TEXT-S&P affirms ESB 'BBB+/A-2' ratings; off watch; otlk neg

Jan 18 -

-- On Jan. 13, 2012, we affirmed our 'BBB+/A-2' long- and short-term sovereign credit ratings on the Republic of Ireland and removed them from CreditWatch negative. The ratings now carry a negative outlook.

-- Consequently, in our view, the risk of a sovereign rating action triggering a downgrade of Irish utility Electricity Supply Board (ESB) has reduced.

-- We are therefore affirming our 'BBB+/A-2' long- and short-term corporate credit ratings on ESB and removing them from CreditWatch negative.

-- The negative outlook reflects that on the sovereign and our opinion that a downgrade of the sovereign is likely to result in a downgrade of ESB.

As previously announced, on Jan. 17, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term corporate credit and 'BBB+' senior unsecured debt ratings on Irish utility Electricity Supply Board (ESB). At the same time, we removed the ratings from CreditWatch, where they were placed with negative implications on Dec. 8, 2011. The outlook is negative.

The rating actions follow those on the Republic of Ireland (BBB+/Negative/A-2) on Jan. 13, 2012. For further details, see "Ireland's 'BBB+/A-2' Ratings Affirmed; Off Watch Neg; Outlook Negative," published on RatingsDirect on the Global Credit Portal.

The ratings on ESB reflect our assessment of the company's business risk profile as "strong" and its financial risk profile as "significant."

The 'BBB+' long-term corporate credit rating on ESB is based on the company's stand-alone credit profile (SACP), which we assess at 'bbb+', as well as on our opinion that there is a "moderate" likelihood that the Republic of Ireland would provide timely and sufficient extraordinary support to ESB in the event of financial distress.

In accordance with our criteria for government-related entities (GREs), our view of a "moderate" likelihood of extraordinary government support is based on our assessment of ESB's:

-- "Important" role as the monopoly owner of the national electricity transmission grid and the owner and operator of the electricity distribution network. The company has a leading market position in the Irish energy market. ESB also has an important role in implementing the Irish government's policy of enhancing competition and expanding the use of renewable energy sources in Ireland.

-- "Limited" link with the Irish government, given our view that economic pressure may cause the sovereign to assign a lower priority to providing any sort of extraordinary support to ESB, and our understanding that the Irish state is contemplating divesting a minority stake in the company. ESB is 95% state-owned, with the remainder held by an employee share ownership trust.

The negative outlook on ESB reflects that on the sovereign and our opinion that a rating action on the sovereign is likely to result in a similar rating action on ESB. We generally cap our ratings on GREs at the level of the sovereign rating given the GREs' direct exposure to the sovereign government. The Irish government owns ESB and a significant proportion of its earnings is regulated and originates from Ireland. We would likely revise the outlook to stable if we revised the outlook on the sovereign to stable.

The stability of the SACP depends on ESB maintaining a Standard & Poor's-adjusted ratio of funds from operations to debt of 15%-20%. We could revise ESB's SACP downward if the business environment in Ireland worsens, with negative consequences for ESB's earnings, or if ESB's financial risk profile weakens such that the FFO-to-debt ratio is lower than we assume in our base case.

RELATED CRITERIA AND RESEARCH

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Corporate And Government Ratings That Exceed The Sovereign Rating, Jan. 10, 2012

-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

-- Use Of CreditWatch And Outlooks, Sept. 14, 2009

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Ireland's 'BBB+/A-2' Ratings Affirmed; Off Watch Neg; Outlook Negative, Jan. 13, 2012

-- Credit FAQ: How Sovereign Credit Quality Impacts The Ratings On Utilities In Greece, Ireland, Italy, Portugal, And Spain, Aug. 3, 2011

-- Credit FAQ: How S&P Derives Its Ratings On Government-Related Entities, April 4, 2011