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20 Oct 2010
(P)Baa1/P-2 ratings of EMTN programme affirmed
London, 20 October 2010 -- Moody's Investors Service has today assigned a Baa1 rating to the new
EUR500 million 3.875% Senior Unsecured Notes due October
2020 ("the Notes") to be issued by Eurogrid GmbH ("Eurogrid") and guaranteed
by Eurogrid's main subsidiaries 50Hertz Transmission GmbH ("50Hertz")
and 50Hertz Offshore GmbH. At the same time Moody's affirmed
the (P)Baa1/P-2 ratings of Eurogrid's EUR2.5 billion
EMTN programme, under which the Notes have been issued. The
outlook is stable.
Eurogrid is a newly established holding company, which on 19 May
2010 acquired 50Hertz Transmission GmbH, one of the four German
electricity transmission network operators. 50Hertz was previously
owned by Vattenfall Europe AG, a wholly-owned subsidiary
of Swedish utility group Vattenfall AB. Eurogrid is ultimately
owned 60% by Belgian transmission grid operator Elia System Operator
NV/SA ("Elia") and 40% by an infrastructure fund managed by Industry
Funds Management Pty Ltd. ("IFM"), an investment management
company that invests on behalf of a number of pension funds.
Eurogrid acquired 50Hertz for an acquisition price of around EUR810 million,
of which around EUR465 million had been funded through an equity injection
by its shareholders.
Moody's assessment of Eurogrid's credit profile reflects the combination
of (i) a relatively low business risk profile underpinned by the monopoly
transmission network activities under a new regulatory regime that is
still developing, and (ii) the substantial capital investment commitments
that will gradually increase the group's leverage from initially moderate
Eurogrid's main subsidiary 50Hertz operates under a relatively new and
untested incentive-based regulatory regime in Germany. Moody's
views the German regulatory framework as modestly riskier in relation
to its transparency and predictability than more established regimes,
such as the UK framework. However, the rating agency believes
that the regulatory framework is characterised by low risk and a modest
degree of risk allocation to companies. In this context,
Moody's has also considered that the Federal Network Agency (Bundesnetzagentur),
the German regulatory body for energy and infrastructure networks,
has demonstrated the willingness to address a number of potential risk
factors for the transmission operators since the introduction of the incentive-based
regime in January 2009.
Over the next decade, Eurogrid plans a significant investment programme
for 50Hertz, which is estimated to account for circa EUR3.0
billion in total. On-shore investments (which account for
more than half of the total investment programme) primarily relate to
the expansion of the network to accommodate (i) the integration of new
generation units, (ii) the increasing distances between generation
capacity and demand, and (iii) improved interconnections with neighbouring
grids. Off-shore projects (which account for the remainder
of the capex programme) will connect off-shore wind farms in the
Baltic sea to the on-shore grid.
Given the recent acquisition with relatively modest debt funding,
Moody's expects the group to initially exhibit a healthy financial profile
with FFO to Net Debt in excess of 20%. However, given
the shape of the capex programme, the group's leverage is expected
to increase, albeit gradually, over the medium term.
A large part of the capex programme relates to off-shore connections,
whose timetable may slip, which in turn would potentially reduce
pressure on the group's leverage. Moody's also believes that a
prudent financial policy that is aimed at a flexible dividend profile
to accommodate the future funding needs of an extensive capital programme
will help support the current rating.
In order to maintain its Baa1 ratings Moody's expects Eurogrid to exhibit
at least an FFO Interest Coverage ratio of 3.0x, FFO to Net
Debt in the low teens and RCF to Net Debt in high single-digits.
The stable outlook assigned to Eurogrid is based on Moody's view that,
whilst the group's medium-term financial profile will reflect a
gradual increase in leverage as the capital investment programme takes
place, this will be within the minimum financial parameters mentioned
above. Whilst Moody's considers the risk related to the limited
track record of a newly established company following the recent change
in ownership, this is partially offset by the presence of Elia as
a strategic investor with a controlling interest. In Moody's view,
Elia -- itself an experienced operator of transmission networks --
has the operational competence to manage the execution risks associated
with the acquisition and support the establishment of stable financial
policies at Eurogrid.
Given the significant investment programme and the associated funding
requirements in the future, Moody's sees limited potential for a
rating upgrade over the medium term. However, a sustainable
improvement of cash flow based debt metrics, such as FFO to Net
Debt consistently in the high teens and RCF to Net Debt in the low teens,
could create upward pressure for the rating. Such an improvement
in the credit metrics would have to be accompanied with an established
track record of prudent financial policy applied by management,
in particular towards carefully aligning the dividend profile with the
requirements of the extensive capex programme.
The rating could come under downward pressure if the FFO Interest Cover
fell below 3.0x, FFO to Net Debt declined below the low teens
or RCF to Net Debt below high single-digits, due for example,
to operational underperformance, higher-than-expected
dividend payments or material increases in capex, without offsetting
balance sheet measures.
The principal methodology used in rating Eurogrid was the Regulated Electric
and Gas Network 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.
Eurogrid GmbH is the holding company of 50Hertz Transmission GmbH.
50Hertz operates Germany's third-largest electricity transmission
network by length of km (it is the second largest by area), covering
an area of around 109,000 square kilometres in the five former Eastern
German states of Thuringia, Saxony, Saxony-Anhalt,
Brandenburg and Mecklenburg-Western Pomerania as well as the city
states of Berlin and Hamburg. Its network comprises around 9,700
km of high voltage overhead lines. As at December 2009, 50Hertz
reported revenues of EUR4.2 billion and fixed assets of EUR1,238
million under German GAAP.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
However, the credit rating action was based on limited historical
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
MD - Infrastructure Finance
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Moody's assigns Baa1 rating to Eurogrid's EUR500 million 3.875% Senior Unsecured Notes due 2020
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