RTE Holding Company, CTE, Assigned #A-# Outlook Proposed Bond Rated #BBB+#

Stocks and Financial Services Press Releases Tuesday June 6, 2017 17:37
LONDON--6 Jun--S&P Global Ratings

LONDON (S&P Global Ratings) June 6, 2017--S&P Global Ratings assigned its 'A-' long--term corporate credit rating to Coentreprise de Transport d'Electricite (CTE), a holding company of French power grid Reseau de Transportd'Electricite (RTE). The outlook is stable.

At the same time, we assigned our 'BBB+' rating to the proposed issuance   expected in 2017.
The rating action reflects our view that debt at CTE, which owns 100% of RTE,   will be serviced by RTE's cash flow generation, and we therefore take a   consolidated view of RTE and CTE.

The newly created holding company CTE is a joint venture controlled by EDF (50.1%; owned through its dedicated asset portfolio set aside for the nuclear provisions), CDC (29.9%), and CNP Assurances (20%). CTE is an ad-hoc entity created as part of EDF's disposal process of a 49.9% stake of RTE, which was completed on March 31, 2017. A shareholder agreement between EDF, CDC, and CNP targets dividend payments to 60% of net result while keeping the leverage at RTE (excluding CTE) at about 60% of debt to regulated asset base. As part of this transaction, CTE raised a €2.8 billion bridge loan to acquire a proportion of the RTE shares from EDF, while EDF contributed its remaining RTE shares to the structure.

Our 'bbb+' stand-alone credit profile (SACP) assessment for CTE is based on our taking a consolidated approach of CTE together with RTE. The €2.8 billion bridge loan that CTE has in place is currently low cost. We expect CTE to have a prudent liability management and refinance a large part or the whole of the bridge loan before the end of 2017. The dividend flow from RTE to CTE--which we anticipate will be at least €200 million per year--is largely sufficient, in our view, to cover CTE's expected cost of debt and remunerate its shareholders. Given the high debt issued at the RTE level (about €10 billion) and the absence of operating assets in CTE beyond RTE shares, we believe that the debt issued by CTE is structurally subordinated to that of RTE and therefore we rate the proposed senior unsecured bond at 'BBB+', one notch lower than the corporate credit rating on CTE. This reflects that bondholders at CTE's level have a higher risk of default than bondholders at RTE's level and that we understand that RTE will not guarantee CTE's debt.

We view the group's business risk profile as excellent, supported by RTE's position as France's only power transmission system operator (TSO), with a monopolistic position conferred by law. CTE is not involved in any other activities. The French regulator, Commission de regulation de l'energie, governs nearly all of RTE's revenues and capital expenditures (capex). We view the French regulatory framework as very supportive. The strong predictability and limited volatility of RTE's sizable earnings underpin its business risk profile. RTE also has a good operating track record in ensuring grid safety and stability. At year-end 2016, RTE posted revenues of €4.4 billion and had a regulatory asset base of €13.6 billion.

Our adjusted debt for the group increases to €12.8 billion from €10.0 billion based on our expectation for year-end 2017. This results in the group funds from operations (FFO) to debt declining to 9%-10% on average over the new 2017-2021 regulatory period. We believe that improved profitability in the new regulatory period starting in 2017 partially mitigates the higher level of debt. We expect EBITDA margins to improve despite lower regulatory return, to 6.125% from August 2017 until 2021 versus 7.25% previously. This is because the regulator adjusted down RTE's profitability for past outperformance during the two previous regulatory periods, but this adjustment will not be applied after 2017. This relates to the "Compte de Regulation des Charges et des Produits" mechanism, which we detail in our article "Why Do We See The French Electricity And Gas TSO Regulatory Framework As Supportive?" published on March 11, 2016 on RatingsDirect. As a result, we expect EBITDA to increase to €2.0 billion in 2019-2020 from about €1.7 billion at year-end 2016.

We view the group's financial risk profile as significant, and its credit metrics as weak versus its European rated peers, including Fingrid, Terna, and National Grid. We therefore apply a negative comparative adjustment to reflect this weaker financial profile. We continue to benchmark RTE's credit metrics to the low volatility table.

We view the likelihood of extraordinary support from the French government to CTE as moderate. As a result, the long-term ratings on CTE benefit from a one-notch uplift on its 'bbb+' SACP (versus a two-notch uplift for RTE). Indeed, CTE is indirectly controlled by the French government through its ownership from EDF and CDC, together representing 80% of the capital. The remaining 20% is owned by CNP Assurances, majority controlled by French public sector entities, including CDC. The shareholder agreement includes a five-year lock-up period, which provides a good degree of stability in the new shareholding structure. We view CTE's role as important for France as the holding company of the French TSO. RTE's importance to France is further reinforced by the government's aims to reduce the country's dependence on nuclear power by 2025 to 50% from 75% currently. RTE is a key enabler of such an energy transition.

In our base case, we assume:
Adjusted EBITDA margins of 35%-40% in the new regulatory period.Capex of around €1.3 billion-€1.4 billion per year.

A dividend based on a 60% payout ratio.Based on these assumptions, we arrive at the following credit measures: FFO to debt around 9%-10% on average, increasing toward the end of the regulatory period.Neutral to slightly negative free operating cash flow.

Consolidated net debt to regulated asset value around 80%.

The stable outlook on CTE reflects our expectation that consolidated leverage of the RTE group (including the additional debt at CTE) will result in FFO to debt of close to 10% in the next two to three years, on average, supported by cost rationalization and active debt management. The stable outlook also reflects our expectation that CTE will continue to benefit from a moderate likelihood of extraordinary support from the French government in the event of financial distress.

We could take a negative rating action if CTE's credit quality (ignoring potential state support) worsened by one notch to 'bbb', which we believe is unlikely given the regulated nature of RTE's activities, its good operating performance, and the current shareholder pact that targets RTE's leverage at 60% debt to regulated value.

We could, however, revise our approach if CTE failed to refinance most of its bridge loan by the end of 2017, as it might lead us to question the company's financial policy and its access to financial markets.
A downgrade could also occur if we revised down our assessment of a moderate likelihood of support.
We believe there is some potential for rating upside toward the end of the new regulatory period depending on RTE's performance and the financial policy of the new owners.

If the group demonstrated that it could maintain FFO to debt sustainably above 11%, on average, with a supportive financial policy and good operating performance, we might revise up the consolidated group's SACP to 'a-', which would lead to one-notch upgrade of CTE,all else being equal.

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