European Infrastructure Finance Yearbook - Investing In Bonds ...

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UTILITIES Publication Date: Aug. 17, 2007 Issuer Credit Rating: A+/Negative/A-1 Primary Credit Analyst: Peter Kernan, London, (44) 20-7176-3618 Secondary Credit Analysts: Amrit Gescher, London, (44) 20-7176-3733 Ralf Etzelmueller, Frankfurt, (49) 69-33-999-123 46 ■ NOVEMBER 2007 RWE AG Rationale The ratings on Germany-based utility RWE AG reflect the group’s strong competitive position in the German electricity market, which provides the majority of group earnings and has delivered sustained strong operating performance. The ratings also reflect the group’s strong financial profile. These strengths are partially offset by the weakening of RWE’s business profile following the sale of its regulated water operations and its reliance on competitively exposed generation for future growth. Competition in the German retail market remains moderate. Nevertheless, the introduction of a network regulator and tariff cuts will likely increase competitive pressures. Meanwhile, RWE’s substantially lower level of freely granted carbon dioxide (CO2) allowances for phase 2 of the EU Emissions Trading Scheme (2008-2012) will likely reduce generation margins. (RWE estimates that slightly more than 50% of its German CO2 emissions will be covered by free allowances.) RWE will, however, benefit from changes in the German tax regime, which will result in the average tax rate on German profits dropping to 31% from about 39%, from 2008. RWE’s balance sheet has further strengthened following the sale of RWE Thames Water for an enterprise value of £8.0 billion (sale price of £4.8 billion plus pro forma net debt of £3.2 billion) in December 2006. At June 30, 2007, net debt (including pension provisions, and under RWE’s definition) was €6.8 billion. RWE plans to complete the sale of its U.S. water business through an IPO by the end of 2007, subject to market conditions, which will further deleverage the group. RWE has a general net debt cap of between €22 billion and €24 billion and has substantial headroom relative to this cap to increase leverage. RWE has material nuclear asset retirement obligations, of which Standard & Poor’s Ratings Services treats about €7 billion as debt. The group’s financial performance has been strong over the past few years, with funds from operations (FFO) increasing to more than €7 billion for full-year 2006, on the back of strong power prices. The medium-term outlook for power prices continues to be favorable on the back of tight capacity margins and tightness in fuel markets--given strong global demand for commodities--as well as a tighter market for CO2. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK RWE’s target for 2007 is that revenue will rise slightly above the 2006 level of €44.2 billion and that EBITDA will rise by between 5% and 10% above the 2006 level of €7.17 billion. There is an ongoing debate within the EU about levels of competition in power markets, and a draft third liberalization directive is expected later in 2007. Among other areas, the debate has focused on ownership unbundling of transmission businesses to increase competition. Such a measure could adversely affect RWE’s German business, but Standard & Poor’s currently considers that it is unlikely that this change will be required. Short-term credit factors The ‘A-1’ short-term rating is underpinned by large and diversified cash flows (cash flows from operating activities were in excess of €2.5 billion for the six months to June 30, 2007), RWE’s current low level of net debt, and a benign maturity profile. The rating is also supported by substantial alternative sources of liquidity, including more than €12 billion of liquid securities held to offset on-balance-sheet nuclear liabilities. At Dec. 31, 2006, €5.5 billion of RWE’s €20.0 billion debt issuance program was available. RWE faces a moderate maturity peak of about €3.7 billion in 2007. In addition, the company had unused funds of €3.5 billion equivalent under its $5.0 billion CP program at Dec. 31, 2006. Outlook RWE’s financial profile is strong for the ratings. The negative outlook, however, reflects some near-term uncertainty about the direction of RWE’s strategy, financial and acquisitions policies--in part due to planned changes in senior management--and the manner in which RWE could releverage its balance sheet. The deterioration of RWE’s business profile as a result of the water disposals could negatively affect the ratings if the disposals are followed by rapid and substantial investments in riskier operations. To maintain the ratings, RWE needs to restrict itself to moderate-scale or low-risk acquisitions, and maintain conservative financial policies. The outlook could be revised to stable if RWE maintains its current strong financial profile. ■
Publication Date: Aug. 30, 2007 Issuer Credit Rating: A+/Stable/A-1 Primary Credit Analyst: Paul Lund, London, (44) 20-7176-3715 Secondary Credit Analyst: Mark J Davidson, London, (44) 20-7176-6306 SCOTTISH AND SOUTHERN ENERGY PLC Rationale The ratings on U.K.-based energy utility Scottish and Southern Energy PLC (SSE) and its subsidiaries are supported by strong, predictable cash flows from the group’s regulated monopoly electricity and gas network businesses, which will likely contribute 40%-45% of operating profits over the medium term. The group’s strong financial profile, low-cost generation portfolio, and strong cost-cutting record also support the ratings. These strengths are offset by the exposure of SSE’s operating profits to movements in wholesale-power, coal, and gas prices as well as the risk of customer losses in the highly competitive electricity and gas retail markets. An increase in the proportion of profits derived from the group’s unregulated businesses, which is likely, could increase business risk. SSE is the third-largest electricity and gas supplier in the U.K. in terms of customer numbers. In June 2007, its customer base had increased to about 5 million electricity and 2.9 million gas customers, despite a period of significant increases in electricity and gas supply prices. The company remains the cheapest supplier of energy and was the first to reduce prices on March 1, 2007, lowering average annual electricity and gas bills by 5% and 12%, respectively. The group has a relatively diverse fuel portfolio compared with other U.K. powerstation operators, which provides good operational flexibility and risk mitigation in volatile markets. SSE’s long generating and contractual position in relation to its residential supply volumes exposes its cash flows to greater long-term price risk than some of its peers (although this position is beneficial in a high wholesale-price environment). Accordingly, cash flows at SSE are vulnerable to a downward shift in long-term gas and power prices, although any such trend should largely be offset by higher supply margins. In addition, the company’s diverse fuel portfolio allows for optimization of fuel sources. Standard & Poor’s Ratings Services proportionally consolidates the accounts of gas distribution networks Southern Gas Networks PLC (BBB/Positive/--) and Scotland Gas Networks PLC (BBB/Positive/--)--including £1.1 billion of debt at March 31, 2007--into SSE’s financial statements. This reflects our view that the two entities (together known as Scotia) represent a STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK UTILITIES core investment for the group. Excluding Scotia, SSE’s financial profile remains solid. Adjusted EBITDA grew by more than 21% to £1.42 billion in the year ended March 31, 2007, from £839 million one year earlier. Standard & Poor’s adjusted gross consolidated debt figure for SSE, excluding Scotia, was £2.66 billion at March 31, 2007. This includes approximately £400 million in adjustments for operating leases, postretirement debt obligations, and power purchase agreements. Short-term credit factors The short-term rating is ‘A-1’. SSE has satisfactory liquidity, with a £650 million, fiveyear committed revolving credit facility due in 2009 to cover maturing obligations (principally CP). SSE’s debt is generally long term, with only £40 million due to mature before March 2008. The group has good access to CP markets under a €1.5 billion program, which it has used only lightly. SSE will likely be required to raise debt and refinance maturing bonds to fund capital expenditures in 2008. The group has good access to capital markets, although it is a relatively infrequent issuer. Some financial flexibility is available from its dividends. SSE’s financial flexibility has improved, as its additional debt requirement should be reduced in view of planning issues that are expected to delay the Beauly-Denny transmission line (which will have a knock-on effect on investment in major renewables projects in Scotland). Outlook The stable outlook reflects the likelihood that SSE will maintain cash flow protection measures in line with our expectations. Consolidated FFO to interest, excluding 50% contributions from Scotia that Standard & Poor’s rates on a consolidated basis, will likely remain close to current levels of about 9x, with FFO to debt at about 42%. Acquisition activity could, however, result in higher-than-expected debt levels, which could put pressure on the ratings. Furthermore, lower-thanexpected gas or electricity prices, or any largescale customer loss, could threaten cash flow ratios, which could also weigh on the ratings. Retaining customers and energy-supply margins will be challenging as wholesale prices fall back from the peaks of 2005 and 2006. Ratings upside potential is very limited over the short term. ■ NOVEMBER 2007 ■ 47
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
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Page 22 and 23: UTILITIES 20 ■ NOVEMBER 2007 •
Page 24 and 25: Publication Date: osenergoatom (sta
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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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