December 19, 2012 / 1:05 PM / in 5 years

Iberdrola asset sales, dividend hang on Spanish energy bonds

* 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 (Reuters) - 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 cover costs.

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 said.

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.


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 negative outlook.

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

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