ScottishPower seeks £1.9bn of debt funding to shore up American arm

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Scottishpower abandoned attempts to sell its Southern Water division yesterday and instead unveiled plans to raise £1.9bn by refinancing the business with debt.

The money will be used to shore up its ailing US operation PacifiCorp, which has been hit by a $520m (£356m) charge because of the turmoil in the American energy market.

News of the restructuring at Southern Water came as ScottishPower reported an £83m loss for the first half of the year after taking hefty charges to cover its withdrawal from retailing in the UK and the difficulties at PacifiCorp.

ScottishPower had been in negotiations to sell Southern Water to Centrica, the owner of British Gas, and the French group Vivendi Environmental but pulled out on Tuesday evening after failing to agree a price. Ian Russell, ScottishPower's chief executive, said the decision to refinance the business "delivers more cash and greater certainty for our shareholders".

The group will raise a total of £1.7bn in bonds to refinance Southern Water and leave about £150m to £200m of existing funding in the business. Revenues from water bills will be enough to pay the interest on the bonds and finance all Southern Water's operating costs and capital spending, currently running at £300m to £350m a year.

The £1.7bn of cash will be used partly to build additional power station capacity in the US in an attempt to make PacifiCorp self-sufficient and partly to expand ScottishPower's UK energy business. ScottishPower bought the West Coast electricity company for £7bn two years ago but has since been plagued with difficulties because of the volatility in the US energy market.

Mr Russell admitted that ScottishPower had made "no progress at all" in raising the returns it is permitted to make from PacifiCorp under the existing regulatory regime because of the chaos in the US power market in the past two years. But he denied that he had ever regretted buying the business, insisting it remained a "terrific deal".

The refinancing of Southern Water will lower its cost of capital, enabling it to fund its day-to-day operations and its capital investment programme more cheaply and is certain to put pressure on other water companies to follow suit.

Ian Russell, chief executive of ScottishPower, said: "A lot of other companies are looking at similar plans. We are setting a frontier which the water regulator will take into account at the next price review."

Glas Cymru, the owner of Welsh Water, has also turned the business into a debt-funded operation and AWG, the owner of Anglian Water is looking at similar plans. But other companies, such as Kelda, the owner of Yorkshire Water, and Pennon, which owns South West Water, have abandoned attempts at refinancing.

Mr Russell said it had only decided to press ahead with the refinancing of Southern Water after lengthy discussions with the water regulator, Philip Fletcher. He is likely to insist that the reduced cost of financing Southern Water is reflected in lower customer bills but not until the next price review in 2005.

Group operating profit fell by £198m to £247m due to lower UK electricity prices and a £185m reduction in ScottishPower's US profits after PacifiCorp bought power at high prices and was then forced to sell it cheaply when demand slowed.