Eneco Holding N.V. Table Of Contents

Transcription

1 November 11, 2011 Eneco Holding N.V. Primary Credit Analyst: Karin Erlander, London (44) ; Secondary Contact: Mark J Davidson(UK), London (44) ; mark_j_davidson@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Business Description Government Support And GRE Methodology Impact Business Risk Profile: Strong; Due To Regulated Distribution Networks Financial Risk Profile: Intermediate; Due To Large And Partially Debt-Financed Capex Financial Statistics/Adjustments Related Criteria And Research 1

2 Major Rating Factors Strengths: Monopoly owner and operator of regional electricity and gas distribution networks in The Netherlands. Stable and predictable earnings from regulated and low-risk business accounting for more than 50% EBITDA. Vertically integrated position likely to strengthen as balance between generation and supply activities improves. Corporate Credit Rating A-/Stable/A-2 Weaknesses: Exposure to competitive and potentially volatile generation and supply activities. Risks entailed in sizable and partially debt-financed capital expenditure program. Exposure to periodic regulatory reset risk. Rationale The ratings on Netherlands-based energy utility Eneco Holding N.V. and N.V. Eneco Beheer (collectively known as Eneco) reflect Standard & Poor's Ratings Services' view of Eneco's strong business risk profile and intermediate financial risk profile. Our assessment of Eneco's strong business risk profile reflects its strong market position in the Dutch energy market as the monopoly owner and operator of regional electricity and gas distribution networks. The distribution network operator Stedin, which is the third-largest network operator in The Netherlands, accounts for more than 50% of Eneco's annual EBITDA, providing stable and predictable earnings in support of the company's strong business risk profile. We consider that the company remains exposed to regulatory reset risk every third year, with the current regulatory period being The business risk profile also takes into account Eneco's exposure to competitive and volatile generation and supply activities, given that Eneco's own generation and long-term power purchasing contracts only cover about 50% of its power supply needs. However, we consider that near-term risk is mitigated by the company's prudent and effective hedging strategy. Both the risks related to Eneco's supply obligations to its customers and the risks related to purchase obligations from its suppliers are hedged on the international futures markets. We also take into account the fact that Eneco fully covers its retail supply obligations with its own or contracted generation capacity. We believe that Eneco's integrated position is likely to strengthen in the medium term, as the balance between generation and supply activities improves with the company's investments in power generation. At the same time, we understand that Eneco has improved its positions in gas procurement and supply, through a more-diversified procurement base as well as market-based pricing. Our assessment of Eneco's financial risk profile as intermediate reflects the significant proportion of regulated earnings, providing relatively stable and predictable cash flow generation. It also factors in, however, our view of the company's sizable and partially debt-financed capital expenditures (capex) program. Standard & Poors RatingsDirect on the Global Credit Portal November 11,

3 The 'A-' rating on Eneco is based on the company's stand-alone credit profile (SACP), which we assess as 'a-', and on our opinion that there is a "moderate" likelihood that its owners would provide timely and sufficient extraordinary support to Eneco in the event of financial distress. In accordance with our criteria for government-related entities, our view of a "moderate" likelihood of timely and sufficient extraordinary support is based on our assessment of Eneco's: "Important" role, given its strategic importance to the provinces and municipality owners as the monopoly provider of gas and electricity distribution services in its license areas; and "Limited" link with the owners given the dispersed ownership structure. Eneco's owners are the municipalities of Rotterdam (31.69%), The Hague (16.55%), Dordrecht (9.05%), and 57 other small local authorities (each with less than 4%). Key business and profitability developments Eneco reported a 55% increase in operating profit for the first six months of 2011, largely due to improved profitability in the regulated networks. We believe that Eneco will be able to sustain this level of earnings, given the approved regulated network tariffs through 2013 and the company's ongoing cost-saving program. In our view, revenues are also likely to increase as a result of the consolidation of Dutch energy supply company, Oxxio, which Eneco acquired in June At the same time, new assets are likely to make a positive contribution to earnings, given that the Enecogen power plant--in which Eneco and Danish utility DONG Energy A/S (A-/Stable/A-2) each hold 50%--and the Gasspeicher gas storage facility in Germany are due to start up at the end of We assume that Eneco will remain an integrated utility, with activities spanning power generation, electricity and gas trading and supply, district heating, and regulated gas and power distribution networks. We understand that the Dutch Ministry of Economic Affairs has appealed a court ruling that the enforced unbundling of the generation and supply operations from the regulated distribution networks is not compliant with EU directives. We also note that a verdict on this appeal by the Supreme Court is anticipated toward the end of 2011, but we believe that a subsequent legal review or appeal process is likely to stretch over many months and that Eneco will therefore remain an integrated utility for at least the next couple of years. Key cash flow and capital-structure developments Eneco's Standard & Poor's-adjusted debt increased to about 2.3 billion as of Dec. 31, 2010, from 2.1 billion in 2009, due mainly to partially debt-financed investments in the regulated networks, the Enecogen plant, and the gas storage facility. Debt-financed investments continued in 2011, resulting in a slight increase of debt to 2.4 billion by June 30, At the same time, however, funds from operations (FFO) increased by 19% in 2010, leading to a largely unchanged adjusted FFO-to-debt ratio of 27% at year-end FFO continued to increase in the first six months of 2011, by 14% compared with 2010, resulting in FFO to debt of 32% on a rolling-12-month basis. We project that Eneco's capex program will total close to 1.7 billion through 2013, following an estimated 900 million of investment in 2011, which we think will be partially debt-financed. That said, we also anticipate higher revenues from the distribution networks, given that the regulator has approved increasing tariffs through 2013, as well as from new assets coming on stream toward the end of In our opinion, Eneco's credit metrics will remain relatively solid in the next two years, with the adjusted FFO-to-debt ratio at about 25%. 3

4 Liquidity We view Eneco's liquidity as adequate under our criteria. Projected sources of liquidity (mainly surplus cash, operating cash flow, and available bank lines), exceed projected uses (mainly working capital outflow at its cumulative peak, capex, debt maturities, and dividends) by about 1.4x over the next 12 months. Eneco's ability to absorb high-impact, low-probability events with limited need for refinancing; its sound bank relationships; its satisfactory standing in the credit markets; and its generally prudent risk management further support our opinion of liquidity as adequate. We believe that Eneco will maintain substantial headroom under the financial covenants in the documentation for its credit facility expiring in Our assessment of Eneco's adequate liquidity is underpinned by its unrestricted cash and short-term marketable securities of about 298 million as of Sept. 30, 2011, and access to an undrawn 1,500 million committed credit facility expiring in We understand from management that this credit facility has recently been replaced with a 1,250 million, five-year credit line. We forecast that Eneco will generate gradually higher FFO over the next 12 months compared with last year (FFO was 630 million for the full-year 2010 and 455 million in the first half of 2011). We further forecast capex of more than 800 million over the next 12 months and dividend payments in line with the current dividend payout policy of 50% of net income. Outlook The stable outlook reflects our view that Eneco's financial risk profile will remain stable in the near-to-medium term, due to stronger earnings from the distribution networks than we anticipated and the contribution from new assets. This will mitigate the pressure on the credit metrics from the company's partially debt-financed capex program. In particular, we believe that FFO coverage of adjusted debt will remain comfortably at about 25% on a sustainable basis. The stable outlook also reflects our view that Eneco's business risk profile will remain unchanged, given our assumption that its generation and supply operations will not be unbundled in the near term. We could lower the ratings if Eneco's credit metrics were to deteriorate below our guideline levels for an extended period of time, for instance, due to a substantial debt-financed acquisition or a significant increase in Eneco's capex program. Assuming that the currently strong business risk profile remains unchanged, the stability of the 'A-' rating is dependent on Eneco maintaining an adjusted FFO-to-debt ratio of about 25%. We could raise the ratings on Eneco if its financial risk profile were to improve substantially on a sustainable basis. We could consider an upgrade if, for instance, the adjusted FFO-to-debt ratio were to exceed 30% on a sustainable basis. Business Description Eneco is the third-largest integrated utility based in The Netherlands, servicing 2.1 million businesses and domestic customers. Its activities span mainly power generation, electricity and gas trading and supply, district heating, and regulated gas and power distribution networks. It is active in The Netherlands, Belgium, France, Germany, and the U.K. Eneco is wholly owned by Dutch public authorities. Eneco had a generation capacity of 2,200 megawatts (MW) -or 12.2 terawatt hours (TWh)--at year-end 2010, 18% of which was generated by Eneco's own gas-fuelled combined heat and power plants and wind farms, and 82% of which was contracted by means of long-term power purchasing agreements with power plants and wind farm Standard & Poors RatingsDirect on the Global Credit Portal November 11,

5 operators. The total available capacity was sufficient to cover 51% of Eneco's total electricity sales of 24.4 TWh, and fully covered Eneco's retail portfolio. Gas sales totaled 6.7 billion cubic meters (bcm) and were covered with purchases under short- and long-term gas purchasing contracts with large gas producers, as well as purchases on the Dutch gas exchange, the Title Transfer Facility. Eneco supplied 130,000 customers with district heating totaling close to 13,157 terajoules, sourced mainly through long-term contracts with integrated utilities E.ON AG (A/Negative/A-1) and Nuon Power Generation B.V. (ultimate parent company Vattenfall AB; A/Negative/A-1). Government Support And GRE Methodology Impact In accordance with our criteria for GREs, the 'A-' rating on Eneco is based on the company's SACP, which we assess as 'a-', and on our opinion that there is a "moderate" likelihood that Eneco's owners would provide timely and sufficient extraordinary support to Eneco in the event of financial distress. We view Eneco's role as "important" to the municipality owners because it provides an essential public service in the form of gas and electricity distribution to about 1.9 million customers in its services areas. We assess Eneco's link to the owners as "limited" because of the dispersed ownership structure. Together, the municipalities of Rotterdam, The Hague, and Dordrecht own 57.29% of Eneco, but the remainder is split between 57 small local authorities, each with less than 4%. Business Risk Profile: Strong; Due To Regulated Distribution Networks The major supports for the strong business risk profile are: Monopoly electricity and gas distribution networks in Eneco's license areas in the west and north of The Netherlands. Following Enexis Holding N.V.'s (A+/Positive/--) acquisition of Dutch gas distribution network operator Intergas in May 2011, and Alliander N.V.'s (A+/Positive/A-1) acquisition of Endinet in July 2010, there are seven regional network companies in The Netherlands. The three largest, Alliander, Enexis, and Stedin account for 90% of the market. Stedin is the third-largest with a market share of about 26%. Eneco's regulated electricity and gas distribution network operator, Stedin, which provides relatively stable and predictable revenues under a transparent regulatory framework. We anticipate that the regulated earnings from the networks will continue to account for more than 50% of Eneco's EBITDA through Eneco's electricity and gas network tariffs are regulated by the Dutch Ministry of Economic Affairs and the regulator, Energiekamer. The Dutch energy regulator has confirmed regulatory tariff increases for all Netherlands-based distribution companies for the regulatory period, enabling them to cover an increase in costs in the previous period. Eneco's stable district heating services, accounting for more than 10% of EBITDA in Eneco supplies district heating to more than 130,000 customers in The Netherlands. Due to the restriction on transporting heat, these operations could be considered natural monopolies that add stability and predictability to Eneco's earnings. Eneco's focus on strengthening its vertical integration, so as to obtain a better balance between power generation and supply, as well as optimizing its gas portfolio, which will likely reduce the company's exposure to volatile wholesale markets and commodity prices. We understand that Eneco has increased its proportion of own gas shipping and entered into new or renegotiated short- and long-term gas purchasing contracts that are no longer linked to the price of oil and are with a relatively diversified group of producers. Eneco has thereby improved its gas purchasing portfolio in terms of supplier concentration and pricing. In our opinion, Eneco will also benefit from reserved capacity at the liquefied natural gas facility Gate (Gas Access To Europe) terminal in Rotterdam 5

6 and its gas storage facility in Germany. Eneco's generally prudent hedging strategies. Both the risks related to Eneco's supply obligations to its customers and the risks related to purchase obligations from its suppliers are hedged on the international futures markets. Our opinion is that Eneco will enhance its vertical integration with the commissioning of the 870 MW Enecogen plant, in which Eneco holds 50%. We also understand that wind farms under construction and the biomass plant project announced earlier this year will likely add at least 150 MW of generation capacity by 2013, and that the wind farm project in the North Sea announced on Nov. 4, 2011, will likely add MW by These supports are partially offset by: Eneco's short supply position. The company's own generation capacity covers about 50% of its total supply requirements, with the remainder fulfilled by the wholesale market. This is a weakness of its business profile as it exposes Eneco to the volatility of the wholesale market. However, we note that Eneco's own capacity does indeed cover the retail supply segment and that the company's trading unit actively hedges the exposure relating to the business segment. We understand that the company intends to increase its generation capacity and enhance the integrated nature of its business in the near-to-medium term. Regulatory reset risk and exposure to incentive-based regulation. While we consider the current regulatory period, which runs through 2013, to be generally positive for all the Dutch distribution network operators, Eneco is nevertheless exposed to the risk that the regulator makes adverse changes to the regulatory framework or imposes higher efficiency requirements in the next regulatory period from Jan. 1, In our opinion, a revision of the regulatory framework with a harsher-than-anticipated outcome for 2014-onward--more-stringent efficiency measures than are currently anticipated, for instance--would have a detrimental effect on Eneco's revenues, EBITDA, and FFO from Risks entailed in the large investment program. Eneco has a sizable capex program, totaling close to 2.6 billion for the period Of this, about one-half will be invested to enhance and expand the gas and electricity distribution networks, with the remainder focused on Eneco's three strategic goals for its commercial business areas: to expand sustainable power generation, increase vertical integration, and strengthen the supply business. Financial Risk Profile: Intermediate; Due To Large And Partially Debt-Financed Capex The main strengths of the intermediate financial risk profile are: Improving and predictable free cash flows from Eneco's regulated businesses, which in our view will continue to account for more than 50% of Eneco's EBITDA. We anticipate that Stedin's earnings and cash flows will continue to improve through 2013, due to the healthy tariff increases approved by the regulator through the period. The regulator has confirmed negative efficiency requirements, or "x-factors," for Stedin, which result in tariff increases of 7.9% in electricity and 2.9% in gas through , before inflation. Last year we assumed very low or slightly negative x-factors for the current regulatory period. Earnings stemming from new investments. The acquisition of Oxxio--the fourth-largest power and gas supplier in The Netherlands--adds 426,000 customers to Eneco's portfolio. Meanwhile, Eneco's investments in power generation capacity and gas storage facilities should, in our view, start to generate earnings from The Enecogen power plant, jointly owned with Denmark-based DONG Energy, is scheduled to start operations at the end of 2011, and we understand the gas storage facility Gasspeicher is shortly to be commissioned. We also Standard & Poors RatingsDirect on the Global Credit Portal November 11,

7 project that earnings from committed investments in wind farms currently under construction or in the development phase are likely to add to Eneco's income over the medium term. These strengths are moderated by: Partial debt funding of Eneco's sizable capex program. In addition to the capex program focused on the security and enhancement of the distribution networks and expansion of the power generation capacity, we consider that investments could increase depending on several wind farm projects that Eneco has stakes in. We also consider that the Dutch senate approved the new market model in February 2011, which will introduce smart meters. Uncertainties remain about the introduction of the smart meter model, whereby households in The Netherlands would be fitted with a gas or electricity meter. While the mandatory implementation of smart meters has been postponed, and we understand the bulk of investment is likely to be spent from 2015, voluntary installation of smart meters could eventually result in a fairly significant increase in capex beyond our projections. That said, we understand that capex related to smart meters would be covered by regulated rental tariffs. Financial Statistics/Adjustments Eneco reports under International Financial Reporting Standards. Our main adjustments relate to operating leases and unfunded pension obligations, as well as power purchase agreements, the net present value of which we add to the company's debt. At the same time, we deduct surplus cash from Eneco's debt, excluding such amounts that are not freely available or restricted, because the company tends to prefund its upcoming debt maturities. Table 1 Reconciliation Of Eneco Holding N.V. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. ) Eneco Holding N.V. reported amounts --Fiscal year ended Dec. 31, Cash flow from operations Cash flow from operations Shareholders' Operating Interest Dividends Capital Debt equity Revenues EBITDA income expense paid expenditures Reported 1, , , Standard & Poor's adjustments Operating leases Postretirement benefit obligations Surplus cash and near-cash investments Power purchase agreements Asset retirement obligations Reclassification of nonoperating income (expenses) (173.0) (1.5) (1.5)

8 Table 1 Reconciliation Of Eneco Holding N.V. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. ) (cont.) Reclassification of working capital cash flow changes Minority interests Total adjustments (109.0) (40.8) Standard & Poor's adjusted amounts Cash flow from operations Funds from operations Interest Dividends Capital Debt Equity Revenues EBITDA EBIT expense paid expenditures Adjusted 2, , , Table 2 Eneco Holding N.V. Peer Comparison Eneco Holding N.V. Delta N.V. KELAG Energie AG Oberoesterreich Rating as of Nov. 11, 2011 A-/Stable/A-2 BBB+/Stable/-- A/Stable/-- A/Stable/-- (Mil. ) --Fiscal year ended Dec. 31, Fiscal year ended Sept. 30, Revenues 4, , , ,052.0 EBITDA Net income from continuing operations Funds from operations (FFO) Capital expenditures Free operating cash flow (109.8) Dividends paid Discretionary cash flow (198.8) (5.6) Cash and short-term investments Debt 2, , Preferred stock Equity 3, , ,697.7 Debt and equity 6, , ,596.8 Adjusted ratios EBITDA margin (%) EBIT interest coverage (x) Return on capital (%) FFO interest coverage (x) FFO/debt (%) Free operating cash flow/debt (%) (4.7) Discretionary cash flow/debt (%) (8.5) (0.5) Net cash flow/capex (%) Debt/EBITDA (x) Total debt/debt plus equity (%) Return on capital (%) Return on common equity (%) Standard & Poors RatingsDirect on the Global Credit Portal November 11,

9 Table 2 Eneco Holding N.V. Peer Comparison (cont.) Common dividend payout ratio (unadjusted; %) Table 3 Eneco Holding N.V. Financial Summary --Fiscal year ended Dec (Mil. ) Rating history A-/Negative/A-2 A-/Negative/A-2 A/Watch Neg/A-1 A/Negative/A-1 A/Negative/A-1 Revenues 4, , , , ,287.0 EBITDA Net income from continuing operations Funds from operations (FFO) Capital expenditures Free operating cash flow (109.8) Dividends paid Discretionary cash flow (198.8) 9.5 (27.9) (148.5) Debt 2, , , , ,836.0 Equity 3, , , , ,738.0 Debt and equity 6, , , , ,574.0 Adjusted ratios EBITDA margin (%) EBITDA interest coverage (x) EBIT interest coverage (x) FFO interest coverage (x) FFO/debt (%) Free operating cash flow/debt (%) (4.7) Discretionary cash flow/debt (%) (8.5) 0.4 (1.3) 13.0 (8.1) Net cash flow/capex (%) Debt/EBITDA (x) Debt/debt and equity (%) Return on capital (%) Return on common equity (%) Common dividend payout ratio (unadjusted; %) Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Principles Of Credit Ratings, Feb. 16, 2011 Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Use Of CreditWatch And Outlooks, Sept. 14,

10 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, Corporate Criteria: Analytical Methodology, April 15, Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings Detail (As Of November 11, 2011) Eneco Holding N.V. Corporate Credit Rating A-/Stable/A-2 Senior Unsecured (2 Issues) A- Corporate Credit Ratings History 31-Oct Apr Jul Dec-2006 Business Risk Profile Financial Risk Profile A-/Stable/A-2 A-/Negative/A-2 A/Watch Neg/A-1 A/Negative/A-1 Strong Intermediate Debt Maturities As of Dec. 31, 2010: 2011: 123 mil. 2012: 94 mil. 2013: 29 mil. 2014: 161 mil. Thereafter: 1.4 bil. Related Entities N.V. Eneco Beheer Issuer Credit Rating A-/Stable/A-2 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Standard & Poors RatingsDirect on the Global Credit Portal November 11,

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