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12 Nov 2010
London, 12 November 2010 -- Moody's Investors Service has today affirmed the A2 senior unsecured
ratings held by both CEZ a.s., the Central and Eastern
European vertically integrated electric utility and by CEZ Finance a.s.,
the fully owned finance subsidiary of CEZ a.s. The outlook
"The affirmation of the A2 ratings and stable outlook reflects Moody's
view that the challenges faced by CEZ will be offset by its ability to
meet the key targets set out by its recently announced 'New Vision'
strategy," says Richard Miratsky, a Moody's Vice
President--Senior Analyst and lead analyst for CEZ. Specifically,
Moody's believes that CEZ will be challenged to sustain its historically
robust financial profile in the current environment of stagnant electricity
prices, considering its growing leverage levels, increasing
interest expense and additional costs arising from the recently approved
tax on free CO2 allowances. However, at the same time,
the rating and outlook also reflect the rating agency's view that
CEZ will be able to successfully execute the capex reduction and cost-cutting
measures set out in its strategy, while maintaining a credit profile
commensurate with its current rating.
As part of its new strategy -- the aim of which is stabilisation
and consolidation -- CEZ intends to cut future capex by 20%
in the period 2010-2014 and significantly limit future acquisitions.
However, Moody's cautions that, over the next two to
three years, CEZ's financial profile might weaken, driven
mainly by: (i) a significant increase in leverage; (ii) higher
debt service costs; (iii) sizeable dividend payouts; and (iv)
increased costs arising from the recently approved government tax on CO2
allowances. To remain safely positioned within the current rating
category, Moody's would expect CEZ to maintain its debt protection
metrics such that its funds from operations (FFO)/net debt ratio remains
at least in the low-thirties and its retained cash flow (RCF)/net
debt ratio at least in the low-twenties. These minimum ratio
guidelines take into account the change in strategic focus towards core
markets and efficiency programmes announced by CEZ.
Moody's cautions that CEZ might be challenged to remain within the
above ratio guidance, mainly due to the significant amount of debt
that the company has incurred over the past four years. The company
issued the debt in order to cover the demanding upgrade and reconstruction
of its domestic asset base and to finance sizeable acquisitions of foreign
assets and a large, CZK67 billion (EUR2.5 billion) share
buy-back programme executed in 2008 and 2009. CEZ's
debt has risen to CZK157 billion (EUR6.2 billion) in 3Q 2010 from
CZK106 billion (EUR4.2 billion) in 2008 and is expected to rise
above CZK200 billion (EUR8 billion) by 2012. Although CEZ has historically
exhibited significant headroom against the ratio guidance mentioned above
(e.g. 2009 FFO/net debt of 51.8% and RCF/net
debt of 34.5%) and Moody's expects the company to
be adequately positioned for 2010, Moody's cautions that CEZ's
financial flexibility may be further eroded by the still large capital
investment plans targeted for 2011 and 2012 in light of the company's
dividend policy and the revised government stance in relation to CO2 allowances.
In its assessment of CEZ's future financial profile, Moody's
has incorporated the Czech government's proposal for special tax
changes, which is in the process of being approved. Directly
targeting large solar power plants, the tax proposals, such
as a 26% tax on revenues or increased land fees, are not
material to CEZ's costs. However, Moody's believes
that the proposed 32% gift tax levy on free CO2 allowances,
which is also included within the framework of the government's
package, will be detrimental to CEZ's financial profile in
the medium term.
Furthermore, an auctioning of the free CO2 allowances, which
will the Czech Republic receive as part of an EU exemption from 2013 and
whose allocation is also under discussion under the government's
framework package, would represent, in Moody's view,
a significant burden on CEZ's costs and could constrain the recovery
of the company's credit metrics in the medium to long term even
if the capital expenditure were to moderate after 2012. Given the
current price of CO2 allowances -- EUR15 per thousand tons of emitted
CO2 -- a requirement to buy all its CO2 allowances from 2013 onwards
would result in CEZ incurring additional costs of approximately CZK20
billion (EUR800 million) for 2013-15, thereby potentially
prolonging a period of weakened performance unless conditions in the electricity
markets recover substantially. Moody's notes that specific
details of the suggested auctioning of CO2 allowances from 2013 have not
yet been specified within the current tax package.
Nevertheless, Moody's maintains the stable outlook on the
expectation that CEZ may consider offsetting measures, should the
adverse development regarding costs of CO2 allowances from 2013 materialise,
to support its credit metrics unless conditions in the electricity markets
The principal methodology used in rating CEZ was Moody's "Global
Unregulated Utilities and Power Companies Rating Methodology",
published in August, 2009. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found on Moody's website.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
CEZ a.s., headquartered in Prague, Czech Republic,
is the 70% state-owned operating company of a vertically
integrated power utility group. With 9.3 million customers,
14.4 GW of installed capacity and 2009 sales of more than EUR7.3
billion, CEZ is one of the largest electric utility groups in the
Central and Eastern Europe region and ranks among the top ten European
MD - Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
Moody's Investors Service Limited Czech Branch
Moody's Investors Service Ltd.
Moody's affirms CEZ's A2 ratings; outlook stable
One Canada Square
London E14 5FA
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