European Infrastructure Finance Yearbook - Investing In Bonds ...

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UTILITIES 28 ■ NOVEMBER 2007 pressure on market prices. However, new plants can’t be built quickly, so it will take some time to ease this capacity constraint. Higher profitability from increased power prices will underpin generators’ business profile As seen in Western Europe, moving from regulated cost-plus regimes to a deregulated spot electricity market typically increases generators’ business risk and can often dilute credit quality. Standard & Poor’s believes that the new path to deregulation might support improved credit quality in the sector through higher transparency and price growth, while capacity payments and hedging will smooth the impact of volatile spot prices. The deregulated market will translate rising gas prices into higher electricity prices, reflecting the costs of the least efficient (marginal) gas-fired generators for all market players. Generators using other fuels such as coal, nuclear, hydropower would consequently reap higher margins, as would more efficient gas-fired producers. We expect the higher profitability to mitigate increased price volatility because stronger margins will cushion the impact on cash flow. This will somewhat offset price deregulation’s negative impact on cash flow stability. Generation companies’ profitability is currently low, with an average 10% EBITDA margin for UES and a tiny 1%-2% for some thermal generators. Despite most electricity being sold at regulated tariffs, relatively small changes in price or fuel costs-together with weak margins--result in substantial cash flow fluctuation. That implies high business risk. Political risk remains key to power price deregulation and growth Political risk, however, overshadows the rosy prospects for power generators in the new market deregulation plan. Customers will bear substantial price increases and could face soaring electricity bills in the next three to four years, potentially leading to a political backlash. In addition, most of the market deregulation and corresponding price increases are scheduled for 2009-2010. But this comes after the 2008 presidential elections, when Russia will have a new president who may have different views on electricity price policy and perhaps even on the sector’s overall strategy. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK Generators’ active hedging strategies could provide further cash flow stability After the wholesale market is fully deregulated, each generator’s decision on how to balance potentially profitable but volatile opportunities from spot sales in order to lock in a more certain level of profits will determine its spot-market exposure. More forward electricity sales at a fixed price that allows the generator to earn sufficient profits to support its credit quality (assuming that generation costs are also fixed) would imply a lower business risk. Generators currently can hedge price volatility through nonregulated forward contracts at a fixed price. Power exchanges plan to introduce other instruments, such as power futures, to expand hedging opportunities. Thus, a conservative hedging strategy would limit the impact of changes in spot prices on cash flow volatility in the coming one to two years. How capacity market contracts could help The proposed capacity market, a system of payments to generators that cover fixed costs, will also mitigate the impact of spot price volatility on cash flow stability. Standard & Poor’s believes that recovering fixed costs through the capacity market will underpin generation companies’ credit quality. Capacity payments, now accounting for about one-half of wholesale generation revenues, substantially reduce the operational ‘gearing’ (the level of fixed operating costs that determines the dependence of operating income variability on sales variability) of generators. These payments aren’t common in other European generation markets. The still-to-be-determined capacity pricing mechanism will heavily influence the level of market-based capacity payments and generators’ profitability and cash flow. The final mechanism expected in 2007-2008 will reduce this uncertainty. Who will benefit from market deregulation? The competitiveness and profitability of gencos in the deregulated market depend heavily on their marginal cost position. The main factor for gencos is fuel costs and for hydro generators, water tax charges. Deregulation of the electricity market will result in a gradual transition of the average electricity price from regulated tariffs that reflect costs to a
era e e ulated Electr c ty ar ff And Spot r ce n European u Sept verage regulated electricity tariff for 2007 verage spot electricity price an.-Sept. 2007 a a ( per 900 h) 800 700 600 500 400 300 200 100 0 -- u le. h-- egawatt-hour. © Standard & Poor's 2007. osenergoatom idro ( urope) T -1 T -10 -4 ( urope) nter S T -3 ( osenergo) -2 T -5 -5 -1 Tatenergo T -8 T -7 T -6 Bashkirenergo T -9 T -4 -3 ( urope) -6 ( urope) T -2 ra e e ulated Electr c ty ar ff And Spot r ce n S ber an u a an S ( per h) 450 400 350 300 250 200 150 100 50 0 -- u le. h-- egawatt-hour. © Standard & Poor's 2007. verage regulated electricity tariff for 2007 verage spot electricity price an.-Sept. 2007 rkutskenergo T -13 -4 (Si eria) -6 (Si eria) T -12 Novosi irskenergo thers (Si eria) -3 (Si eria) T -11 T -14
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 22 and 23: UTILITIES 20 ■ NOVEMBER 2007 •
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 32 and 33: UTILITIES 30 ■ NOVEMBER 2007 Tabl
Page 34 and 35: UTILITIES 32 ■ NOVEMBER 2007 The
Page 36 and 37: UTILITIES 34 ■ NOVEMBER 2007 thei
Page 40 and 41: UTILITIES 38 ■ NOVEMBER 2007 Evol
Page 42 and 43: UTILITIES Publication Date: Aug. 29
Page 44 and 45: UTILITIES Publication Date: Nov. 12
Page 46 and 47: UTILITIES Publication Date: Sept. 3
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Page 52 and 53: UTILITIES 50 ■ NOVEMBER 2007 stro
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Page 56 and 57: TRANSPORTATION INFRASTRUCTURE 54
Page 58 and 59: TRANSPORTATION INFRASTRUCTURE Publi
Page 64 and 65: TRANSPORTATION INFRASTRUCTURE BAA L
Page 75: Termination events under the swap a
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TRANSPORTATION INFRASTRUCTURE Publi
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TRANSPORTATION INFRASTRUCTURE Publi
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PROJECT FINANCE/PUBLIC-PRIVATE PART
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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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