 | | RESEARCH | | | | Summary: | | | Eneco Holding N.V. |
| | Publication date: | | 14-Nov-2014 | | Primary Credit Analyst: | | Mark J Davidson, London (44) 20-7176-6306;
mark.j.davidson@standardandpoors.com | | Secondary Contact: | | Alf Stenqvist, Stockholm (46) 8-440-5925;
alf.stenqvist@standardandpoors.com | |
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| | | | | | Credit Rating: | A-/Stable/A-2 | | |
Rationale
Business Risk
- Monopoly owner and operator of the Netherlands' third-largest regional electricity and gas distribution network.
- Relatively stable and predictable earnings from low-risk regulated network activities accounting for 50%-60% of EBITDA.
- Strategic focus on subsidized, low-carbon generation.
- Vertically integrated position and balanced generation and supply activities.
- Short regulatory periods result in some earnings volatility.
- Uncertainty associated with potential unbundling.
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Financial Risk
- Strong and predictable free cash flow generation from the regulated gas and electricity distribution networks.
- Conservative financial policies and strong liquidity.
- Weakened ratios in the 2014-2016 regulatory period due to a challenging regulatory reset.
- Potentially material cost of new offshore wind generation projects not included in our base case.
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Outlook |
The stable outlook on Dutch integrated utility group Eneco Holding N.V. and N.V. Eneco Beheer (collectively Eneco) reflects Standard & Poor's Ratings Services' view that Eneco will maintain credit metrics in line with the rating over the next two years. Strong earnings from the distribution networks and the contribution of revenues from new assets support the assessment. In particular, we believe that the Standards & Poor's-adjusted ratio of funds from operations (FFO) to debt will remain in line with the "intermediate" financial risk profile. In this respect, in our base-case rating scenario we assume an adjusted FFO-to-debt ratio comfortably above 25% over the next two years. The stable outlook also reflects our expectation that Eneco's business risk profile will remain unchanged; in particular that its network operations will not be separated from generation and supply.
Downside scenario |
We could lower the ratings if Eneco's credit metrics were to deteriorate below the levels we consider commensurate with the ratings for a sustained period--in particular, we could lower the ratings if the adjusted FFO-to-debt ratio falls below 25%. This could occur if, for example, debt were to increase above our forecast as a result of an acquisition, shareholder distributions, or higher capital expenditure (capex) due to offshore wind investments. We might also consider a downgrade if operating cash flows are lower than we currently anticipate, for example as a result of negative regulatory intervention. We could also lower the ratings if Eneco's business risk was to materially increase, without a commensurate decrease in its financial risk. This could occur if, for example, the Dutch government was to enforce unbundling, resulting in a separation of regulated networks from generation and supply. Negative rating action could also occur if we were to revise our opinion of a "strong" regulatory advantage for distribution network operators in the Netherlands, for example if we believe that the regulatory framework does not allow for full and timely cost recovery, or if tariff resets result in unusually high cash flow volatility. |
Upside scenario |
We consider an upgrade as unlikely in the medium term, because of Eneco's weakened ratios resulting from lower regulatory returns, and pressure on earnings from thermal generation. |
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Standard & Poor's Base-Case Scenario
Assumptions |
Eneco will remain an integrated utility over the next two years, with operations comprising power generation and supply, and regulated distribution of gas and electricity. Depressed wholesale power prices resulting in a decline in profit contribution from the power-generating segment. Stable performance of supply activities and expansion of quasi-regulated renewable energy operations. Dividend payments of about 50% of net income through the forecast period. |
Key Metrics
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2013a |
2014f |
2015f |
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FFO to debt |
35.7% |
25%-28% |
25%-28% |
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FFO cash interest coverage |
9.9x |
7x-9x |
7x-9x |
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DCF/debt |
(5.5%) |
negative |
negative |
f--Forecast. a--Actual. FFO--Funds from operations. DCF--Discretionary cash flow. |
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Business Risk |
Our assessment of Eneco's "strong" business risk profile reflects the substantial contribution of regulated distribution network activities with a "strong" regulatory advantage, accounting for about 50%-60% of group EBITDA. It also reflects, on the unregulated side, Eneco's focus on subsidized generation from renewable sources, and good vertical integration with the customer supply business. These positive factors are offset by challenging market conditions in thermal generation, a degree of cash flow volatility resulting from the relatively short regulatory period in the distribution business, and uncertainties associated with unbundling in the Netherlands. We consider unbundling as an event-type risk that we do not, at this stage, factor into our ratings. However, a separation of regulated networks from unregulated generation and supply could have a material impact on Eneco's business risk profile, depending on the final structure of Eneco Holding. |
Financial Risk |
Eneco's "intermediate" financial risk profile reflects the group's solid credit metrics and strong liquidity, which we see as supported by a consistently applied and conservative financial policy. Eneco is investing heavily in wind power assets, which will benefit from supportive subsidy schemes for renewable energy. Due to the sizable capex and associated negative discretionary cash flows, a debt reduction through the forecast period is unlikely, in our view. However, we believe that the group's metrics will remain solidly within the ranges we consider commensurate with the current rating, and adjusted FFO to debt in our base case will remain comfortably above 25% throughout 2015. |
Liquidity |
We assess Eneco's liquidity position as "strong" under our criteria, reflecting our view that Eneco's liquidity resources will exceed its funding needs by 1.5x over the next 12 months and by 1.0x over the next 24 months. Our assessment of Eneco's liquidity is further supported by the group's: - Ability to absorb high-impact, low-probability events, and its limited need for refinancing;
- Sound bank relationships;
- Solid standing in credit markets; and
- Generally prudent risk management.
Principal Liquidity Sources
- Cash and liquid resources of €333 million at Sept. 30, 2014;
- Access to an undrawn 1.25 billion credit facility maturing in October 2018; and
- FFO of approximately €680 million according to our base-case scenario.
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Principal Liquidity Uses
- Capex of about €880 million per year;
- Maturing short-term debt of about €190 million; and
- Shareholder distributions of 50% of net income.
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Other Modifiers |
Modifiers have no impact on the rating. |
Government Influence |
We base our 'A-' rating on Eneco on our view of the company's stand-alone credit profile, 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 52 other small local authorities (each with less than 4% ownership).
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Ratings Score Snapshot
Related Criteria And Research
- Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014
- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014
- Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013
- Methodology: Industry Risk, Nov. 19, 2013
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Corporate Methodology, Nov. 19, 2013
- Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
- Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
- 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
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| | | | Additional Contact: | | Infrastructure Finance Ratings Europe;
InfrastructureEurope@standardandpoors.com |
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