TEXT-S&P cuts Scottish Power to 'BBB'
Overview -- We have downgraded Spain-based utility Iberdrola S.A. to 'BBB' because we believe that an improvement in its credit ratios is uncertain despite management's focus on deleveraging. The outlook on Iberdrola is stable. -- In line with our methodology on rating parents and their subsidiaries, we equalize the ratings and outlook on U.K.-based electricity and gas vertically integrated utility Scottish Power and its subsidiaries with the ratings and outlook on its ultimate parent, Iberdrola. -- We are therefore lowering our long-term corporate rating on Scottish Power and related entities to 'BBB' from 'BBB+' and affirming our short-term rating at 'A-2'. -- The stable outlook on Scottish Power reflects that on Iberdrola, and therefore our view that Iberdrola will maintain credit ratios in line with the rating. Rating Action On Nov. 28, 2012, Standard & Poor's Ratings Services lowered its rating on U.K.-based electricity and gas vertically integrated utility Scottish Power Ltd. and related entities to 'BBB' from 'BBB+'. At the same time, we affirmed our 'A-2' short-term corporate credit rating on Scottish Power. The outlook is stable. Rationale The rating actions on Scottish Power reflect similar actions on Scottish Power's parent, Spain-based utility Iberdrola S.A. (see "Spain-Based Iberdrola Downgraded To 'BBB' On Limited Improvement Of Credit Ratios; 'A-2' Rating Affirmed; Outlook Stable," published Nov. 28, 2012, on RatingsDirect on the Global Credit Portal). In line with our methodology on rating parents and their subsidiaries, we equalize the ratings and outlook on Scottish Power and its subsidiaries with the ratings and outlook on Iberdrola. The downgrade of Iberdrola reflects our view that, despite its strong emphasis on improving credit quality, Iberdrola's strategic plan for 2012-2014 could fail to improve credit ratios to levels commensurate with the 'BBB+' rating, including Standard & Poor's-adjusted funds from operations (FFO) to debt of more than 20%. We believe that management is committed to reducing debt by EUR6 billion by 2014 through a combination of lower capital investments, asset disposals, tariff deficit securitization repayments, and positive free cash flows in all businesses. Nevertheless, our projections of flat EBITDA over 2012-2014 due to the tough fiscal and economic environment in Spain, as well as potential delays in the receipt of EUR3 billion of past tariff deficit receivables, lead us to anticipate that Iberdrola will sustain adjusted FFO to debt of about 18%. Our rating approach of equalizing the ratings on Scottish Power with those on its ultimate parent reflects our view that Scottish Power is a core, integrated subsidiary of Iberdrola. Scottish Power contributed about 15% of Iberdrola's consolidated EBITDA and 28% of group revenues for the first nine months of 2012. Our view of Scottish Power's importance to Iberdrola is underpinned by Iberdrola's strategic plan, according to which about 42% of group's investments are earmarked for the U.K. We recognize that Scottish Power owns three regulated subsidiaries--SP Transmission, SP Distribution, and SP Manweb--which have certain regulatory ring-fence mechanisms currently in place. We do not believe that these mechanisms are sufficient in themselves to shield the ratings on the U.K. regulated utilities from the credit quality at their parent companies. Nevertheless, a core mechanism such as the cash lock-up could potentially offer rating protection if it is activated in a timely and effective manner as the regulated utilities' licenses specify, while the underlying credit quality of these utilities is still investment grade. According to the cash lock-up mechanism, the regulator has a duty to intervene once the rating on the licensees is 'BBB-', with either a negative outlook or a CreditWatch negative placement. For more information, see "How Regulatory Ring-Fencing Affects Our Ratings On U.K. Utilities," published Nov. 22, 2012. The ratings on Scottish Power remain underpinned by our view of the predictable cash flows from its monopoly regulated network business, well-balanced generation and retail portfolio, and diverse generation fleet. These strengths are partially offset by our view of Iberdrola's "significant" financial risk profile, because we understand that Iberdrola provides for its U.K. subsidiary's funding and liquidity requirements. Further weaknesses are regulatory reset risk applicable to the U.K. network business, and competition and price volatility in the U.K. power market. Liquidity The short-term corporate credit rating is 'A-2'. Scottish Power depends on Iberdrola for short-term and intraday funding because it has upstreamed predominantly all of its cash to its parent. On Sept. 30, 2012, Scottish Power had a GBP50 million unused credit facility, which expires in July 2013. We assess Iberdrola's liquidity as "strong" under our criteria, indicating our view that Iberdrola has sufficient capacity to support any funding shortfalls at Scottish Power. Our opinion is underpinned by the parent's available cash balances, undrawn committed bank lines, and operating cash flows, which cover by more than 1.5x our projection of its liquidity needs over the 12 months from Sept. 30, 2012. Additional comfort derives from Iberdrola's proactive approach to refinancing and prudent liability management. Outlook The stable outlook on Scottish Power reflects that on Iberdrola, and therefore our view that Iberdrola will maintain credit ratios in line with the rating. The outlook also reflects our opinion that Scottish Power will continue to represent an important core part of Iberdrola. Any rating action on Iberdrola will be followed by a similar rating action on Scottish Power. That said, any change in the parent's attitude toward its U.K. holdings--which is unlikely, in our view--could lead us to revise our rating approach. In case of further deterioration of Iberdrola's credit quality, we will assess the implications for Scottish Power's regulated subsidiaries separately. We could maintain the ratings on the regulated subsidiaries at the cash lock-up level of 'BBB-' if the cash lock-up is activated effectively and in a timely manner, while we assess the subsidiaries' underlying stand-alone credit quality as investment grade. Related Criteria And Research -- Spain-Based Iberdrola Downgraded To 'BBB' On Limited Improvement Of Credit Ratios; 'A-2' Rating Affirmed; Outlook Stable, Nov. 28, 2012 -- How Regulatory Ring-Fencing Affects Our Ratings On U.K. Utilities, Nov. 22, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept.18, 2012 -- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link to Parent, Oct. 28, 2004 Ratings List Downgraded; CreditWatch/Outlook Action; Ratings Affirmed To From Scottish Power Ltd. Scottish Power U.K. PLC Scottish Power U.K. Holdings Ltd. Scottish Power Investments Ltd. Scottish Power Generation Ltd. Scottish Power Energy Retail Ltd. Scottish Power Energy Networks Holdings Ltd. Scottish Power Energy Management Ltd. SP Transmission Ltd. SP Manweb PLC SP Distribution Ltd. Corporate Credit Rating BBB/Stable/A-2 BBB+/Watch Neg/A-2 Scottish Power Finance U.S. Corporate Credit Rating BBB/Stable/-- BBB+/Watch Neg/-- SP Manweb PLC Senior Unsecured Debt BBB BBB+/Watch Neg SPD Finance UK PLC Senior Unsecured Debt* BBB BBB+/Watch Neg Scottish Power U.K. PLC Senior Unsecured Debt BBB BBB+/Watch Neg *Guaranteed by SPD Distribution Ltd. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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