limited

....LT Issuer Rating, Affirmed Baa1

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: Scottish Power UK plc

....LT Issuer Rating, Affirmed Baa1

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

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

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

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: ScottishPower Energy Management Limited

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: ScottishPower Energy Retail Ltd

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: ScottishPower Generation Ltd

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: ScottishPower Investments ltd

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: SP Distribution plc

....LT Issuer Rating, Affirmed Baa1

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: SP Manweb plc

....LT Issuer Rating, Affirmed Baa1

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

Outlook Actions:

....Outlook, Changed To Stable From Positive

Issuer: SP Transmission plc

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

....Outlook, Changed To Stable From Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating 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 2017.

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 GBP5.4 billion in 2016.

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
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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