* To sell more assets if govt fails to cover tariff deficit
* Big part of debt target depends on recovering deficit
* Failure to recover deficit, sell assets could hit dividend
By Andrés González and Tracy Rucinski
MADRID, Dec 19 Spanish utility Iberdrola
may have to step up asset sales and cut its dividend if
the country's cash-strapped government fails to pay it back in
full for years of selling power at regulated prices that do not
Spain's power companies have racked up a deficit of some 24
billion euros ($32 billion) from selling electricity at a loss.
The government is obliged by law to repay utilities and has been
issuing bonds which are designed to transfer the debt onto the
state-backed Electricity Deficit Amortisation Fund (FADE).
But the FADE bonds are competing with the state's other,
already strained fundraising plans. About 2.5 billion euros is
still owed to Iberdrola and a long halt in FADE bond issues in
2012 has raised concerns how much it will get back, and when.
"Given our view that there could be obstacles to further
issuance of accumulated tariff deficit (bonds), we feel that a
dividend cut looks perfectly feasible in the short term,"
Mirabaud analyst Jose Martin-Vivas said.
Iberdrola, the world's largest operator of wind farms, has
said it will cut its debt to 26 billion euros from 32 billion by
2014 to maintain its coveted investment grade rating, which S&P
left at one notch above junk last month.
However, a good chunk of its debt-cutting target depends on
collecting money from the state to cover the cost of selling
power at a loss - the so-called tariff deficit.
The group has ordered the sale of wind farms and other
assets in Europe and the United States worth close to 1.5
billion euros, two sources with knowledge of the matter said.
It has also identified a further 3 billion euros of
potential sales if needed, which Deutsche Bank analysts say
could include minority stakes in infrastructure assets.
A partial listing of British unit Scottish Power would be a
"Plan C" alternative, Deutsche added in research note after a
roadshow with management.
This would only be considered under a highly stressed
macro-economic scenario including renewed pressure on the
Spanish sovereign and a shutdown of capital markets, the bank
Iberdrola has declined to comment on its various options.
The government has repeatedly said it is committed to
clearing the tariff deficit and is looking at other options due
to tough bond market conditions. They could include higher
prices for consumers, though that would be politically hard.
KEEPING THE CREDIT RATING
Iberdrola's efforts mirror those of other Spanish firms like
Telefonica and Repsol, intent on avoiding the
big credit downgrades that have hit the Spanish government and
which make borrowing harder as well as more costly.
"The rating is Iberdrola's number one priority. A downgrade
to junk would be fatal, and if it feels more pressure from the
agencies it will get even more aggressive with asset sales," one
source with direct knowledge of the matter said on condition of
anonymity, given the confidential nature of the sales process.
Iberdrola's leverage - its debt as a percentage of total
debt and shareholders' equity - stood at 48.4 percent at Sept.
30 including the tariff deficit, on its balance sheet as a
receivable. Without the deficit, leverage was 45.9 percent.
When S&P downgraded Iberdrola's rating to BBB from BBB+, in
line with Fitch, just 24 hours before a 1.75-billion-euro FADE
bond issue for the sector, it cited concerns about possible
delays in the electricity tariff deficit securitisation.
Moody's rates Iberdrola Baa1, two notches above junk, with a
Endesa - which has the highest deficit pending
compensation - and Gas Natural are also awaiting more
payments. Gas Natural recently warned it could miss 2014
earnings targets because of financing hurdles, but has yet to
announce a new strategic plan.
Delays to recovering the deficit could put pressure on
Iberdrola's commitment to pay 60 percent of its earnings, or
about 3.1 billion euros, to shareholders in the next two years
with a 0.30 euro dividend.
The firm, whose shares have fallen 12 percent so far this
year, currently offers a 7.9 percent dividend yield, compared
with 6.9 percent for peers, according to Thomson Reuters data.
For now, Iberdrola has said its financing needs are covered
for the next two years even in a stressed scenario, meaning that
the dividend looks protected, a priority Chairman Ignacio Galan
reiterated in a Dec. 2 interview with Reuters.
Last week it sold seven onshore wind farms in Germany for
52.7 million euros. Other assets up for sale are concentrated in
Poland, France and Mexico.
The company is also in the process of selling some of its 10
wind farms in the United States and has received offers from
multiple bidders, said a source with direct knowledge of the
matter, and who is separate from the two sources cited above.
The source, who declined to be identified because of
confidentiality reasons, said there is no set schedule for the
disposals but that at least one of the bids fell far below the
price Iberdrola was seeking.
($1 = 0.7568 euro)
(Additional reporting by Joyce Lee in Seoul; Editing by Fiona
Ortiz and Mark Potter)