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Rating Action:

MOODY'S DOWNGRADES NUON DEBT RATINGS TO A2 AND UPGRADES NUON POWER GENERATION TO A3 FROM B1, ASSIGNS STABLE OUTLOOK TO ALL RATINGS

06 Feb 2004
MOODY'S DOWNGRADES NUON DEBT RATINGS TO A2 AND UPGRADES NUON POWER GENERATION TO A3 FROM B1, ASSIGNS STABLE OUTLOOK TO ALL RATINGS

London, 06 February 2004 -- Moody's Investors Service has today downgraded to A2 from A1 the senior unsecured rating of Netherlands-based utility n.v. Nuon (Nuon) and its guaranteed finance vehicle Nuon Finance BV. The outlook is stable. The short-term P-1 rating is affirmed. At the same time, the senior unsecured long-term issuer rating of Nuon Power Generation BV (formerly Reliant Energy Power Generation Benelux or REPGB) has been upgraded to A3 from B1. The rating for Nuon Power Generation has a stable outlook. These rating actions conclude the review initiated on n.v. Nuon in June 2003, and that initiated on Nuon Power Generation in December 2003.

Moody's rating actions follow Nuon's recent acquisition of REPGB for EUR985 million after the approval in December 2003 of the transaction by the Dutch antitrust authorities, the NMa.

Nuon's A2 rating reflects the following factors as a result of the transaction:

(1) Nuon's net debt has increased as a result of the REPGB transactions and is expected to be around EUR2.6 billion at the end of 2003, hence weakening its financial profile. Nonetheless, further divestments and free cash flow are expected to gradually reduce debt and therefore, assuming that cash flows recover as planned, debt protection measures should improve over time.

(2) At the same time the acquisition of REPGB, with its flexible power generation portfolio, will provide a valuable hedge to NUON's downstream supply risk. Nonetheless, Moody's notes that conditions imposed by the NMa on the transaction will mean that -- unless Nuon wins its current appeal against restrictions to market share -- it will have to auction some production (around 5 Terawatt Hours) resulting in a hedge of around two-thirds of its portfolio through its own contracts and resources. However, this will mean that one third of its supply will not benefit from such a hedge in a market of rising wholesale prices

(3) Following the acquisition of REPGB, around 60% of Nuon's gross cash flow will still be derived from lower risk activities (principally regulated distribution activities and some district heating) although this proportion will gradually reduce as Nuon looks to expand into other areas. The recent agreement on the 2004-2006 network pricing structure should mean nonetheless that Nuon will benefit from a more predictable regulatory framework under which it has to meet a comparatively low efficiency factor.

(4) We believe that management is adopting a more conservative strategy with a focus on its core business and achievement of efficiencies, as well as shifting away from the mixed success of some non-core investment and geographic diversification that featured more prominently in earlier plans. Whilst not currently envisaged, further acquisitions in the intermediate-to-medium term may be a possibility.

Nonetheless, Moody's believes that a number of challenges face the company, which are also factored into the A2 rating, which could mean that the company's anticipated improvements in debt protection measures may not materialise or be sustainable, these include:

(1) Some uncertainty as regards the impact of full supply liberalisation with effect from mid-2004, which could have an impact on market share and margins or both, to which Nuon hopes to compensate with diversification into sales in neighbouring markets and growth in ancillary businesses

(2) Some integration risk associated to the purchase of REPGB - although Nuon has had time to prepare for the acquisition, given the lengthy approval process.

(3) Possible future privatisation of some of the larger Dutch utilities, including Nuon - which whilst large in the Netherlands remain small in the broader European context - could lead to some changes in the competitive landscape in the medium term.

(4) The system integration and billing issues that have impacted the whole Dutch industry, resulting in some working capital issues, have not yet been fully resolved although the backlog is expected to be cleared by the end of Q1 2004.

(5) Both Nuon and REPGB have entered into a number of cross-border lease transactions. Whilst the risks of early termination on these transactions are low, they do add a degree of additional complexity to the companies. Nuon and its subsidiary currently maintain a number of letters of credit with respect to these leases. Moody's considers that the principal risk on these transactions relate to ensuring that suitable facilities are in place so as to minimise any liquidity risks, and the rating agency expects Nuon to enhance its existing sound liquidity/funding arrangements to meet these needs.

Nuon Power Generation BV's former B1 rating had primarily reflected the financial and operating problems of its then parent, Reliant Resources Inc. The upgrade to A3 reflects:

(1) Its sound and well balanced generation portfolio mix, but the rating nonetheless incorporates the higher risk profile compared to the parent's diversified operating risk

(2) Its position as a fully integrated subsidiary of n.v. Nuon, with limited costs and with take-off for its production through the Nuon group. In addition, Nuon's intention to maintain little or no debt at the subsidiary level, given that Nuon will centralise the group's treasury needs, should allow the power generation subsidiary to generate free cash flow.

Both ratings are comfortably positioned within their rating categories with a stable outlook, and both entities could accommodate a degree of financial flexibility at this rating level. Large-scale acquisitions or very significant negative competitive impact, whilst not expected, could result in a rating downgrade. Improvement and stabilisation of the companies' financial and operating profiles within the context of the Dutch and broader European market place, could put positive pressure on the ratings.

The affected ratings are:

-The senior unsecured A2 ratings assigned to the EUR2billion EMTN programme of Nuon Finance BV, under the guarantee of n.v Nuon, and all debt issued thereunder

- n.v. Nuon's senior unsecured A2 issuer rating.

- Nuon Power Generation BV's A3 issuer rating

Headquartered in Amsterdam, n.v. Nuon is an electricity, gas and water company serving over 2.7 million customers in the Netherlands. As at 31 December 2002, it had consolidated sales of EUR4.4 billion.

Reliant Energy Power Generation Benelux or REPGB (now Nuon Power Generation BV) was formerly a subsidiary of Reliant Resources, Inc., of Houston, US.

London
Stuart Lawton
Managing Director
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

London
Helen Francis
Vice President - Senior Analyst
European Corporates
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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