European Infrastructure Finance Yearbook - Investing In Bonds ...

UTILITIES
16 ■ NOVEMBER 2007
transmission grids in England and Wales (as well
as some U.S. network assets). While Centrica has
a higher level of business risk than National Grid
because its earnings are competitively exposed
and are more volatile, this is compensated by
Centrica’s significantly lower leverage. Following
National Grid’s recent acquisition of U.S.-based
KeySpan Corp. (A-/Stable/A-2), unadjusted net
debt will increase to approximately £19.5 billion
by 2009, from £11.8 billion in 2007, with
consolidated funds from operations (FFO) interest
coverage of about 3.5x and FFO to total debt of
about 15%. By comparison, in the 12 months to
June 2007, Centrica’s FFO coverage of adjusted
net debt was very strong at about 97%.
Why would an ISO model have less of an impact
on credit quality than unbundling?
An ISO model in which the operational
management and investment plans of transmission
networks would be controlled and determined by
parties independent of the owners has been
presented as an alternative--and potentially less
politically divisive--option than ownership
unbundling. The impact of such a move on the
ratings in the sector would in principle be
significantly less than that of unbundling, because
the network owners would not be forced to divest
and would retain access to the relatively solid,
stable, and predictable network earnings
(compared with, for example, volatile power
generation earnings).
An ISO model would mean that the vertically
integrated utilities--such as E.ON, RWE, EDF,
EnBW, and Vattenfall--that own transmission
networks and whose credit quality benefits from
such ownership, would continue to own the
network and consolidate their earnings. Rating
risk under an ISO model would, therefore, be
limited compared with the significant rating risk
presented by ownership unbundling.
The ultimate effect of such a move would
depend, however, on factors such as whether the
networks would continue to be fully consolidated.
In addition, current transmission network owners
could decide to unilaterally sell networks if an
ISO system were introduced, thereby redeploying
capital from what would be a passive low-risk
investment into a fully controlled and managed
investment such as high-risk power generation.
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
What was the impact on Scottish Power and
Scottish and Southern Energy when the operation
of their transmission networks moved to an
ISO model?
None. National Grid has operated the
transmission networks of Scottish Power and
Scottish and Southern Energy since 2005.
Both companies continue to consolidate their
transmission networks, and their consolidated
credit quality continues to benefit from the
relatively stable earnings of the
transmission networks. ■