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Rating Action:

Moody's changes outlook to negative on A3 of Iberdrola and Scottish Power subsidiaries

05 Jul 2010

London, 05 July 2010 -- Moody's Investors Service has today changed the rating outlook for the senior unsecured A3 ratings of Iberdrola SA, its guaranteed subsidiaries and Scottish Power Ltd and its subsidiaries to negative from stable. The companies' short term Prime-2 ratings are affirmed. The ratings of Iberdrola USA and its subsidiaries are unaffected. A list of the affected companies is below.

The rating action has been prompted by the recent announcement by the Spanish Government, in conjunction with the Popular Party, of a review of the Spanish system's electricity costs and the freezing of the 4% increase in electricity tariffs that was due to be implemented from 1 July 2010.

A full review of the energy sector with the aim of putting a long-term framework in place has been announced in a more detailed document, released by the Spanish Government late last week entitled "Elements for an Agreement on Energy Policy". The Goverment have said that further details will be available during the course of this month.

In Moody's opinion, these moves increase regulatory risk in the sector and could have negative consequences for Spain's electricity companies. Moody's concerns relate to the fact that current electricity tariffs are too low to fully cover all the regulated and unregulated costs of the system. In order to cover both past and potential future deficits, either electricity prices will need to rise significantly or other measures must be taken to cut the costs of electricity to reach full tariff sufficiency by 2013 and maintain a sustainable tariff structure in the years beyond. Given the apparent reluctance to raise tariffs (as signalled by the announced freeze on tariffs), it seems likely that the electricity companies will need to bear at least some of the pain related to control of costs and hence remuneration of existing assets is likely to be affected.

Moody's acknowledges that Iberdrola exercises disciplined financial management and in its commitment to an A3 rating has recently taken measures to bolster and improve its financial profile via scrip dividends, divestments and a capital increase in 2009 as well as a close control of capex. The rating agency further notes that cash flow has been resilient in the face of recessionary market conditions in its key markets, in particular Spain, reflecting active management of a well-diversified and flexible portfolio of assets. Nonetheless, the company has limited financial flexibility at the current A3 rating level and approximately 45% of the group's EBITDA is derived from Spanish activities in liberalised generation, renewables and distribution activities. This means the company's cash flow would be impacted by pressure on margins in these businesses in the absence of offsetting measures. Additionally, Moody's believes that, given the broad-ranging scope of the Government's review, the risk that companies may have to face unexpected financial commitments, for example with regard to possible nuclear life extension, cannot be ruled out.

Moody's notes that the Minister of Industry has committed to proceed with the securitisation of the existing tariff deficits and those recognised up until 2013, as outlined in Royal Decree Law 6/2009. Whilst this affirmation is welcome, Moody's is concerned that difficult market conditions means that this securitisation could be delayed and in the meantime these deficits will continue to weigh on the companies' balance sheets.

Moody's will continue to monitor the Minister's plans for the sector, the impact on the electricity companies and their response to any such measures. Whilst we expect Iberdrola to be proactive in minimising the impact on its financial profile, the current uncertainty is a key driver of the current negative outlook.

The outlook would likely be returned to stable if the Government's actions prove to have a minimal impact on Iberdrola, or if Iberdrola responds with appropriate measures to redress any negative impact of such actions so as to secure its positioning within the current A3 rating category.

The A3/P-2 ratings of the following entities are impacted:

Iberdrola S.A.

Iberdrola International B.V.

Iberdrola Finanzas, S.A.U.

IBERDROLA RENEWABLES Holdings, Inc.

Iberdrola Finance Ireland Limited

Scottish Power Limited

Scottish Power UK Holdings Ltd.

ScottishPower Finance (US), Inc.

Scottish Power UK plc

ScottishPower Energy Management Limited

SP Manweb plc

SP Distribution Ltd

SP Transmission Ltd

ScottishPower Investments ltd

ScottishPower Generation Ltd

ScottishPower Energy Retail Ltd

The last rating action on Iberdrola SA was on 17 September 2008 when the A3/P-2 ratings and stable outlooks of Iberdrola SA and its guaranteed subsidiaries were affirmed following the completion of the acquisition of Energy East Corporation (since renamed Iberdrola USA).

The principal methodology used in rating Iberdrola was the "Rating Methodology for Unregulated Utilities and Power Companies", published in August 2009, and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Iberdrola SA, based in Madrid Spain, is one of Europe's largest utility companies, with extensive operations in Spain, the UK, via its Glasgow-based subsidiary Scottish Power and the US via Iberdrola USA. It also has significant renewable businesses through Iberdrola Renovables. As of FYE 2009, its consolidated revenues were EUR24.5 billion.

London
Monica Merli
Managing Director
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Helen Francis
VP - Senior Credit Officer
Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook to negative on A3 of Iberdrola and Scottish Power subsidiaries
No Related Data.
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