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TEXT-S&P affirms Bord Gais 'BBB+/A-2' ratings; outlook negative
August 21, 2012 / 10:23 AM / 5 years ago

TEXT-S&P affirms Bord Gais 'BBB+/A-2' ratings; outlook negative

Aug 21 -

Overview

-- On Aug. 2, 2012, we affirmed our 'BBB+/A-2' long- and short-term sovereign credit ratings on the Republic of Ireland. The outlook on Ireland remains negative.

-- We are now revising upward our view of likelihood of extraordinary support to Irish utility Bord Gais Eireann (Bord Gais) from the Irish government to "high" from "moderate" to reflect the government's intention to remain a majority shareholder and sell Bord Gais' power generation and supply business.

-- In accordance with our criteria on government-related entities, the above changes do not affect the corporate credit ratings on Bord Gais as long as we continue to assess its stand-alone credit profile (SACP) as 'bbb+' and the sovereign rating is 'BBB+'.

-- We are therefore affirming our 'BBB+/A-2' long- and short-term corporate credit ratings on Bord Gais.

-- The negative outlook reflects that on the sovereign and our view that, over the medium term, Bord Gais' SACP will remain under pressure due to uncertainties about the group's forthcoming restructuring.

Rating Action

On Aug. 21, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term corporate credit ratings and 'BBB+' senior unsecured debt ratings on Irish Utility Bord Gais Eireann (Bord Gais). The outlook is negative.

Rationale

The affirmation follows that on the Republic of Ireland (BBB+/Negative/A-2) on Aug. 2, 2012. For further details, see "Ireland Ratings Affirmed At 'BBB+/A-2'; Outlook Remains Negative," published on RatingsDirect on the Global Credit Portal.

The affirmation also follows the Irish government's announcement earlier this year that it intends to remain a majority shareholder of Bord Gais and to sell Bord Gais' power generation and supply business Bord Gais Energy. The government intends to retain the regulated gas transportation and distribution systems and two gas interconnectors.

The government plans to merge into Bord Gais the water supply businesses maintained by a number of local authorities. The government will incorporate these businesses into Irish Water, which will become a regulated and ring-fenced subsidiary of Bord Gais.

To reflect these changes, we are revising upward our assessment of Bord Gais' role for the Irish government to "very important" from "important" previously and its link with the government to "strong" from "limited." Consequently, we are revising upward our view of the likelihood of timely and sufficient extraordinary support to Bord Gais from the Irish government to "high" from "moderate" in accordance with our criteria on government-related entities (GREs).

We consider that the aforementioned changes to Bord Gais' activities are likely to strengthen its business risk profile, because more than 95% of its EBITDA is likely to come from regulated monopoly operations. That said, we believe that the establishment of Irish Water could be challenging for Bord Gais in terms of integration, additional costs, and investments. We also consider the lack of an established regulated framework for water activities in Ireland to be a negative factor for Bord Gais compared with its water peers in the U.K.

In addition, we do not yet have any information on the capital structure of the new entity and we do not have enough information to assess Bord Gais' financial risk profile following the completion of the sale, which is likely to occur before year-end 2013.

We therefore continue to assess Bord Gais' stand-alone credit profile (SACP) at 'bbb+'. In accordance with our criteria on GREs, the above changes do not affect the corporate credit ratings on Bord Gais as long as we continue to assess its SACP at 'bbb+' and the sovereign rating is 'BBB+'.

The SACP on Bord Gais reflects our assessment of the company's business risk profile as "strong" and its financial risk profile as "significant."

The "strong" business risk profile is underpinned by Bord Gais' leading market position in the Irish natural gas market and the significant proportion of stable and predictable cash flows from its low-risk regulated gas transmission and distribution network operations.

These strengths are partially offset by increasing competition in the energy retail market, promoted by the Irish government. This competition has resulted in Bord Gais losing share in the gas supply market and has prompted the company's expansion into the low-margin electricity supply market.

The "significant" financial risk profile reflects Bord Gais' partially debt-financed investments in power generation, and our view that the company's credit metrics have underperformed against our guidelines for the ratings over the past two years.

In our opinion, Bord Gais will be able to sustain the SACP of 'bbb+' if coverage of net debt by funds from operations (FFO) exceeds 13% on a Standard & Poor's-adjusted basis. This assumes that we continue to assess the company's business risk profile as "strong." Under our base-case scenario, Bord Gais' adjusted FFO to net debt will strengthen to more than 13.0% in 2012, compared with 12.9% in 2011.

The 'BBB+' long-term corporate credit rating on Bord Gais is based on the group's SACP, as well as on our opinion that there is a "high" likelihood that the Republic of Ireland would provide timely and sufficient extraordinary support to Bord Gais in the event of financial distress.

In accordance with our criteria for GREs, our view of a "high" likelihood of extraordinary government support is based on our assessment of Bord Gais':

-- "Very important" role as the monopoly owner and operator of the gas transmission and distribution networks in Ireland. Bord Gais also has a very important role in implementing the Irish government's reforms of water services in Ireland by setting up and operating Irish Water; and

-- "Strong" link with the Irish government, given our view that the government will remain an important majority shareholder, with no plans to privatize Bord Gais' core gas infrastructure business. Bord Gais is 96.73% state-owned, with the remainder held through an employee share ownership plan. While Bord Gais has an independent management team that makes autonomous business decisions, the government has a strong influence on the company's strategies and business plans, appoints eight of the nine Board members, and sets Bord Gais' borrowing limit.

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