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13 Aug 2010
London, 13 August 2010 -- Moody's Investors Service has today assigned provisional long-
and short-term (P)Baa1/P-2 senior unsecured ratings to the
proposed EMTN programme (the "Programme") of Eurogrid GmbH
("Eurogrid"). All notes to be issued under the Programme will benefit
from an unconditional and irrevocable guarantee by Eurogrid's main
operating subsidiaries 50Hertz Transmission GmbH ("50Hertz")
and 50Hertz Offshore GmbH, itself a wholly owned subsidiary of 50Hertz.
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 from 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 a fund
managed by Industry Funds Management Pty Ltd. ("IFM"),
an investment management company that invests on behalf of a number of
Eurogrid acquired 50Hertz for an acquisition price of around EUR900 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 levels.
Eurogrid's main subsidiary 50Hertz operates under a relatively new
and untested incentive-based regulatory regime in Germany.
Whilst 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, 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 (P)Baa1/P-2 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 the group's medium-term financial profile will reflect
a gradual increase in leverage as the capital investment programme takes
pace, but nevertheless 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, the rating agency also takes into account positively
the presence of Elia as a strategic investor with 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 going forward, 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 ratings. Such an improvement
in the credit metrics would have to be accompanied with an established
track record of a 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
and/or RCF to Net Debt below high single-digits, due,
for example, to operational underperformance, higher than
expected dividend payments or material increases to capital expenditure,
without offsetting balance sheet measures.
The principal methodology used in rating Eurogrid was Moody's Regulated
Electric and Gas Network methodology, published in August 2009 and
available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Eurogrid is the holding company of 50Hertz Transmission GmbH, one
of the four German electricity transmission network operators, previously
owned by Vattenfall Europe AG, a wholly-owned subsidiary
of Swedish generator Vattenfall AB. 50Hertz operates Germany's
third largest electricity transmission network covering an area of more
than 109,000 square kilometres in the five former Eastern German
states as well as the cities of Berlin and Hamburg. Its network
comprises approximately 9,700 km of high voltage overhead lines.
As at December 2009, 50Hertz reported revenues of around EUR4.2
billion under German GAAP.
MD - Infrastructure Finance
Infrastructure Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Asst Vice President - Analyst
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 (P)Baa1/P-2 ratings to Eurogrid's proposed EMTN programme; outlook stable
One Canada Square
London E14 5FA
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