INVESTING IN GAS TRANSMISSION

Transcription

1 INVESTING IN GAS TRANSMISSION Rating Agency Perspective GIE Annual Conference Monica Merli, Managing Director Infrastructure Finance Edinburgh, 23 June 2011

2 Agenda 1. Credit quality of the European gas transmission sector 2. The investment fundamentals 3. The credit challenges Can investing in infrastructure become a business which does not pay?

3 3 Moody s Ratings of EU Gas Transmission Networks National Grid Gas Plc A3/P-2/Stable Bord Gáis Éireann Baa1/P-1/Under review for downgrade N.V. Nederlandse Gasunie Aa3/Under review for downgrade TIGF A3/Stable SLOVAK R. Slovensky Plynarensky Priemysel, a.s. A1/Stable Enagas S.A. A2/P-1/Stable

4 4 Rating Positioning» All ratings are investment grade in a Aa3-Baa1 range» 50% of the European gas transmission grid companies rated by Moody s are Government-Related Issuers (GRIs) and government ownership influences a number of ratings: Gasunie s baseline credit assessment is equivalent to an A3: Aa3 rating incorporates 3 notches of uplift for potential government support from the Dutch government (Aaa/Stable) SPP s baseline credit assessment is in the single-a range and its rating also incorporates uplift for potential government support from the Slovak government (A1/Stable) Bord Gais s baseline credit assessment is under review for possible downgrade following Moody s downgrade of the Irish government s rating to Baa3 with a negative outlook» Gas transmission is seen as essential infrastructure in Europe under legal frameworks shaped by the EU gas market directives» Owners of gas transmission networks may exhibit significant debt capacity at investment-grade levels: regulatory framework is seen as a key credit driver

5 5 Moody s Rating Methodology for Regulated Electric & Gas Networks Focus on the following 4 key rating factors and 13 sub-factors: 1. Regulatory Environment & Asset Ownership Model (40%) Stability & Predictability of Regulatory Regime Asset Ownership Model Cost & Investment Recovery Revenue Risk 2. Efficiency and Execution. Risk (10%) Cost Efficiency Scale & Complexity of Capital Program 3. Stability of Business Model & Financial Structure (10%) Ability & Willingness to Pursue Opportunistic Corporate Activity Ability & Willingness to Increase Leverage Targeted Proportion of Operating Profit outside the Core Regulated Business 4. Key Credit Metrics (40%) Adjusted ICR or FFO Interest Cover Net Debt / RAV or Fixed Assets FFO / Net Debt RCF / Capex

6 Peer Comparison: EU Gas Transmission Networks 6 Issuer name [*] Regulatory Environment & Asset Ownership Efficiency & Execution Risk Stability of Business Model & Financial Structure Key Credit Metrics Stability and Predictability of Regulatory Regime Bord Gais Eirann Enagas Gasunie National Grid Gas Slovensky Plynarensky Priemysel Aa A A Aaa Ba Asset Ownership Model Aa Aaa Aaa Aa Aa Cost and Investment Recovery A A A A Baa Revenue Risk Aaa Aa A Aa Ba Cost Efficiency Baa Baa Baa Baa Aa Scale & Complexity of Capital Programme Baa Baa Ba Ba Aa Ability and Willingness to Pursue Opportunistic Corporate Activity Ability and Willingness to Increase Leverage Targeted Proportion of Operating Profit Outside Core Regulated Activities Baa Baa A A A Baa Baa Baa Baa Baa B Aa Baa Aa Aa FFO ICR Adj. ICR A Aa Aa A Aaa Net Debt/RAV Net Debt/Fixed Assets A A Aa Baa Aaa FFO/Net Debt A A Aa A Aaa RCF/Capex Ba Ba Ba Ba B Indicated BCA/Rating A3 A2 A2 A3 A3 Actual BCA/Rating Assigned Baa1 A2 A3 A3 A1-A3 Rating Assigned, if government ownership Baa1 Aa3 A1 [*] TIGF s scores not published yet

7 7 Regulatory Environment UK regulatory regime scored highest but other EU frameworks also score highly» The UK regulated networks represent the best understood regulated sectors in Europe» All of the main regulatory regimes in the UK exhibit features which are seen as critical to minimising regulatory risk: Established methodologies for price setting and a long track record of consistent and transparent application (with public or shared model) Extensive public consultation Formal, statutory dispute resolution procedure» Mechanisms for the remuneration and roll-forward of the Regulatory Asset Values are transparent and supportive of credit quality Capital programmes set at the price reviews Regulators have a statutory duty to ensure operators are able to finance their functions No evidence of regulators abusing investors confidence by back-loading returns or postponing cost recovery

8 8 Investing in EU Regulated Gas Transmission Networks: A Favourable Environment So Far Investors attracted by sector s strong underlying fundamentals» Key features of UK-style incentive-based regulation that are attractive to investors: Authority responsible for economic regulation is independent body with adequate technical expertise and resources Capital expenditure programmes agreed with regulators ex-ante Investments remunerated as spent, i.e. work in progress can earn a return or financing costs otherwise recovered before assets are completed and enter into operation» Key features of UK-style incentive-based regulation that are attractive to customers: Modest risk transfer to network owners and operators translates in relatively low return on capital required by investors and thus lower tariffs for what is essential and strategic infrastructure Investors belief in the currency of the RAV allows the allocation of investment costs to successive generations of customers in a way that is reflective of the long lives of the underlying assets» Gas transportation tariffs a small percentage of total gas price to final customers: political sensitivity seen as low» Application of similar models of incentive-based regulation in various member states and common EU principles and framework for independent regulation widen interest and facilitate familiarity and understanding among investment community

9 Investing in EU Regulated Gas Transmission Networks: but Challenges Lie Ahead Investment climate may deteriorate due to market developments and sovereign debt crisis» Investment in infrastructure to support cross-border flows may not be supported by existing national regulatory models and there may be significant uncertainty about the prospective market model» Gas transportation infrastructure, particularly cross border, may have exposure to dynamics in commodity markets: investors may be concerned by the potential risk of stranded assets over the long term» Challenge for the Commission, ACER and national regulatory authorities of ensuring that high standards of regulation are upheld within member states and in dealing with crossborder issues» Instances of unfair, inconsistent or unclear regulatory decisions or of politically-motivated government interference can damage investor confidence beyond the boundaries of a single member state» Sovereign debt crisis could raise cost of funding and undermine trust on the regulatory deals and institutional frameworks even beyond the countries and companies most directly impacted 9

10 10 Examples of Exposure to Key Risks Two gas transmission operators currently at risk of downward rating migration» Gasunie s Aa3 rating placed on review for possible downgrade on 19 May 2011 following announcement from the Dutch Office of Energy Regulation (NMa): Gasunie s regulated asset base (RAB) could be substantially cut by approximately 25% (to 4.8 billion as calculated in 2005 from 6.4 billion determined by the policy rule of the Ministry of Economic Affairs in 2008) Compensation of up to 1 billion for Gasunie's customers through lower future gas transmission tariffs» Bord Gais s Baa1 rating placed on review for possible downgrade on 18 April 2011 following Moody s downgrade of the Irish government s rating to Baa3 with a negative outlook: Bord Gais s rating benefited from uplift in the past due to its ownership by the Irish government and Ireland s high credit quality The recent decline of Ireland s credit strength means that Bord Gais s country of operation and ownership now represent a negative credit factor

11 11 Conclusions Investors should not be taken for granted» Yes, investing in gas transmission in Europe could be a business that does not pay» Investors may become more selective as regards which companies, projects, countries to support» Investors will look for clear, transparent and fair rules for the allocation of transportation costs to the final gas consumers across member states» Investment in European gas infrastructure can remain attractive, but coherent, robust and stable policy vision and implementation will be needed

12 12 Appendices 1. Moody s Rating Methodology for Regulated Electric & Gas Networks 2. Moody s Related Research

13 13 Background to Moody s Industry Methodologies» Global consistency across regulated electric and gas network sector» Evaluation of regulatory, operational and financial criteria» Mapping in accordance with key rating factors» Transparency of criteria and process» Enable users to anticipate a company s rating within two alpha-numeric notches

14 14 Moody s Rating Methodology for Regulated Electric & Gas Networks Focus on the following 4 key rating factors and 13 sub-factors: 1. Regulatory Environment & Asset Ownership Model (40%) Stability & Predictability of Regulatory Regime Asset Ownership Model Cost & Investment Recovery Revenue Risk 2. Efficiency and Execution. Risk (10%) Cost Efficiency Scale & Complexity of Capital Program 3. Stability of Business Model & Financial Structure (10%) Ability & Willingness to Pursue Opportunistic Corporate Activity Ability & Willingness to Increase Leverage Targeted Proportion of Operating Profit outside the Core Regulated Business 4. Key Credit Metrics (40%) Adjusted ICR or FFO Interest Cover Net Debt / RAV or Fixed Assets FFO / Net Debt RCF / Capex

15 15 Methodology Process» For each network, each of the 13 sub-factor metrics is mapped to a notional rating (Aaa, Aa, A, B)» Factors weighted to reflect importance - no single metric is likely to drive the Indicated Rating outcome» A further weight is applied by rating category as per the following table: Rating Category Aaa Aa A Baa Ba B Weighting » The methodology grid yields a mapped rating the Indicated Rating» Goal is that for most companies the Indicated Rating will be within 2 rating notches of the actual rating

16 16 Factor 1: Regulatory Environment & Asset Ownership Model Divided into Four Sub-Factors Stability & Predictability of Regulatory Regime (15%)» Captures how developed, transparent and stable is the regulatory environment in which a network operates» Measured by reference to the regulator s track-record and independence» The country s overall institutional strength also may be reflected in the assigned score Asset Ownership Model (10%)» Recognises the risk that a licence or concession may be terminated» Measured by reference to the nature of a company s right to exploit the network assets» Most companies score in Aa, reflecting the characteristics of the prevalent model adopted in most jurisdictions

17 17 Factor 1: Regulatory Environment & Asset Ownership Model (cont d) Divided into Four Sub-Factors Cost & Investment Recovery (10%)» Assesses the ability of a company to recover its costs and investment and the timeliness thereof» Measured by reference to how tariffs are designed; i.e. how risks are allocated between the network operator and its final customers» Networks subject to efficiency targets/incentive-based regulation will typically score A Revenue Risk (5%)» Considers the mechanics of revenue generation» Measured by reference to a network s exposure to gas/electricity volumes transported» Exposure to revenues from connections may also be reflected in the assigned score

18 18 Factor 1 Regulatory Environment & Asset Ownership Model

19 19 Factor 1 (cont d) Regulatory Environment & Asset Ownership Model

20 20 Factor 2: Efficiency and Execution Risk Divided into Two Sub-Factors Cost Efficiency (6%)» Assesses a network s individual performance within its regulatory framework» Measured by reference to sustainable cost performance (in terms of opex, capex and WACC) relative to regulatory assumptions» Networks subject to incentive-based regulation will generally score Baa» Not a measure of operational efficiency Scale & Complexity of Capital Programme (4%)» Captures execution risk associated with capex programme» Measured by reference to total (i.e. maintenance and enhancement spend) annual capex (gross of subsidies) as % of Regulated Asset Value ( RAV ) or net fixed assets» Most scores in the Baa or Ba rating categories reflect (1) substantial replacement needs for ageing grids and (2) large investment programmes to upgrade and expand networks so as to meet projected demand growth and ensure security of supply

21 21 Factor 2 Efficiency & Execution Risk

22 Factor 3: Stability of Business Model & Financial Structure Divided into Three Sub-Factors This factor is similar to that used for other infrastructure sectors (e.g. toll roads, airports) Ability & Willingness to Pursue Opportunistic Corporate Activity (3.33%)» Assesses management appetite for corporate activity» Measured by reference to strategy, track-record, legal/regulatory restrictions and/or covenants Ability & Willingness to Increase Leverage (3.33%)» Captures the likelihood that a company s financial structure may change in the future» Measured by reference to financial policy, track-record, licence conditions and/or covenants Targeted Proportion of Operating Profit Outside Core Regulated Activities (3.33%)» Adjusts for planned involvement in higher-risk activities» Measured by reference to % operating profit generated from unregulated businesses, with ranges from 0% (Aaa) to > 20% (single-b) 22

23 23 Factor 3 Stability of Business Model & Financial Structure This factor is similar to that used for other infrastructure sectors (e.g. toll roads, airports and regulated water)

24 24 Factor 4: Key Credit Metrics KEY CREDIT METRICS Rating Category Aaa Aa A Baa Ba B a) 3-yr Adjusted ICR 6.0x 4.0x - 6.0x 2.0x - 4.0x x x <1.1x OR OR OR OR OR OR OR 3-yr FFO Interest Cover 7.0x x x x x <1.5x b) 3-yr Net Debt / RAV (or Fixed Assets) 30% >30-45% >45-60% >60-75% >75-90% >90% c) 3-yr FFO / Net Debt 30% 20-30% 12-20% 8-12% 4-8% <4% d) 3-yr RCF / Capex 3.5x x x x x <0.5x» Inputs generally based on projected metrics; historical as starting point» Credit metrics incorporate all standard adjustments applied by Moody s» Need to also take account of peculiarities of different regulatory frameworks

25 25 Structural Considerations & Sources of Rating Uplift from Creditor Protection Structural enhancements may provide valuable creditor protection and be a source of rating uplift up to 3 notches. We classify these in 3 categories:» Event risk protection - this is captured by Factor 3 in the grid» Debt structure and liquidity protection» Control afforded to creditors these are captured separately see below ASSESSING LIQUIDITY PROTECTION AND CONTROL AFFORDED TO CREDITORS None Low Medium High Very High Weighting: 0% 25% 50% 75% 100% 1 - Debt Structure & Liquidity Protection Overall assessment of the following factors: a) Dedicated cash reserves to cover all costs for at least next 12 months under base case b) Timing reserves to cover future "lumpy" payments (e.g. maintenance) Total Weighted Count c) No material re-financing risk (e.g. benefits of amortising debt) Liquidity Protection Score d) Covenanted hedging policies 2 - Control Afforded To Creditors Overall assessment of the following factors: a) Step-in rights and remedies to delay concession termination or insolvency b) Restrictions on payments and dividend lock-ups (e.g. if metrics deteriorate below x%) Total Weighted Count c) Frequent and regular reports of creditors' technical advisers Control Afforded To Creditors NOTCH UPLIFT 1.000

26 26 Other Rating Considerations and Limitations These include:» Liquidity» Notching practices for debt subordination» Ownership (inc. Government support)» Corporate governance» Financial reporting and disclosure A material influence of any of the above or similar factors may result in a differential between the grid-indicated rating and the rating actually assigned by Moody s

27 27 Moody s Related Research» Incentive-Based Network Regulation in Germany, Special Comment, October 2010» Regulated Networks: European Utilities at a Strategic Crossroad, Special Comment, December 2009» Unregulated Utilities and Power Companies, Rating Methodology, August 2009» UK Regulated Industries: Q&A on Lending against the Regulated Asset Value, Special Comment, November 2007

28 Monica Merli Managing Director Infrastructure Finance Moody s Investors Service Limited One Canada Square Canary Wharf London E14 5FA United Kingdom Phone: monica.merli@moodys.com

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