European Infrastructure Finance Yearbook - Investing In Bonds ...

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UTILITIES 20 ■ NOVEMBER 2007 • For TVO, a strong turnkey, time-certain supply contract with ample guarantees, backed by strong suppliers and security bonds in the construction phase, as well as by offtake agreements with its main shareholders during the operation phase. • For EDF, during the construction phase by the group’s expertise in building nuclear plants, its last such plant in France having been commissioned in 2002, and by the group’s leading domestic position and the protective French regulatory environment in the operation phase. • For the Slovakian plants by the strong support of the government, which owns 34% of SE. From a financial perspective, both EDF and Enel have the financial flexibility to carry out the investments necessary for their new builds of, respectively, € 3.3 billion and $2.2 billion. TVO is much smaller, but the protective turnkey contract and the offtake arrangements with its major shareholders provide substantial comfort. That said, in August 2007 we revised to negative the outlooks on Estonia-based integrated electric utility Eesti Energia AS (A-/Negative/--) and Lithuania-based electricity transmission company Lietuvos Energija (A-/Negative/A-2) to reflect the risks stemming from their possible participation in a prospective new nuclear power plant at Ignalina, Lithuania. The Ignalina nuclear project is based on a 2006 agreement between the governments of Lithuania, Estonia, Latvia, and, at a later stage, Poland. However, realization of the project, including funding, will be the responsibility of the participating state-owned power companies. Eesti Energia could participate in the nuclear project with a 22% stake, while Lietuvos Energija would have a 34% stake and would be responsible for the plant’s operations. The nuclear power plant would have maximum installed capacity of 3,400 MW at a projected cost of up to €4 billion. Extension Of Existing Plants Would Be Credit Positive A number of EU nuclear operators are seeking to extend the operating life of their plants drawing on the U.S. example, where at the end of 2006, 47 licenses extending the operating life of nuclear plants to 60 years had been granted and an STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK additional eight were being reviewed. In the U.K., British Energy Group PLC (BE; BB+/Watch Neg/--) obtained approval in 2005 for a 10-year extension of its Dungeness plant. In 2008, BE may apply to extend the lives of its Hinkey Point and Hunterston plants, which are currently scheduled to close in 2011. Extending the operating life of its nuclear plant beyond the current 40 years is also a key pillar of EDF’s strategy. Czech operator CEZ a.s. (A-/Stable/--), has also launched an upgrade program at its Dukovany nuclear plant, with a view to increasing capacity by 160 MW and extending operating life by up to 20 years. Although Swedish utilities have not applied for life extensions they have obtained approval for uprates (capacity increases), which will significantly boost their nuclear capacity: Uprates underway and planned between 2006-2011 at the Ringhals plant, which is operated by Vattenfall AB (A-/Stable/A-2), will increase its capacity by close to 500 MW. The group will also boost capacity at its other nuclear plant, Forsmarks, by 410 MW between 2008-10. E.ON Sverige AB (A/Stable/A-1) is also planning a 250 MW uprate of its Oskarshamn-3 reactor, to increase its capacity to 1,450 MW. We view such extensions very positively as, while running, nuclear power plants are highly cash generative in light of their low variable costs and limited capital expenditures for maintenance. Such extensions also delay decommissioning liabilities and capital expenditures for capacity replacement. Conversely, New Nuclear Build Is Inherently Risky Building new nuclear plants is challenging given: • Long lead times with no offsetting revenue. EDF Energy PLC (A/Stable/A-1), which is interested in building four new nuclear plants in the U.K., believes that the earliest such a plant can be commissioned is 2017. •High upfront capital costs (about € 3 billion), with the risks of delays overruns, especially for “first of a kind” plants. The TVO plant in Finland is now about two years late and has experienced very substantial cost overruns. Such features are specific to nuclear power plants, conventional power plants having much shorter lead times and much lower capital costs.
Conversely, conventional power plants are much more exposed to the vagaries of fuel prices. New nuclear plants also represent large capacity increases in one step (the new French and Finnish plants both have 1,600 MW capacity), whereas incremental capacity additions are better suited to deregulated markets. Operational Inflexibility Is A Drawback In A Competitive Environment In operation, nuclear plants’ low operating costs and lack of carbon emissions are key competitive advantages. Yet operational inflexibility partially offsets these benefits, with nuclear plant operators limited in their ability to alter output in response to fluctuating energy demands, which weakens their market position. Nuclear plants provide base-load power and are, therefore, price takers rather than price setters. This is a significant drawback in today’s largely unregulated markets, which are characterized by volatile demand patterns. The risks of investing in new nuclear power stations are mitigated to a degree by the EU’s rapidly declining capacity margin and the resulting substantial investments in power generation required to meet the growth in demand and planned power plant decommissioning. Moreover, only the largest EU utilities will be able to invest significantly in new nuclear capacity. These groups all have large customer bases as well as a diversified generation mix-except EDF, which has a quasi-exclusive focus on nuclear power but benefits from the protective French environment--and extensive experience in running nuclear plants. What is more, to mitigate risks they may chose to expand, especially abroad, through partnerships, and/or to enter into offtake agreements. The large European utilities are likely to invest both in their own markets--if nuclear phase-out agreements are revised--but also abroad. EDF and the German utilities have highlighted their interest in new nuclear builds in the U.K., while five STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK UTILITIES groups--Electrabel, which is part of Suez S.A. (A-/Watch Pos/A-2), CEZ, E.ON AG (A/Stable/ A-1), Enel, and RWE AG (A+/Negative/A-1)--have placed indicative bids for an up to 49% stake in the Belene nuclear power plant project in Bulgaria. Likewise Enel, Electrabel, Iberdrola S.A. (A/Watch Neg/A-1), RWE, and CEZ have bid to participate in the construction of reactors 3 and 4 in Romania at Cernavoda. Only EDF appears interested in investing in nuclear projects outside of Europe. It is focusing on the U.S., China, and South Africa. EDF recently announced an agreement with U.S. utility Constellation Energy Group Inc. (BBB+/Negative/A-2) to set up a 50/50 joint venture to build, own, and operate European pressurized reactors (EPRs) in the U.S. In the short term, we expect investments in nuclear power by EU utilities to increase only gradually, reflecting the long lead time for new nuclear projects and the time needed to build up political and public support. Investments in nuclear power are therefore unlikely to significantly weigh on ratings. Risks may increase in the medium term as investments in nuclear power rise, though. The pace of such investments and the context--the degree of competitiveness of power markets, share of generation to be derived from nuclear power, life extensions of existing nuclear plants, level of expected wholesale and carbon prices, and political environment--in which they are carried out, will be key to our assessment of any rating impact. As a rule of thumb, we are likely to consider too strong an exposure to nuclear power in an open market as risky. We expect most investments in nuclear power to be on balance sheet, given the financial firepower of major European utilities, the difficulty of nonrecourse funding of such projects in light of the risks entailed, and the difficulty of replicating alternatives approaches such as TVO’s mixed-ownership structure, which encompasses both utilities and electro-intensive industrial groups. ■ NOVEMBER 2007 ■ 21
Page 1 and 2: November 2007 Infrastructure Financ
Page 3 and 4: CONTENTS Introduction STANDARD & PO
Page 5 and 6: INTRODUCTION 2007: New Challenges A
Page 8 and 9: ject Finance Rating Distribution: I
Page 10 and 11: COMMENTARY Publication Date: Sept.
Page 12 and 13: (Bil. ) 140 120 100 80 60 40 20 0 F
Page 14 and 15: UTILITIES EUROPEAN UTILITIES Once a
Page 16 and 17: UTILITIES approach to ownership unb
Page 18 and 19: UTILITIES 16 ■ NOVEMBER 2007 tran
Page 20 and 21: UTILITIES 18 ■ NOVEMBER 2007 Limi
Page 24 and 25: Publication Date: osenergoatom (sta
Page 26 and 27: UTILITIES 24 ■ NOVEMBER 2007 Tabl
Page 28 and 29: UTILITIES 26 ■ NOVEMBER 2007 supp
Page 30 and 31: UTILITIES 28 ■ NOVEMBER 2007 pres
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RATINGS LIST RATINGS LIST Utilities
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RATINGS LIST Transportation Infrast
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RATINGS LIST Project Finance Name I
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CONTACTS KEY ANALYTICAL CONTACTS Fr
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ARGENTINA AUSTRALIA BRAZIL CANADA C
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