S&P: Eneco Beheer Rating On Watch Negative; Eneco Holding Rating Affirmed After Further Disclosure On Likely Unbundling Plans
At the same time, we placed our 'A-' long-term corporate credit rating on N. V. Eneco Beheer on CreditWatch with negative implications, while affirming our short-term 'A-2' rating.
Finally, we assigned our 'A-' long-term corporate credit rating to Stedin Netbeheer B. V. (Stedin Netbeheer). The outlook is stable.
The affirmation of the ratings on Eneco Holding and the new rating assigned to Stedin Netbeheer follow the company's disclosure of how it plans to unbundle its regulated network from the rest of its activities by Jan. 31, 2017, if it is forced to do so. This plan is based on the separation of the businesses into two entities, with Eneco Holding and Stedin Netbeheer holding the network activities, and Eneco Beheer operating the non-network businesses, including mainly power generation and supply and energy services.
We estimate that the regulated group--composed of Eneco Holding and Stedin Netbeheer--would have an excellent business risk profile and would maintain a significant financial risk profile with funds from operations (FFO) to debt at 11%-12% on average over the next few years. This is a higher leverage than Eneco Holding is currently operating at, but the regulated entity would benefit from a stronger business risk profile, almost entirely comprising regulated network activities benefiting from a strong regulatory framework. We will benchmark the credit metrics on Eneco Holding and Stedin Netbeheer on the low volatility table post-unbundling. Stedin Netbeheer owns a 45,037 km electricity distribution network in The Netherlands and is an efficient operator. We understand that all existing bonds will remain within the regulated group.
We believe that the unregulated group, which will be owned by Eneco Beheer, will have a satisfactory business risk profile, benefiting from the majority of its EBITDA being generated by a portfolio of renewable energy in supportive jurisdictions, as well as district heating and cooling activities. This compensates, to some extent, for the competitive supply and energy services activities and the group's limited size compared to European peers. We anticipate that Eneco Beheer should be able to maintain a modest financial risk profile based on an FFO-to-debt ratio of above 50%, which would be commensurate with a 'BBB+' rating, as we would benchmark the credit metrics on the standard volatility table.
The Court of Amsterdam still plans to issue its final ruling on Oct. 25, 2016. Although there is little chance that the ruling will be favorable to Eneco Holding, we believe there is still a small degree of uncertainty over whether unbundling will go ahead, given the legal precedents over the past 10 years on the unbundling issue. This is why we still align the ratings on Eneco Beheer with Eneco Holding's group credit profile, but have placed the long-term rating on CreditWatch with negative implications pending the court ruling. The CreditWatch placement reflects the likelihood that we could downgrade Eneco Beheer to 'BBB+' should the transaction go ahead.
Eneco Holding issued a €500 million hybrid in 2014, which included a clause giving the company a call option if unbundling was forced upon the company and Eneco Holding had to dispose of the regulated networks. As the current plan is for Eneco Holding to remain owner of the regulated network, the clause would not operate and therefore there is no impact on our assessment of the equity content of the hybrid.
The stable outlook on Eneco Holding and Stedin Netbeheer reflects the current performance of the group and our view that the proposed transaction will not result in any change to our existing 'A-' long-term ratings. The outlook reflects that Eneco Holding and Stedin Netbeheer will maintain a FFO-to-debt ratio clearly above 11% on a sustainable basis after the unbundling.
Pre-unbundling, we could lower the ratings on Eneco Holding if we expected its credit metrics to deteriorate below the levels we consider commensurate with the ratings for an extended period of time. In particular, this could happen if we expected the adjusted FFO-to-debt ratio to fall consistently below 25%. This could be caused by a substantial debt-financed acquisition or a significant increase in Eneco Holding's capex or shareholder distributions.
Post-unbundling, we see a remote risk of a downgrade of Eneco Holding and Stedin Netbeheer given the group's investment plan and earnings visibility. However, if we expect FFO to debt to fall below 11% on a sustainable basis, on the back of unfavorable regulatory changes or a more-aggressive financial policy, we could take a negative rating action.
We consider an upgrade of Eneco Holding and Stedin Netbeheer unlikely as long as current uncertainties surrounding unbundling remain.
The negative CreditWatch placement on Eneco Beheer reflects our view that the unregulated group is likely to be rated one notch lower if Eneco Holding is forced to unbundle. Based on the management statement, we don't expect a downgrade of more than one notch as we understand the unregulated group will sustain FFO to debt above 50% on a long-term basis. We expect to resolve the CreditWatch placement once the Court of Amsterdam has issued its final hearing at the end of October 2016.