European Infrastructure Finance Yearbook - Investing In Bonds ...

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UTILITIES Publication Date: Sept. 3, 2007 Issuer Credit Rating: A-/Watch Pos/A-2 Primary Credit Analyst: Hugues De La Presle, Paris, (33) 1-4420-6666 Secondary Credit Analyst: Beatrice de Taisne, London, (44) 20-7176-3938 48 ■ NOVEMBER 2007 SUEZ S.A. Rationale On Sept. 3, 2007, Standard & Poor’s Ratings Services said that its ‘A-/A-2’ ratings on Franco- Belgian multi-utility Suez S.A. remain on CreditWatch with positive implications, following the announcement of the revised terms for the merger between Suez and French gas utility Gaz de France S.A. (GDF; AA-/Watch Neg/A-1+). The ratings were placed on CreditWatch on Feb. 27, 2006, following the initial merger announcement. The continued positive CreditWatch reflects that, notwithstanding changes in the terms of the merger, it should have a beneficial impact on Suez from a credit standpoint--in terms of both business and financial risk. From a business risk perspective this reflects that, although Suez is the larger and more diversified company, Standard & Poor’s views GDF’s business risk as lower, given the large share of earnings it derives from regulated French businesses. Likewise, from a financial risk perspective, although Suez’s financial profile has improved significantly, GDF still has much stronger credit ratios. Under the revised terms, 21 GDF shares will be exchanged for 22 Suez shares, with no special dividend being paid. Initially the terms of the merger were a one-for-one share exchange plus a €1 billion special dividend to be paid to Suez shareholders prior to completion. To mitigate the difference in the share prices of Suez and GDF, 65% of the share capital of Suez’s environment arm (20% of first-half 2007 Suez EBIT) will be spun off to Suez shareholders at the time of the merger, with the enlarged group retaining a 35% stake. The environment business had reported net debt of €5.4 billion at the end of June 2007, out STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK of Suez’s reported consolidated debt of €12.9 billion. Although the lack of a special dividend and the spin-off of Suez Environment--given its significant debt--are favorable from a financial standpoint compared with the initial terms, the enlarged group intends to offer substantial returns to its shareholders. From a business perspective, although the European water operations (39% of the EBIT of Suez Environment in first-half 2007) rank amongst Suez’s strongest businesses, they would have been small in the context of the enlarged group. These revised terms are a significant step forward but the merger still faces some hurdles, especially its approval by both groups’ shareholders; the signing of the decree allowing the privatization of GDF following the passing of the law in the French parliament; and the opposition of GDF’s unions. To resolve the CreditWatch placement, we will focus on the enlarged group’s strategy and financial policy. Short-term credit factors Suez’s European utility activities’ recurring cash flow generation and strong liquidity underpin the ‘A-2’ short-term rating. Debt maturities in the second half of 2007 amount to €5.1 billion (including €2.3 billion of CP) and represent €3.3 billion and €3.5 billion, respectively, in 2008 and 2009. These are covered by about €8 billion of available cash, excluding €1 billion of overdrafts in the next 12 months, while the group has €6.7 billion of undrawn bank lines, excluding the €2.3 billion of CP drawings. ■
Publication Date: June 11, 2007 Issuer Credit Rating: A-/Stable/A-2 Primary Credit Analyst: Mark Schindele, Stockholm, (46) 8-440-5918 VATTENFALL AB Rationale The ratings on Sweden-based utility Vattenfall AB reflect its strong, vertically integrated position in the north European electricity market, competitive generation portfolio, significant monopoly utility operations, and strong cash flow generation. Negative rating factors include Vattenfall’s exposure to competition and price volatility in power generation, political risks related to nuclear and coal generation, and increasing regulatory pressure on monopoly network operations. Standard & Poor’s Ratings Services currently factors no direct support from Vattenfall’s 100% owner, the Kingdom of Sweden, into the ratings. Political and taxation pressures on the company have increased, although the Swedish government appears to have no plans for restructuring or major strategy changes. In addition, there is no plan to privatize Vattenfall in the foreseeable future. Vattenfall’s capital expenditure is likely to increase over the medium term. By 2011, the company plans to invest about Swedish krona (SEK) 134 billion, mainly in new power generation capacity, reinforcement of its electricity network, and reinvestments. Following the integration of its acquired German operations, and the acquisition of SEK12.6 billion (on a net basis) of Danish power generation assets in 2006, we expect Vattenfall to continue its growth strategy and to be acquisitive --both in its current markets and in neighboring European countries. The number of potential acquisition targets will likely be limited and any acquisitions will be highly contested, however. Vattenfall’s financial performance remains strong for the ratings, with funds from operations to adjusted debt of about 39% in 2006 (treating SEK8.9 billion in hybrid capital notes as 50% debt and 50% equity). Standard & Poor’s expects Vattenfall to exploit the financial headroom in the current ratings through debt-financed acquisitions or capital expenditures. In the absence of major acquisitions or large scale capital expenditures, and in view of strong wholesale power price developments, funds from operations to adjusted debt should remain at above 30% over the medium term. STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK UTILITIES Short-term credit factors Vattenfall’s short-term rating is ‘A-2’. The company is expected to have adequate internal liquidity over the short term, reflecting strong operating cash flow protected by hedging arrangements, and significant access to alternative sources of liquidity. Although much of Vattenfall’s operations are in highly competitive and volatile markets, movements in sales prices and volumes are not expected to have a material negative impact on the company’s liquidity and financial performance over the short term. The company’s adequate liquidity position is supported by the following factors: • Cash and short-term investments at March 31, 2007 of about SEK27.9 billion, compared with SEK15.9 billion in shortterm debt. • Strong free operating cash flow (about SEK23.4 billion for the twelve months ended March 31, 2007), reflecting solid profitability and manageable capital expenditure needs in the utility operations. • Access to unused committed credit facilities of SEK9.7 billion as of March 31, 2007. In February 2006, the company refinanced a €600 million revolving credit facility and at the same increased the amount to €1 billion. The new revolver matures in 2013, and the company has good access to public debt markets. •The absence of rating triggers or onerous covenants in Vattenfall’s financing agreements. • Free operating cash flow is expected to remain at SEK5 billion-15 billion a year, based on sustained operating profitability. • Company policy is to maintain the equivalent of 10% of group turnover in cash or committed credit lines, or the equivalent of the next 90 days’ debt maturities, whichever is greater. Outlook The stable outlook reflects the increasing regulatory and political pressure in Vattenfall’s main markets, which tempers the prospect of continued improved credit quality from its current NOVEMBER 2007 ■ 49
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
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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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