Research Update:
Global Energy Group GDF SUEZ's
'A/A-1' Ratings On CreditWatch
Negative On Adverse Business
Outlook
Primary Credit Analyst:
Nicolas Riviere, Paris (33) 1-4420-6709; nicolas_riviere@standardandpoors.com
Secondary Contact:
Vittoria Ferraris, Milan (39) 02-72111-207; vittoria_ferraris@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
CreditWatch
Related Criteria And Research
Ratings List
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Research Update:
Global Energy Group GDF SUEZ's 'A/A-1' Ratings
On CreditWatch Negative On Adverse Business
Outlook
Overview
• In our view, the recent and significant deterioration in European energy
prices is structural.
• We believe this will erode GDF SUEZ's profitability and cash flow in the
coming years and put some pressure on its credit metrics.
• We are placing our 'A/A-1' corporate credit ratings on GDF SUEZ (GDFS) on
CreditWatch with negative implications.
• The CreditWatch placement reflects our view that we could revise downward
our assessment of GDFS' business risk profile, and lower the ratings, in
the absence of support from a strengthening financial profile.
Rating Action
On Jan. 29, 2013, Standard & Poor's Ratings Services placed its 'A' long-term
and 'A-1' short-term corporate credit ratings on France-based global energy
player GDF SUEZ S.A. (GDFS) and related entities on CreditWatch with negative
implications.
Rationale
The rating action reflects our view that European energy markets will remain
structurally challenged, as reflected by falling forward prices and generation
spreads for electricity. We believe this could in turn structurally weaken
GDFS' profitability and impair our current view of its business risk profile
as "excellent." We believe that this could also delay the recovery of the
group's credit metrics, which also depends upon the execution of a large
disposal program.
We believe GDFS' business risk profile is pressured by the structural
deterioration of power and gas market conditions in Europe, in particular
owing to depressed gas-fired generation margins that dilute the group's
earnings and profitability. We expect GDFS' adjusted funds from operation
(FFO) to debt in 2012 to be in line with our expectations of slightly under
23%. However, we now estimate that the group could underperform our November
2012 base-case scenario by about €1.5 billion in EBITDA by 2015–-adjusted for
Suez Environnement's deconsolidation--assuming commodity prices remain in line
with current forward prices and factoring in higher dilution from disposals,
which GDFS scaled up in December to €11 billion over 2013-2014.
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Research Update: Global Energy Group GDF SUEZ's 'A/A-1' Ratings On CreditWatch Negative On Adverse
Business Outlook
We believe however, that GDFS' €3.5 billion cost-cutting program between now
and 2015; its strong organic growth in fast-growing markets under contracted
terms; and the disposal of some merchant assets could mitigate the group's
earnings' contraction and offset the pressure on its credit metrics. In this
respect, we believe management has realistic disposal plans and is committed
to proactive actions. Nevertheless, although management's track record and the
group's strong financial flexibility confer credibility to its ambitious
plans, any significant shortfall in execution or weaker market conditions than
current forward prices suggest would likely hold back the strengthening of the
group's credit metrics in the medium term.
GDFS' business risk profile remains supported by the group's unrivaled scale
and diversification, its strong competitive positions in regional markets, its
sizable share of regulated and contracted operations, its young and clean
power generation assets, and its broad and highly diversified gas sourcing,
including its leading position in liquefied natural gas (LNG). These strengths
are partially offset by GDFS' increasing exposure to fast-growing but
historically volatile overseas markets, depressed market conditions in its
core European operations, and some political risks in its historic home
countries. Over the longer term, we believe an increased focus on long-term
contracted and regulated operations could support cash flow stability.
GDFS' financial risk profile remains supported by its "strong" liquidity and
financial flexibility, track record of financial discipline, and our
anticipation of positive free operating cash flow. Constraints include GDFS'
extensive investment program and high shareholder returns, which contribute to
the group's significant debt burden.
Liquidity
The 'A-1' short-term rating is supported by GDFS' liquidity, which we consider
to be "strong" under our criteria.
Projected sources of funds exceed projected uses by more than 2.2x over the
next 12 months, and by more than 2.1x in the subsequent 12 to 24 months.
Excluding any proceeds of asset sales not yet secured, projected sources of
funds exceed projected uses by nearly 1.9x over the next 12 months and by more
than 1.5x in the subsequent 12 to 24 months.
Our assessment is further supported by the group's ongoing and proactive
liquidity and debt management, solid relationships with banks, and ample and
proven access to capital markets, even under dire conditions. GDFS became one
of the few issuers of a century bond in March 2011. More recently between May
and October 2012, GDFS issued bonds for a total of about €6 billion with an
average cost of only 1.7%.
We factor into our liquidity assessment for the next 12 months, based on our
estimates, the following sources at end-2012:
• About €10 billion in available cash at the group level;
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Research Update: Global Energy Group GDF SUEZ's 'A/A-1' Ratings On CreditWatch Negative On Adverse
Business Outlook
• About €10 billion in available committed credit lines maturing beyond 12
months adjusted for outstanding commercial paper. This includes two
syndicated facilities: €4 billion maturing in June 2015 and €4.5 billion
maturing in March 2017, with one option for a one-year extension;
• Asset disposals that we assume at about €5.5 billion, in line with GDFS'
targets; and
• Our forecast of unadjusted FFO of about €10.2 billion over the next 12
months (on a pro forma basis not accounting for subsidiary Suez
Environnement's contribution in the first six months).
Against these sources, we factor in the following liquidity uses:
• Short-term debt of about €3.2 billion, net of outstanding commercial
paper;
• Our estimate of capital expenditures; not exceeding €8 billion in light
of management revised guidance;
• Dividend cash payments of about €4.2 billion including dividends of the
group's subsidiaries to minorities; and
• Our assumption of working capital needs of about €0.8 billion over the
next 12 months.
CreditWatch
The CreditWatch placement reflects our view that the depressed energy market
conditions in Europe and any shortfall in the execution of the group's
cost-cutting and disposal plans could weaken the company's credit profile,
which may lead us to lower the ratings. Such a downgrade could arise from a
reassessment of either the group's business risk or financial risk profile, in
accordance with our rating methodology. A weakening of GDFS' business risk
profile that may not be offset by a stronger financial profile would result in
a downgrade. We expect that a downgrade would be limited to one notch.
We expect to resolve the CreditWatch status within the coming three months. We
will review GDFS' business risk and financial risk profile in light of the
adverse evolution of its electricity and gas operations in Europe,
acceleration in the strategic shift toward nonmerchant activities and
fast-growing markets, and the execution risk of its cost-cutting, disposal,
and commissioning plans.
Related Criteria And Research
• GDF SUEZ S.A., Nov. 20, 2012
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To
GDF SUEZ S.A.
Corporate Credit Rating
A/Watch Neg/A-1
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
From
A/Stable/A-1
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Research Update: Global Energy Group GDF SUEZ's 'A/A-1' Ratings On CreditWatch Negative On Adverse
Business Outlook
Senior Unsecured
Commercial Paper
GIE Suez Alliance
International Power PLC
Corporate Credit Rating
Belgelec Finance S.A.*
Electrabel*
GIE Suez Alliance
Senior Unsecured
*Guaranteed by GIE Suez Alliance.
A/Watch Neg
A-1/Watch Neg
A
A-1
A/Watch Neg/--
A/Stable/--
A/Watch Neg
A
International Power Finance (2010) PLC
International Power Finance (Jersey) II Ltd.
International Power Finance (Jersey) III Ltd.
International Power Finance (Jersey) Ltd.
Senior Unsecured
A-/Watch Neg
AThese four issues are guaranteed by International Power PLC.
Additional Contact:
Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
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(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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