TEXT-S&P cuts Scottish Power to 'BBB'

Wed Nov 28, 2012 12:24pm EST

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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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