11 November 2002 – Standard & Poor’s Ratings Services said Friday it lowered its long-term corporate credit ratings on Austria-based electricity generation utility Verbundgesellschaft (Verbund) to single-‘A’ from single-‘A’-plus.
S & P said the outlook for the company was stable. At the same time, Standard & Poor’s lowered its senior unsecured debt ratings on some of Verbund’s issues to single-‘A’-minus from single-‘A’-plus to reflect structural subordination.
The rating actions reflect Verbund’s exposure to competitive wholesale power markets and its high debt burden.
“Although the plan by Verbund and Austria’s main regional electricity utilities to merge their trading and supply activities in a partnership called EnergieAustria will mitigate market and operating risks, it will not offset them completely,” said Standard & Poor’s credit analyst Amrit Gescher. A decision by the EU anti-trust commission is expected later in 2002.
Factors supporting Verbund’s ratings include its favourable monopoly as owner and operator of the national transmission grid and its low marginal cost and environmentally friendly generation assets, which account for about one-half of Austria’s production capacity. The main constraining factors are the company’s high debt, exposure to the competitive wholesale power markets, and some susceptibility to poor hydrological conditions.
The Austrian power market was fully liberalized in October 2001. As a result, the competitive pace is likely to increase, and has already developed faster than expected in wholesale, although it may be slowed by the impact of EnergieAustria.
About two-thirds of the company’s profits, but slightly less in cash flow, comes from generation and wholesale supply. Although underpinned by among the most favourable low-marginal-cost production assets in Central Europe-83 per cent of its 7350 MW are hydro-based–and a rigorous, successful cost-cutting program, competition and revenue risks have increased considerably. Transmission, however, which accounts for about one-third of profits and cash flow is expected to continue generating fairly stable revenues and earnings based on volume growth and cost cutting.
Verbund’s fairly weak financial profile improved in 2001. The high debt burden, largely the result of a recent investment program, was reduced to A2.5bn (adjusted; $2.5bn), or adjusted net leverage of about 61 per cent. Supported by an improved price environment and earnings, funds from operations (FFO) net interest coverage improved to 3.0 times (x) from a low of 2.5x following liberalization, and net FFO to adjusted debt improved to 11.0 per cent from 7.5 per cent. Although still fairly modest, these ratios are expected to stabilize and continue to improve gradually.
“The stable outlook presumes that the planned EnergieAustria will come to fruition in early 2003 and that prices will continue to improve moderately, as expected,” said Ms. Gescher. “Cancellation or significant delay in implementation of EnergieAustria or a departure from the current strategy to reduce debt levels could, however, lead to downward pressure on the ratings.”