European Infrastructure Finance Yearbook - Investing In Bonds ...

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TRANSPORTATION INFRASTRUCTURE BAA Ltd. amounts 62 ■ NOVEMBER 2007 allows a proportion of the costs associated with a future investment (depreciation) to be recovered before that new investment comes into operation. In addition, assets are remunerated during the course of construction at the regulatory cost of capital. This mechanism has significantly reduced risk in the T5 investment. Although the recovery of 75% of incremental security costs incurred in the event of additional security requirements (subject to minimal costs) being introduced by the government is viewed favorably, this is lower than in previous regulatory reviews. Although historically BAA has achieved or beaten operating cost forecasts assumed in the regulatory review, the group has underperformed in the current regulatory period due to new legal security requirements, market-driven costs such as utilities and business rates, and White Paper obligations on noise and blight. In the 12 months --12 months to Dec. 31, 2006-- STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK to December 2006, the adjusted operating margin before depreciation was 42.1%. In previous years, margins have ranged close to or above 45%. Operating income in 2006 was affected by reorganization costs, bid advisory costs, staffrelated costs due to the change in ownership, and costs incurred to ensure that T5 becomes operational in March 2008. An increase in pension contributions put further pressure on operating costs. Financial Risk Profile: High Leverage Reflects Capital Returns, Expected Releveraging After Takeover, And Weak Credit Metrics BAA’s weakened financial profile reflects the company’s debt-funded capital program and limited financial flexibility. Table 1 - Reconciliation Of BAA Ltd. Estimated Amounts With Standard & Poor's Adjusted Amounts (Mil. £)* Operating Operating Operating Cash flow Cash flow Shareholders' income income income Interest from from Capital Debt equity (before D&A) (before D&A) (after D&A) expense operations operations expenditure Reported 6,392.0 6,339.0 972.0 972.0 702.0 159.0 558.0 558.0 1,106.0 Standard & Poor's adjustments Operating leases Postretirement 895.9 -- 72.0 53.8 53.8 53.8 18.2 18.2 16.9 benefit obligations Additional items 162.0 -- 4.0 4.0 4.0 -- (4.9) (4.9) -- included in debt 192.0 -- -- -- -- -- -- -- -- Capitalized interest Share-based -- -- -- -- -- 137.0 -- -- -- compensation expense Reclassification of nonoperating income -- -- -- 5.0 -- -- -- -- -- (expenses) Reclassification of working-capital -- -- -- -- 29.0 -- -- -- -- cash flow changes -- -- -- -- -- -- -- 48.0 -- Minority interest -- 10.0 -- -- -- -- -- -- -- Other -- -- 31.0 31.0 (40.0) 50.0 192.0 191.0 399.0 Total adjustments 1,249.9 10.0 107.0 93.8 46.8 240.8 205.3 252.3 415.9 Standard & Poor's adjusted amounts Operating Cash flow Funds income Interest from from Capital Debt Equity (before D&A) EBITDA EBIT expense operations operations expenditures Adjusted 7,641.9 6,349.0 1,079.0 1,065.8 748.8 399.8 763.3 810.3 1,521.9 *Please note that two reported amounts (operating income before D&A and cash flow from operations) are used to derive more than one Standard & Poor's-adjusted amount (operating income before D&A and EBITDA, and cash flow from operations and funds from operations, respectively). Consequently, the first section in some tables may feature duplicate descriptions and amounts.
Accounting BAA changed its reporting date to Dec. 31 (previously March 31) to align with Grupo Ferrovial S.A., its ultimate majority shareholder. Auditors issued an unqualified audit report for the last fiscal period. The consolidated financial statements for BAA Ltd. (formerly BAA PLC) are prepared in accordance with IFRS and under the historical cost convention, with the exception of investment properties, available-for-sale assets, derivative financial instruments, and financial liabilities that qualify as hedged items under a fair value hedge accounting system. During the course of 2006, BAA changed its accounting treatment for joint venture entities to proportionately consolidate the financial performance for the reporting period and the financial position at Dec. 31, 2006 (previously joint venture entities were equity accounted). This change in policy has no impact on net profit or reserves. The financial information presented in this report is based on the segregation of the fourth quarter of the fiscal year ended March 2006 from the financial report for the nine months to December 2006, and reflects the balance sheet at December 2006. Comparability with the fiscal year ended March 2006 must be considered in view of the three-month crossover. The main adjustments to the company’s reported debt figures concern leases, postretirement obligations (£192 million), and contingent liabilities. BAA has changed the disclosure of its lease obligations under IFRS. Comparing the previous 2004/2005 accounts with the 2005/2006 accounts, the amounts payable in 2005/2006 did not correlate to the previous disclosure or the actual charge in the accounts. The accounts for the year to December 2006 (with restated figures at March 2006) show a large lease liability. For comparison purposes, the adjustment of future lease obligations for the net present value at 6% has also been made for the years ended March 2005 and March 2006. Our adjustments to operating income (before D&A) and EBITDA (see table 1 on previous page) reflect three key components: the operating income contribution for three months (£216 million) less the gain on investments (£206 STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK TRANSPORTATION INFRASTRUCTURE million) plus the derivatives losses (£21 million) recognized in operating income. The adjustments to EBIT reflect the same items along with three months of depreciation (£81 million) and interest income (£10 million). The adjustments to interest expense, cash flow from operations, funds from operations, and capital expenditure relate entirely to the three-month pro forma adjustment. Corporate governance/Risk tolerance/ Financial policies ADIL’s strategy and intention is to migrate existing bondholders into an investment-grade ring-fenced entity backed by BAA’s three designated airports. BAA’s other airports in the U.K. (Southampton, Aberdeen, Glasgow, and Edinburgh) will remain outside of the ringfence and are expected to be financed on a standalone basis. We expect the future ring-fenced structure financing to be supported by: • A strong overall covenant package; •Limitations on additional debt and business activities, such as a rating confirmation requirement for acquisitions above certain thresholds (the latter creating certainty that the revenue profile will not change); • Restrictions on upstream distributions outside the ring-fence; •Likely achievable fixed and floating charges on the assets of the three designated airports; and •The stability provided by BAA’s designated airports business. BAA’s main financial policy objectives are: • To maintain a minimum of 70% of existing debt on fixed rates. • To use foreign currency forward contracts to hedge capital expenditure in foreign currency once a project is certain to go ahead. At December 2006, there were no significant unmatched exposures. • To ensure that the company is not exposed to excessive refinancing risk in any one year. In addition: •Covenants are standardized wherever possible and are monitored on an ongoing basis. BAA continues to comply with all borrowing obligations and financial covenants. NOVEMBER 2007 ■ 63
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November 2007 Infrastructure Financ
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CONTENTS Introduction STANDARD & PO
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INTRODUCTION 2007: New Challenges A
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ject Finance Rating Distribution: I
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COMMENTARY Publication Date: Sept.
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(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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