-- 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
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
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.
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.
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,
-- 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
Downgraded; CreditWatch/Outlook Action; Ratings Affirmed
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