European Infrastructure Finance Yearbook - Investing In Bonds ...

Publication Date:
Aug. 28, 2007
Issuer Credit Rating:
A/Stable/A-1
Primary Credit Analyst:
Peter Kernan,
London,
(44) 20-7176-3618
Secondary Credit Analysts:
Ralf Etzelmueller,
Frankfurt,
(49) 69-33-999-123
Amrit Gescher,
London,
(44) 20-7176-3733
E.ON AG
Rationale
The ratings on Germany-based utility E.ON AG
factor in that the company will releverage its
balance sheet through increased organic
investment, a share buyback, and acquisition
expenditure. Specifically, the ratings incorporate
the assumption that the company’s funds from
operations (FFO) to net adjusted debt will remain
above 20% and at levels commensurate with an
‘A’ rating (absent any greater-than-expected
increase in business risk that could necessitate a
higher level of credit protection).
E.ON’s revised medium-term strategy includes
significant organic growth investments (a €60
billion investment program has been budgeted
through 2010), increased returns to shareholders
(a €7 billion share buyback by the end of 2008),
and more active management of the balance sheet.
Further to E.ON’s decision to withdraw its €70
billion bid for Endesa S.A. (A/Watch Neg/A-1) of
Spain, E.ON has an agreement with Enel SpA
(A/Watch Neg/A-1) and Acciona to acquire
generation assets from Enel and Endesa mainly in
Italy, Spain, and France for an estimated
enterprise value of €10 billion, if Enel and
Acciona gain control of Endesa. Large
acquisitions also remain possible but are expected
to be funded in line with the company’s minimum
rating target of ‘A’ and its 3x economic net debtto-EBITDA
target ratio (barring any material
change in its business risk). As at Dec. 31, 2006,
E.ON calculated that its ratio of economic net
debt to EBITDA was 1.5x.
Standard & Poor’s Ratings Services regards the
company’s business risk profile, pro forma for the
new higher investment program, as slightly
increased compared with the Endesa acquisition
bid, owing to the lack of acquired vertical
integration (including distribution assets) and
focus on riskier growth markets.
E.ON expects its European generation capacity
to increase by 50% to 69 gigawatts (GW) from
46 GW by 2010, of which about 12 GW will
come from generation assets and projects
acquired under the agreement with Enel and
Acciona. A materially increased earnings
contribution from undiversified generation or
from riskier growth markets could ultimately
weaken E.ON’s business risk profile. That said,
the company still clearly recognizes the benefit of
integrated generation and supply operations and
fairly matched position, especially in highly
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
UTILITIES
competitive markets, as well as a proactive
generation margin hedging policy (for 2007 and
2008, 90% and more than 60%, respectively, of
E.ON’s economic generation has been hedged).
Short-term credit factors
The short-term rating on E.ON is ‘A-1’, reflecting
the company’s significant cash flows, a securities
portfolio totaling about €11 billion at Dec. 31,
2006 (notionally available to meet future pension
and nuclear liabilities), and significant unused
facilities--specifically, an undrawn €10 billion
syndicated multicurrency loan.
E.ON’s liquidity also benefits from the group’s
significant operating cash flow. In 2006, under
U.S. GAAP, cash provided by operating activities
was almost €7.2 billion, which comfortably
financed E.ON’s 2006 capital expenditure of
€4.1 billion, and made a significant contribution
to the group’s €4.6 billion dividend paid in 2006.
Although capital and investment expenditure will
increase significantly and free cash flows before
dividends might be negative and reach a low
point in 2008, a significant portion of firmly
planned capital expenditures and increased
dividends should remain internally funded over
2007-2009. Ongoing financial flexibility is
supported by the largely discretionary nature of
the planned investments as well as E.ON’s wide
and discrete asset base, which could be reduced
without affecting crucial core operations.
Outlook
The ratings factor in E.ON’s plans to significantly
releverage its balance sheet. The stable outlook
reflects the company’s continued strong financial
flexibility. The ratings could conceivably improve
in the case of a better-than-expected business
profile, for example due to riskier investments not
materializing (and barring other material changes
in the company’s business environment).
A significantly better-than-expected financial
profile could also have a positive effect on the
ratings. The ratings could deteriorate, for
example, due to greater-than-expected business
risk from German or EU-wide regulatory
initiatives or significantly increased exposure to
the Russian Federation or Eastern Europe.
Neither scenario is expected to have an impact on
the ratings in the near term, owing to E.ON’s
clearly articulated strategy and its strong financial
profile for the ratings. ■
NOVEMBER 2007 ■ 43