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12 Dec 2007
Moody's downgrades Iberdrola to A3/P-2; Stable outlook
All ratings of Scottish Power and subsidiaries are A3; Stable Outlook
London, 12 December 2007 -- Moody's Investors Service has downgraded to A3/P-2 from A2/P-1
the senior unsecured ratings of Iberdrola and its guaranteed subsidiaries.
The rating downgrades incorporate the partly debt-funded acquisition
of Scottish Power in April 2007; the recently announced IPO of Iberdrola's
renewables subsidiary, Iberdrola Renovables SA, for around
EUR4.5billion; and an ambitious investment strategy for 2008-2010
amounting to EUR24.2 billion, of which EUR17.8 billion
will be focused on organic investments and EUR6.4 billion devoted
to the expected acquisition of Energy East Corporation (EEC) of the US,
subject to regulatory approvals.
Iberdrola's A3/P-2 ratings reflect Moody's overall
low/medium assessment of Iberdrola's business risk following the
recent corporate actions and take into account its revised strategic plan.
This risk assessment reflects the significantly increased scale of the
group with leading positions in Spain and the UK, and the benefits
of increased size, geographic spread and diversification of risks,
in particular those of regulation, pricing and fuel technology.
Nonetheless, Moody's assessment also factors a degree of execution
and integration risk as the company has expanded into new markets in which
it has had less prior experience, and in addition it has ambitious
growth targets which may be affected if the operating environment becomes
Moody's expects Iberdrola's ratios to be positioned at the
low end of the expected range for an A3 rating for a company with this
business risk profile: RCF/adjusted debt of 12-16 %,
FFO/debt of >17% and FFO/interest of >4x; these ratios
are anticipated to improve gradually. Around 75% of the
plan will be funded by the proceeds of the renewables IPO, cash
flow and divestments. Whilst debt has risen from around EUR13 billion
to EUR26 billion prior to IPO proceeds, leverage is expected to
stay within 50% aided by the recent capital-raising exercises.
The rating outlook is stable; however, failure to maintain
this financial profile could exert negative pressure on the rating.
Moody's will not notch the rating at this point to reflect structural
subordination at Iberdrola SA; nonetheless Moody's notes that
debt at operating companies is expected to be initially rather high (slightly
above 25% of overall debt by end 2008 assuming the EEC transaction
goes ahead) and the rating does assume that the company will gradually
reduce the degree of debt at the operating companies towards 20%
In Moody's view the business and financial profile of Scottish Power
on a "stand-alone" has improved over time, reflecting
strong business operations and lower debt within the group -- partially
as a result of the transfer of some debt and businesses (renewables) to
Iberdrola. Moody's therefore believes that the combined profile
of Scottish Power Ltd (SP Ltd) and the UK group companies -- where
all major operating subsidiaries are concentrated -- today has a
credit profile of a "mid A" company, an improvement
over the previous "low A" evaluation. As a result,
the intermediate and ultimate holding companies within the group,
and their guaranteed entities, that were previously rated one notch
lower to reflect structural subordination have been raised to A3.
Given the lack of external debt above Scottish Power UK plc (SPUK),
notching is compressed at one notch. However, all ratings
are capped at A3 by the rating of Iberdrola, reflecting the reality
of Iberdrola's ability to move cash flows around the group to service
debt. Moody's has hence confirmed the A3/P-2 senior
unsecured ratings of SPUK and the A3 ratings of SP Manweb plc, Scottish
Power Distribution Ltd, Scottish Power Transmission Ltd and ScottishPower
Investments Ltd. Ratings upgraded to A3 from Baa1 are the long
term ratings of Scottish Power UK Holdings Ltd (SPUKH) and its guaranteed
entities: ScottishPower Generation Ltd, ScottishPower Energy
Retail Ltd and ScottishPower Energy Management Ltd; SP Ltd and its
guaranteed entity Scottish Power (Finance) US.
Scottish Power ratings were formerly under review for possible downgrade
as a result of the lack of clarity, and hence possible negative
implications for, the group's future business and financial
structure following its takeover by Iberdrola. Clarification of
these issues, including the transfer of some debt and assets to
Iberdrola, and the continuing strong performance of Scottish Power
has led to an upwards evaluation of the credit strength of the group on
a "stand-alone" basis and Moody's has hence been
in a position to take the actions indicated.
These actions conclude the reviews of the Iberdrola and Scottish Power
group ratings, initiated in September 2005 and November 2006,
Iberdrola SA is a leading vertically integrated utility in Spain.
Scottish Power Ltd is a vertically integrated energy group based in the
UK, owned by Iberdrola. As of end-Q3 2007 the combined
group had total revenues of EUR11.4billion.
Moody's Investors Service Ltd.
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Vice President - Senior Analyst
Moody's Investors Service Ltd.
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