May 31, 2012 Summary: Eneco Holding N.V. Primary Credit Analyst: Karin Erlander, London (44) 20-7176-3584; karin_erlander@standardandpoors.com Secondary Contact: Mark J Davidson, London (44) 20-7176-6306; mark_j_davidson@standardandpoors.com Table Of Contents Rationale Outlook Related Criteria And Research www.standardandpoors.com/ratingsdirect 1
Summary: Eneco Holding N.V. Credit Rating: A-/Stable/A-2 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 business risk profile as "strong" is supported by the company's 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. We consider that the company remains exposed to regulatory reset risk every third year, with the current regulatory period being 2011-2013. Our assessment of the business risk profile also takes into account Eneco's exposure to competitive and volatile generation and supply activities, since 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. However, it also factors in our view of the company's sizable and partially debt-financed capital expenditures (capex) program. 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%). Standard & Poors RatingsDirect on the Global Credit Portal May 31, 2012 2
Summary: Eneco Holding N.V. S&P base-case operating scenario We believe that Eneco will be able to sustain earnings at the 2011 level in the near term, due to the approved regulated network tariffs through 2013 and the company's ongoing cost-savings program. Eneco reported a 2% increase in revenues and Standard & Poor's-adjusted EBITDA rose 22% in 2011, compared with 2010. The higher earnings were largely due to improved profitability in the regulated networks. Revenues also increased as a result of the consolidation of Dutch energy supply company, Oxxio, which Eneco acquired in June 2011, and the acquisition of the remaining 50% interest in the Prinses Amalia wind farm in October 2011. At the same time, we believe that new assets are likely to make a positive contribution to earnings from 2012, 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 started up at the end of 2011. 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. On Feb. 24, 2012, the Supreme Court in The Netherlands took a decision on the appeal of the State of the Netherlands against the ruling of the Court of The Hague in connection with the Network Management Act (NMA). The Court ruled that the enforced unbundling of the generation and supply operations from the regulated distribution networks is not compliant with EU directives. The State appealed against this ruling. The Supreme Court has now posed questions about the compatibility of the NMA with European law that must first be answered by the European Court of Justice in Luxembourg. The ruling on the appeal has been postponed until the European Court has answered these questions. This suggests to us that Eneco will remain an integrated utility for at least two to three years. S&P base-case cash flow and capital-structure scenario We project that Eneco's capex program, which we believe will be partly debt-financed, will total close to 2.8 billion through 2014, of which 1.7 billion is committed. This follows close to 740 million of investment in 2011. Eneco also announced on April 26, 2012, a joint venture with EDF Energy to develop a 900 megawatt (MW)-1,200 MW wind farm off the U.K. coast. However, we understand that this project is currently in the development phase, with a planning application likely to be submitted at the end of 2013. Looking ahead, we anticipate higher revenues from Eneco's distribution networks, since the regulator has approved increasing tariffs through 2013, as well as from new assets coming on stream toward the end of 2011. However, we also believe that Eneco's adjusted debt will increase. Eneco's adjusted debt was largely unchanged at about 2.3 billion as of Dec. 31, 2011, compared with 2010. At the same time, however, funds from operations (FFO) increased by 40% in 2011, leading to a significant strengthening of the adjusted FFO-to-debt ratio to 38% at year-end 2011, compared with 27% at year-end 2010. In our opinion, Eneco's credit metrics will likely weaken as a result of the partially-debt financed capex program, but remain solidly above 25%. Liquidity We assess Eneco's liquidity position as "adequate" as defined in our criteria, supported by our view that Eneco's liquidity sources will exceed its funding needs by close to 1.5x over the next 12 months. As of March 31, 2012, we estimate that Eneco's liquidity sources over the next 12 months will exceed 2.1 billion under our base-case scenario. These include: www.standardandpoors.com/ratingsdirect 3
Summary: Eneco Holding N.V. Unrestricted cash and short-term deposits of about 100 million. Access to an undrawn 1.25 billion committed credit facility expiring in 2016. We believe that Eneco will maintain substantial headroom under the financial covenants in the documentation for its credit facility. Annual FFO of about 800 million. We estimate that Eneco's liquidity needs over the next 12 months from March 31, 2012, will be close to 1.5 billion, including: Working capital of about 400 million. Capex in excess of 900 million. 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 in our opinion mitigate the pressure on credit metrics from the company's partially debt-financed capex program. In particular, we believe that FFO coverage of adjusted debt will remain at comfortably more than 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 current "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. 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, 2009 Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Standard & Poors RatingsDirect on the Global Credit Portal May 31, 2012 4
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