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28 Jun 2007
Moody's continues Iberdrola's A2/P-1 review for downgrade
London, 28 June 2007 -- Moody's maintains the A2/P-1 senior unsecured debt ratings
of Iberdrola SA and its guaranteed subsidiaries under review for possible
downgrade following the announcement of the acquisition of the US entity,
Energy East Corporation("EEC"). Moody's also maintains
the review of the long-term ratings of the Scottish Power group
entities including Scottish Power plc (rated Baa1). Moody's
expects to conclude the review of the ratings once Iberdrola's revised
strategic plan is available in Autumn 2007.
Moody's notes that Iberdrola will acquire Energy East Corporation
(rated Baa2 senior unsecured, negative outlook) for Eur3.4billion
plus assumed debt of Eur3billion. Iberdrola has also just closed
a capital raising exercise of Eur3.4billion which is designed to
fund the cash component of this acquisition. The EEC transaction
is subject to shareholder and regulatory approvals and is expected to
close during the latter half of 2008.
The EEC acquisition should not materially impact the financial profile
of the group given the equity component to the transaction. The
recent capital raising exercise will improve the group net debt position
in the short term, although the cash will be utilised to complete
the EEC transaction, assuming all the appropriate approvals are
received. Nonetheless on a gross basis, Iberdrola's
debt position has risen from around Eur13billion to around Eur26billion
following the partially debt-funded acquisition of Scottish Power.
Moody's believes that the most likely outcome of the current rating
review will be a downgrade to A3/P-2 for Iberdrola's ratings
given the expectation that financial metrics following the Scottish Power
acquisition and a likely heavy future investment programme are likely
to be inconsistent with the current A2/P-1 ratings. The
rating agency would also factor Iberdrola's target of a rating in
the A category, as evidenced by its willingness to raise additional
equity to partially fund new investments and take into account the increased
scale and diversification of business risk of the enlarged group.
Nonetheless, given the recent announcements by the company regarding
a number strategic moves in the US and in renewables, Moody's
will wait until the revised strategic plan is available and there is greater
clarity on a number of important points to conclude the review of the
ratings. These include:
(i)The pace and scale of the revised strategic plan and the impact that
this will have on the financial and business profile of the enlarged Iberdrola
group. This is of interest ,in particular, in the renewables
sector where Iberdrola has signalled that all such businesses of Iberdrola
and Scottish Power will be moved under the aegis of Iberdrola SA's
subsidiary, Iberenova. Iberdrola have also announced a public
listing of 20% of this company. The cash proceeds of the
IPO will be beneficial to the financial strength of Iberenova but will
need to be weighed against the scale of renewables investments in the
group's revised plan.
(ii) The size and structure of debt within the enlarged group and how
cash will flow throughout the group. Moody's expects that acquisition
debt will be funded at the Iberdrola holding company level and that Iberdrola
will work to reduce any resulting structural subordination issues,
however the details remain to be clarified. Moody's will
assess how the operating activities and debt of the enlarged group will
be organised among the individual rated entities.
On an operational basis, key drivers of the enlarged group's ratings
i) the evolution of power prices and the competitive environment,
in particular, in the UK and Spain.
ii) maintenance of a reasonably favourable regulatory environment in Spain,
US and the UK.
iii) successful integration of the new acquisitions and execution of its
Our current guidance for an A3 rating for Iberdrola SA is RCF/debt of
12-16% and FFO/interest of more than 4x. However
these parameters may change if Moody's believes that the business
risk profile has shifted from the current low/medium assessment of the
Iberdrola SA based in Madrid, is Spain's second largest vertically
integrated utility. In April 2007 it acquired 100% of Scottish
Power Plc, the holding company of a vertically integrated UK utility
group. The combined group has revenues of around Eur22billion.
Energy East Corporation (EEC) is a holding company and serves as parent
for six regulated utility energy distribution subsidiaries in the New
York/New England region. It also has modest investments in energy-related,
non-regulated businesses. Its headquarters are in Portland,
Moody's Investors Service Ltd.
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Vice President - Senior Analyst
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