Moody's - Sourcebook_Project & Infrastructure Finance 2006
Moody's - Sourcebook_Project & Infrastructure Finance 2006
Moody's - Sourcebook_Project & Infrastructure Finance 2006
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99 Church Street<br />
New York, New York 10007<br />
Telephone: 212.553.7923<br />
E-mail: daniel.gates@moodys.com<br />
Website: www.moodys.com<br />
A Note From The Director<br />
Welcome to the latest edition of Moody’s <strong>Project</strong> <strong>Finance</strong> <strong>Sourcebook</strong>.<br />
Credit trends continue to be stable for the majority of project finance issuers. For the second year in<br />
a row, more project finance ratings were upgraded than were downgraded during 2005. This was consistent<br />
with broad rating trends for several sectors that have a large number of project finance issuers,<br />
including power, energy, and toll roads. The rating outlook distribution for project finance issuers is currently<br />
quite balanced. Over 90% of issuers have a stable outlook, and the number of issuers with a positive<br />
outlook slightly exceeds the number with a negative outlook.<br />
New issuance of bonds and loans for power projects increased in 2005 and is expected to increase<br />
significantly in <strong>2006</strong>. Financing primarily relates to acquisition and refinancing for existing assets. However,<br />
new construction is beginning to revive after several years in which there was little new construction<br />
in North America and some other regions due to excess generating capacity. New construction is<br />
particularly focused on plants that are coal-fired or located in transmission constrained areas, and new<br />
builds that will provide greater self-sufficiency for load serving entities.<br />
There continues to be a strong flow of infrastructure project finance activity, particularly in Europe<br />
and Latin America. There are more privatization transactions in Latin America, the U.S., and in Canada,<br />
where some transactions are now emulating the concession approach that has been utilized for a number<br />
of years in the U.K. and Australia.<br />
Moody’s global project and infrastructure finance team continues to maintain comprehensive coverage<br />
of this evolving market. This sourcebook contains some of the pre-sale reports, special comments,<br />
and rating methodologies that we believe will be most relevant and useful. If you have questions or feedback,<br />
please contact any of the project finance professionals whose names and contact information are<br />
listed on page vi. Please also visit our website at www.moodys.com/projectfinance.<br />
Sincerely,<br />
Daniel Gates<br />
Managing Director<br />
<strong>Project</strong> and <strong>Infrastructure</strong> <strong>Finance</strong>
PAGE INTENTIONALLY LEFT BLANK
Moody’s <strong>Sourcebook</strong><br />
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong><br />
February <strong>2006</strong>
PUBID: 94984<br />
© Copyright <strong>2006</strong>, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, "MOODY’S"). All rights reserved. ALL<br />
INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER<br />
TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR<br />
MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources<br />
believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of<br />
any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular<br />
purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or<br />
relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in<br />
connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special,<br />
consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages,<br />
resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein<br />
are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED,<br />
AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION<br />
IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on<br />
behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and<br />
each provider of credit support for, each security that it may consider purchasing, holding or selling.<br />
MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by<br />
MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody’s Corporation<br />
(MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating<br />
processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly<br />
reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate<br />
Governance — Director and Shareholder Affiliation Policy.”<br />
Moody’s Investors Service Pty Limited does not hold an Australian financial services licence under the Corporations Act. This credit rating opinion has been prepared without taking into<br />
account any of your objectives, financial situation or needs. You should, before acting on the opinion, consider the appropriateness of the opinion having regard to your own objectives,<br />
financial situation and needs.<br />
PRINTED IN U.S.A<br />
• iv •
Table of Contents<br />
Moody’s Investors Service — Global <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Group.............................................vi<br />
Sources of Updated Ratings and Information ........................................................................................... vii<br />
Moody’s Rating Definitions .......................................................................................................................ix<br />
Rating Lists ..........................................................................................................................................xxxv<br />
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings ......................................................................................................xxxvii<br />
Global Power Rating List by Operating Relationship ........................................................................................ xliii<br />
Government Bonds & Country Ceilings.......................................................................................................... xlviii<br />
Government and Government-Related Issuers .................................................................................................... l<br />
Supranationals..................................................................................................................................................lix<br />
Country Guidelines for Local Currency Obligations .............................................................................................lx<br />
Bibliography of Pre-Sale Reports ............................................................................................................. lxi<br />
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research 1999-2004.................................................... lxii<br />
Special Reports .....................................................................................................................................lxvii<br />
Global Independent Exploration and Production (E&P) Industry........................................................................ lxix<br />
<strong>Moody's</strong> Comments on the Government of Canada's Proposed New Airport Rent Policy ..................................xcv<br />
Australian <strong>Infrastructure</strong> Companies Remain Appropriately Rated at Investment Grade Despite High Debt Levels........ xcvii<br />
U.S. Toll Road Sector Outlook Stays Stable for 2005 ........................................................................................ciii<br />
Latin American Power Industry Update ............................................................................................................cix<br />
Credit Opinions: <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> ...................................................................................... 1<br />
Credit Opinions: Governments, Supranationals, Financial Guarantors, and <strong>Project</strong> Developers............... 125<br />
Glossaries............................................................................................................................................. 185<br />
Alphabetical Index of Credit Opinions.................................................................................................... 193<br />
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong>..................................................................................................................... 195<br />
Governments, Supranationals, Financial Guarantors, and <strong>Project</strong> Developers ................................................. 196<br />
Page<br />
• v •
Moody’s Global <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Group<br />
Visit our website at www.moodys.com/projectfinance<br />
NEW YORK CITY<br />
Utilities and <strong>Project</strong> <strong>Finance</strong><br />
Daniel Gates, Managing Director<br />
Chee Mee Hu, Senior Vice President<br />
Richard Donner, Vice President<br />
Michael Haggarty, Vice President<br />
A.J. Sabatelle, Vice President<br />
Laura Schumacher, Vice President<br />
Sanjeeva Senanayake, Vice President<br />
Scott Solomon, Vice President<br />
Aaron Freedman, Assistant Vice President<br />
Fred Zelaya, Assistant Vice President<br />
Oil & Gas<br />
John Diaz, Managing Director<br />
Thomas Coleman, Senior Vice President<br />
Alexandra Parker, Senior Vice President<br />
Gretchen French, Analyst<br />
Public <strong>Finance</strong><br />
Maria Matesanz, Senior Vice President/Team Leader<br />
Dan Aschenbach, Senior Vice President<br />
Bart Oosterveld, Vice President<br />
Anne Van Praagh, Vice President<br />
Tom Paolicelli, Vice President<br />
Josh Schaff, Analyst<br />
212.553.7923........................................................ daniel.gates@moodys.com<br />
212.553.3665........................................................ cheemee.hu@moodys.com<br />
212.553.7226.................................................... richard.donner@moodys.com<br />
212.553.7172................................................ michael.haggarty@moodys.com<br />
212.553.4136..................................................angelo.sabatelle@moodys.com<br />
212.553.3853............................................... laura.schumacher@moodys.com<br />
212.553.3669......................................... mahasen.senanayake@moodys.com<br />
212.553.4358..................................................... scott.solomon@moodys.com<br />
212.553.4426...................................................aaron.freedman@moodys.com<br />
212.553.7278.......................................................... fred.zelaya@moodys.com<br />
212.553.1977............................................................. john.diaz@moodys.com<br />
212.553.0365................................................. thomas.coleman@moodys.com<br />
212.553.4889.................................................alexandra.parker@moodys.com<br />
212.553.3798...................................................gretchen.french@moodys.com<br />
212.553.7141.................................................. maria.matesanz@moodys.com<br />
212.553.0880..................................................dan.aschenbach@moodys.com<br />
212.553.7914....................................................bart.oosterveld@moodys.com<br />
212.553.7207.................................................. anne.vanpraagh@moodys.com<br />
212.553.0334................................................. thomas.paolicelli@moodys.com<br />
212.553.7831...................................................... joshua.schaff@moodys.com<br />
LONDON<br />
Stuart Lawton, Managing Director<br />
Andrew Blease, Vice President<br />
Monica Merli, Vice President<br />
Chetan Modi, Vice President<br />
Johan Verhaeghe, Vice President<br />
44.20.7772.5371..................................................stuart.lawton@moodys.com<br />
44.20.7772.5541................................................andrew.blease@moodys.com<br />
44.20.7772.5433..................................................monica.merli@moodys.com<br />
44.20.7772.5552...................................................chetan.modi@moodys.com<br />
44.20.7772.8652............................................ johan.verhaeghe@moodys.com<br />
PARIS<br />
Eric de Bodard, Managing Director<br />
44.20.7772.5308.................................................eric.debodard@moodys.com<br />
HONG KONG<br />
Gary Lau, Senior Vice President<br />
Ken Chan, Assistant Vice President<br />
852.2916.1177.............................................................gary.lau@moodys.com<br />
852.2916.1162...........................................................ken.chan@moodys.com<br />
SYDNEY<br />
Brian Cahill, Managing Director<br />
Terry Fanous, Vice President<br />
David Howell, Vice President<br />
612.9270.8105........................................................ brian.cahill@moodys.com<br />
612.9270.8125.......................................................terry.fanous@moodys.com<br />
612.9270.8167......................................................david.howell@moodys.com<br />
• vi •
Sources of Updated Ratings and Information<br />
Moody’s ratings are continuously monitored and are subject to change or may be placed under review for possible upgrade or downgrade, subsequent to the publication of this issue. To ensure that investors<br />
have access to the most current status of its ratings, Moody’s makes several sources of information available.<br />
WEB SITE<br />
For the most up-to-date information on ratings, products & services, and other general analytical inquiries, please visit our website at: www.moodys.com<br />
ELECTRONIC DELIVERY SERVICES<br />
Moody’s ratings and research are available electronically via the internet, CD ROM, Lotus Notes, and Bloomberg. If you are interested in these services, contact your Moody’s sales representative,<br />
call 212.553.1658, or visit http://www.moodys.com.<br />
OTHER SERVICES<br />
• Daily facsimiles summarizing Moody’s corporate rating actions.<br />
• Weekly e-mails summarizing Moody’s research highlights on bank, corporate, insurance, sovereign, and structured finance issuers.<br />
• In-depth research reports on the credit quality of large issuers of corporate debt securities and other fixed-income obligations, including bonds, CDs, guaranteed investment contracts and assetbacked<br />
securities.<br />
MOODY’S INFORMATION CENTERS<br />
Moody’s has Information Centers worldwide which may be contacted by phone, fax, or e-mail. They are available to provide up-to-date rating information, as well as details on analytical rationale<br />
of Moody’s rating actions.<br />
THE AMERICAS<br />
EUROPE • MIDDLE EAST • AFRICA<br />
ASIA • PACIFIC<br />
New York<br />
Client Services<br />
Telephone: 1.212.553.1653<br />
Fax: 1.212.553.0882<br />
e-mail: clientservices@moodys.com<br />
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Telephone: 1.212.553.0377<br />
Fax: 1.212.553.0882<br />
e-mail: ratingsdesk@moodys.com<br />
London<br />
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Telephone: 44.20.7772.5454<br />
Fax: 44.20.7623.8969<br />
e-mail: csdlondon@moodys.com<br />
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e-mail: ratingslondon@moodys.com<br />
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Fax: 81.3.5408.4010<br />
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FURTHER INFORMATION<br />
For additional information on this publication, or on any of Moody’s analytical services, please contact one of the following Moody’s representatives:<br />
THE AMERICAS<br />
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ASIA • PACIFIC<br />
Hong Kong: Enoch Chiu<br />
Moody’s Asia Pacific Ltd.<br />
Room 2510-2514,<br />
International<br />
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Sydney: Vickie Brumwell<br />
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Tokyo:<br />
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Moody’s Taiwan Branch<br />
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Sec 1, Taipei, 110 Taiwan<br />
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Seoul:<br />
<strong>Moody's</strong> Asia Pacific Limited<br />
Korea Representative Office<br />
SKC B/D 12 Fl.<br />
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Singapore: Christina Maynes<br />
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Milan:<br />
Investor Services<br />
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Frankfurt:<br />
Moscow:<br />
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Johannesburg: Moody’s Investors Service<br />
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Paris: Pierre-Guy Cotin<br />
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Cyprus Limited<br />
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319, 28th of October Avenue<br />
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CY 3301 Limassol, Cyprus<br />
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34.91.310.14.54<br />
To learn more about Moody’s Partnerships and Alliances worldwide, please visit: www.moodys.com<br />
• vii •
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Moody’s<br />
Rating Definitions<br />
• ix •
PAGE INTENTIONALLY LEFT BLANK
Introduction<br />
Purpose<br />
The system of rating securities was originated by John Moody in 1909. The purpose of Moody’s ratings is<br />
to provide investors with a simple system of gradation by which relative creditworthiness of securities<br />
may be noted.<br />
Rating Symbols<br />
Gradations of creditworthiness are indicated by rating symbols, with each symbol representing a group in<br />
which the credit characteristics are broadly the same. There are nine symbols as shown below, from that<br />
used to designate least credit risk to that denoting greatest credit risk:<br />
Aaa Aa A Baa Ba B Caa Ca C<br />
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa<br />
through Caa.<br />
Absence of a Rating<br />
Where no rating has been assigned or where a rating has been withdrawn, it may be for reasons unrelated<br />
to the creditworthiness of the issue.<br />
Should no rating be assigned, the reason may be one of the following:<br />
1) An application was not received or accepted.<br />
2) The issue or issuer belongs to a group of securities or entities that are not rated as a matter of policy.<br />
3) There is a lack of essential data pertaining to the issue or issuer.<br />
4) The issue was privately placed, in which case the rating is not published in<br />
Moody’s publications.<br />
Withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory<br />
analysis; if there is no longer available reasonable up-to-date data to permit a judgment to be formed;<br />
if a bond is called for redemption; or for other reasons.<br />
Changes in Rating<br />
The credit quality of most issuers and their obligations is not fixed and steady over a period of time, but<br />
tends to undergo change. For this reason changes in ratings occur so as to reflect variations in the intrinsic<br />
relative position of issuers and their obligations.<br />
A change in rating may thus occur at any time in the case of an individual issue. Such rating change<br />
should serve notice that Moody’s observes some alteration in creditworthiness, or that the previous rating<br />
did not fully reflect the quality of the bond as now seen. While because of their very nature, changes are to<br />
be expected more frequently among bonds of lower ratings than among bonds of higher ratings. Nevertheless,<br />
the user of bond ratings should keep close and constant check on all ratings — both high and low —<br />
to be able to note promptly any signs of change in status that may occur.<br />
Limitations to Uses of Ratings 1<br />
Obligations carrying the same rating are not claimed to be of absolutely equal credit quality. In a broad<br />
sense, they are alike in position, but since there are a limited number of rating classes used in grading<br />
thousands of bonds, the symbols cannot reflect the same shadings of risk which actually exist.<br />
As ratings are designed exclusively for the purpose of grading obligations according to their credit<br />
quality, they should not be used alone as a basis for investment operations. For example, they have no<br />
value in forecasting the direction of future trends of market price. Market price movements in bonds are<br />
influenced not only by the credit quality of individual issues but also by changes in money rates and general<br />
economic trends, as well as by the length of maturity, etc. During its life even the highest rated bond<br />
may have wide price movements, while its high rating status remains unchanged.<br />
1. As set forth more fully on the copyright, credit ratings are, and must be construed solely as, statements of opinion and not<br />
statements of fact or recommendations to purchase, sell or hold any securities. Each rating or other opinion must be weighed<br />
solely as one factor in any investment decision made by or on behalf of any user of the information, and each such user must<br />
accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of<br />
credit support for, each security that it may consider purchasing, selling or holding.<br />
• xi •
The matter of market price has no bearing whatsoever on the determination of ratings, which are not<br />
to be construed as recommendations with respect to “attractiveness”. The attractiveness of a given bond<br />
may depend on its yield, its maturity date or other factors for which the investor may search, as well as on<br />
its credit quality, the only characteristic to which the rating refers.<br />
Since ratings involve judgements about the future, on the one hand, and since they are used by investors<br />
as a means of protection, on the other, the effort is made when assigning ratings to look at “worst” possibilities<br />
in the “visible” future, rather than solely at the past record and the status of the present. Therefore,<br />
investors using the rating should not expect to find in them a reflection of statistical factors alone, since<br />
they are an appraisal of long-term risks, including the recognition of many non-statistical factors.<br />
Though ratings may be used by the banking authorities to classify bonds in their bank examination<br />
procedure, Moody’s ratings are not made with these bank regulations in mind. Moody’s Investors Service’s<br />
own judgement as to the desirability or non-desirability of a bond for bank investment purposes is not indicated<br />
by Moody’s ratings.<br />
Moody’s ratings represent the opinion of Moody’s Investors Service as to the relative creditworthiness<br />
of securities. As such, they should be used in conjunction with the descriptions and statistics appearing in<br />
Moody’s publications. Reference should be made to these statements for information regarding the issuer.<br />
Moody’s ratings are not commercial credit ratings. In no case is default or receivership to be imputed<br />
unless expressly stated.<br />
• xii •
Credit Ratings<br />
GENERAL<br />
Long-Term Obligation Ratings<br />
Moody’s long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations<br />
with an original maturity of one year or more. They address the possibility that a financial obligation will<br />
not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered<br />
in the event of default.<br />
Moody’s Long-Term Rating Definitions:<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Caa<br />
Ca<br />
C<br />
Obligations rated Aaa are judged to be of the highest quality, with minimal<br />
credit risk.<br />
Obligations rated Aa are judged to be of high quality and are subject to very<br />
low credit risk.<br />
Obligations rated A are considered upper-medium grade and are subject to<br />
low credit risk.<br />
Obligations rated Baa are subject to moderate credit risk. They are considered<br />
medium-grade and as such may possess certain speculative characteristics.<br />
Obligations rated Ba are judged to have speculative elements and are subject<br />
to substantial credit risk.<br />
Obligations rated B are considered speculative and are subject to high credit risk.<br />
Obligations rated Caa are judged to be of poor standing and are subject to<br />
very high credit risk.<br />
Obligations rated Ca are highly speculative and are likely in, or very near,<br />
default, with some prospect of recovery of principal and interest.<br />
Obligations rated C are the lowest rated class of bonds and are typically in<br />
default, with little prospect for recovery of principal or interest.<br />
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa<br />
through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating<br />
category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the<br />
lower end of that generic rating category.<br />
Medium-Term Note Ratings<br />
Moody’s assigns long-term ratings to individual debt securities issued from medium-term note (MTN) programs,<br />
in addition to indicating ratings to MTN programs themselves. Notes issued under MTN programs<br />
with such indicated ratings are rated at issuance at the rating applicable to all pari passu notes issued<br />
under the same program, at the program’s relevant indicated rating, provided such notes do not exhibit any<br />
of the characteristics listed below:<br />
• Notes containing features that link interest or principal to the credit performance of any third<br />
party or parties<br />
• Notes allowing for negative coupons, or negative principal<br />
• Notes containing any provision that could obligate the investor to make any additional payments<br />
• Notes containing provisions that subordinate the claim.<br />
For notes with any of these characteristics, the rating of the individual note may differ from the indicated<br />
rating of the program.<br />
• xiii •
Market participants must determine whether any particular note is rated, and if so, at what rating level.<br />
Moody’s encourages market participants to contact Moody’s Ratings Desks or visit www.moodys.com<br />
directly if they have questions regarding ratings for specific notes issued under a medium-term note program.<br />
Unrated notes issued under an MTN program may be assigned an NR symbol.<br />
Short-Term Ratings<br />
Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations.<br />
Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such<br />
obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.<br />
Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:<br />
P-1<br />
P-2<br />
P-3<br />
NP<br />
Issuers (or supporting institutions) rated Prime-1 have a superior ability to<br />
repay short-term debt obligations.<br />
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay<br />
short-term debt obligations.<br />
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to<br />
repay short-term obligations.<br />
Issuers (or supporting institutions) rated Not Prime do not fall within any of the<br />
Prime rating categories.<br />
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term<br />
rating of the issuer, its guarantor or support-provider.<br />
Issuer Ratings<br />
Issuer Rating: Corporates and Financial Institutions<br />
Issuer Ratings are opinions of the ability of entities to honor senior unsecured financial obligations and<br />
contracts. Moody’s rating symbols for Issuer Ratings are identical to those used to indicate the credit quality<br />
of long-term obligations.<br />
Counterparty Ratings: Derivatives Product Companies<br />
Issuer ratings assigned to derivative product companies and clearinghouses are opinions of the financial<br />
capacity of an obligor to honor its senior obligations under financial contracts, given appropriate documentation<br />
and authorizations.<br />
• xiv •
SECTOR SPECIFIC<br />
US Municipal and Tax-Exempt Ratings<br />
Municipal Ratings are opinions of the investment quality of issuers and issues in the US municipal and taxexempt<br />
markets. As such, these ratings incorporate Moody’s assessment of the default probability and loss<br />
severity of these issuers and issues. The default and loss content for Moody’s municipal long-term rating<br />
scale differs from Moody’s general long-term rating scale. (Please refer to Corporate Equivalent Ratings<br />
under Policies and Procedures.)<br />
Municipal Ratings are based upon the analysis of four primary factors relating to municipal finance:<br />
economy, debt, finances, and administration/management strategies. Each of the factors is evaluated individually<br />
and for its effect on the other factors in the context of the municipality’s ability to repay its debt.<br />
Municipal Long-Term Rating Definitions:<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Caa<br />
Ca<br />
C<br />
Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to<br />
other US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other<br />
US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated A present above-average creditworthiness relative to other<br />
US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated Baa represent average creditworthiness relative to other US<br />
municipal or tax- exempt issuers or issues.<br />
Issuers or issues rated Ba demonstrate below-average creditworthiness relative to<br />
other US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated B demonstrate weak creditworthiness relative to other US<br />
municipal or tax- exempt issuers or issues.<br />
Issuers or issues rated Caa demonstrate very weak creditworthiness relative to<br />
other US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to<br />
other US municipal or tax-exempt issuers or issues.<br />
Issuers or issues rated C demonstrate the weakest creditworthiness relative to other<br />
US municipal or tax-exempt issuers or issues.<br />
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating category from Aa through<br />
Caa. The modifier 1 indicates that the issuer or obligation ranks in the higher end of its generic rating<br />
category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower<br />
end of that generic rating category.<br />
• xv •
US Municipal Short-Term Debt and Demand Obligation Ratings<br />
Short-Term Debt Ratings<br />
There are three rating categories for short-term municipal obligations that are considered investment grade.<br />
These ratings are designated as Municipal Investment Grade (MIG) and are divided into three levels —<br />
MIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated<br />
SG, or speculative grade. MIG ratings expire at the maturity of the obligation.<br />
MIG 1<br />
MIG 2<br />
MIG 3<br />
SG<br />
This designation denotes superior credit quality. Excellent protection is<br />
afforded by established cash flows, highly reliable liquidity support, or demonstrated<br />
broad-based access to the market for refinancing.<br />
This designation denotes strong credit quality. Margins of protection are<br />
ample, although not as large as in the preceding group.<br />
This designation denotes acceptable credit quality. Liquidity and cash-flow<br />
protection may be narrow, and market access for refinancing is likely to be<br />
less well-established.<br />
This designation denotes speculative-grade credit quality. Debt instruments in<br />
this category may lack sufficient margins of protection.<br />
Demand Obligation Ratings<br />
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned; a long or<br />
short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of<br />
the degree of risk associated with scheduled principal and interest payments. The second element represents<br />
Moody’s evaluation of the degree of risk associated with the ability to receive purchase price upon<br />
demand (“demand feature”), using a variation of the MIG rating scale, the Variable Municipal Investment<br />
Grade or VMIG rating.<br />
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g.,<br />
Aaa/NR or NR/VMIG 1.<br />
VMIG rating expirations are a function of each issue’s specific structural or credit features.<br />
VMIG 1<br />
VMIG 2<br />
VMIG 3<br />
SG<br />
This designation denotes superior credit quality. Excellent protection is<br />
afforded by the superior short-term credit strength of the liquidity provider and<br />
structural and legal protections that ensure the timely payment of purchase<br />
price upon demand.<br />
This designation denotes strong credit quality. Good protection is afforded by the<br />
strong short-term credit strength of the liquidity provider and structural and legal<br />
protections that ensure the timely payment of purchase price upon demand.<br />
This designation denotes acceptable credit quality. Adequate protection is<br />
afforded by the satisfactory short-term credit strength of the liquidity provider<br />
and structural and legal protections that ensure the timely payment of purchase<br />
price upon demand.<br />
This designation denotes speculative-grade credit quality. Demand features<br />
rated in this category may be supported by a liquidity provider that does not<br />
have an investment grade short-term rating or may lack the structural and/or<br />
legal protections necessary to ensure the timely payment of purchase price<br />
upon demand.<br />
• xvi •
Corporate Family Ratings<br />
Moody’s Corporate Family Ratings are generally employed for speculative grade corporate issuers. A Corporate<br />
Family Rating is an opinion of a corporate family’s ability to honor all of its financial obligations and<br />
is assigned to a corporate family as if it had:<br />
• a single class of debt;<br />
• a single consolidated legal entity structure.<br />
A Corporate Family Rating does not reference an obligation or class of debt and thus does not reflect<br />
priority of claim. It applies to all affiliates under the management control of the entity to which it is<br />
assigned. Moody’s employs the general long-term rating scale for Corporate Family Ratings.<br />
Speculative Grade Liquidity Ratings<br />
Moody’s Speculative Grade Liquidity Ratings are opinions of an issuer’s relative ability to generate cash<br />
from internal resources and the availability of external sources of committed financing, in relation to its<br />
cash obligations over the coming 12 months. Speculative Grade Liquidity Ratings will consider the likelihood<br />
that committed sources of financing will remain available. Other forms of liquidity support will be<br />
evaluated and consideration will be given to the likelihood that these sources will be available during the<br />
coming 12 months. Speculative Grade Liquidity Ratings are assigned to speculative grade issuers that are<br />
by definition Not Prime issuers.<br />
SGL-1<br />
SGL-2<br />
SGL-3<br />
SGL-4<br />
Issuers rated SGL-1 possess very good liquidity. They are most likely to have<br />
the capacity to meet their obligations over the coming 12 months through<br />
internal resources without relying on external sources of committed financing.<br />
Issuers rated SGL-2 possess good liquidity. They are likely to meet their obligations<br />
over the coming 12 months through internal resources but may rely on<br />
external sources of committed financing. The issuer’s ability to access committed<br />
sources of financing is highly likely based on Moody’s evaluation of nearterm<br />
covenant compliance.<br />
Issuers rated SGL-3 possess adequate liquidity. They are expected to rely on<br />
external sources of committed financing. Based on its evaluation of near-term<br />
covenant compliance, Moody’s believes there is only a modest cushion, and<br />
the issuer may require covenant relief in order to maintain orderly access to<br />
funding lines.<br />
Issuers rated SGL-4 possess weak liquidity. They rely on external sources of<br />
financing and the availability of that financing is, in Moody’s opinion,<br />
highly uncertain.<br />
Bank Deposit Ratings<br />
Moody’s Bank Deposit Ratings are opinions of a bank’s ability to repay punctually its foreign and/or<br />
domestic currency deposit obligations. Foreign currency deposit ratings are subject to Moody’s country<br />
ceilings for foreign currency deposits. This may result in the assignment of a different (and typically lower)<br />
rating for the foreign currency deposits relative to the bank’s rating for domestic currency obligations.<br />
Unless otherwise indicated, Moody’s Bank Deposit Ratings apply to a bank’s foreign and domestic<br />
currency deposit obligations. A bank may also be assigned different (typically higher) domestic currency<br />
deposit ratings that are unconstrained by the respective country ceilings for foreign currency deposits.<br />
Foreign currency deposit ratings are applicable only to banks and branches located in countries that<br />
have been assigned a country ceiling for foreign currency for bank deposits. Such obligations are rated at<br />
the lower of the bank’s deposit rating or Moody’s country ceiling for bank deposits for the country in which<br />
the branch is located.<br />
Moody’s Bank Deposit Ratings are intended to incorporate those aspects of credit risk that are relevant<br />
to the prospective payment performance of the rated bank with respect to its foreign and/or domestic currency<br />
deposit obligations. Included are factors such as intrinsic financial strength, sovereign transfer risk<br />
(for foreign currency deposits), and both implicit and explicit external support elements.<br />
• xvii •
Moody’s Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes that<br />
make payments to depositors, but they do recognize the potential support from schemes that may provide<br />
direct assistance to banks.<br />
In addition to its Bank Deposit Ratings, Moody’s also publishes Bank Financial Strength Ratings, which<br />
exclude certain of these external risk and support elements (i.e., sovereign risk and external support). Such<br />
ratings are intended to elaborate and explain Moody’s Bank Deposit Ratings, which incorporate and reflect<br />
such elements of credit risk.<br />
Long-Term Bank Deposit Ratings<br />
Moody’s long-term bank deposit ratings employ the same alphanumeric rating system as that for long-term<br />
issuer ratings.<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Caa<br />
Ca<br />
C<br />
Banks rated Aaa for deposits offer exceptional credit quality and have the smallest<br />
degree of risk. While the credit quality of these banks may change, such changes as<br />
can be visualized are most unlikely to materially impair the banks’ strong positions.<br />
Banks rated Aa for deposits offer excellent credit quality, but are rated lower than<br />
Aaa banks because their susceptibility to long-term risks appears somewhat<br />
greater. The margins of protection may not be as great as with Aaa-rated banks, or<br />
fluctuations of protective elements may be of greater amplitude.<br />
Banks rated A for deposits offer good credit quality. However, elements may be<br />
present that suggest a susceptibility to impairment over the long term.<br />
Banks rated Baa for deposits offer adequate credit quality. However, certain protective<br />
elements may be lacking or may be characteristically unreliable over any great<br />
length of time.<br />
Banks rated Ba for deposits offer questionable credit quality. Often the ability of<br />
these banks to meet punctually deposit obligations may be uncertain and therefore<br />
not well safeguarded in the future.<br />
Banks rated B for deposits offer generally poor credit quality. Assurance of punctual<br />
payment of deposit obligations over any long period of time is small.<br />
Banks rated Caa for deposits offer extremely poor credit quality. Such banks may be in<br />
default, or there may be present elements of danger with regard to financial capacity.<br />
Banks rated Ca for deposits are usually in default on their deposit obligations.<br />
Banks rated C for deposits are usually in default on their deposit obligations, and<br />
potential recovery values are low.<br />
Note: Moody’s appends the numerical modifiers 1, 2, and 3 to each generic rating category from Aa to Caa.<br />
The modifier 1 indicates that the bank is in the higher end of its letter-rating category; the modifier 2 indicates<br />
a mid-range ranking; and the modifier 3 indicates that the bank is in the lower end of its letter-rating category.<br />
Short-Term Bank Deposit Ratings<br />
Moody’s employs the following designations to indicate the relative repayment ability for bank deposits:<br />
P-1<br />
P-2<br />
P-3<br />
NP<br />
Banks rated Prime-1 for deposits offer superior credit quality and a very strong<br />
capacity for timely payment of short-term deposit obligations.<br />
Banks rated Prime-2 for deposits offer strong credit quality and a strong capacity<br />
for timely payment of short-term deposit obligations.<br />
Banks rated Prime-3 for deposits offer acceptable credit quality and an adequate<br />
capacity for timely payment of short-term deposit obligations.<br />
Banks rated Not Prime for deposits offer questionable to poor credit quality and<br />
an uncertain capacity for timely payment of short-term deposit obligations.<br />
• xviii •
US Bank Other Senior Obligation Ratings<br />
Deposit notes, bank notes and bank subordinated notes are bank obligations that are structured to be sold<br />
and traded as securities similar to corporate bonds or medium-term notes. As bank obligations, such<br />
instruments are exempt from SEC registration (if issued by a US bank or by the US branch of a foreign<br />
bank). Deposit notes have the legal status of deposits and will rank pari passu in liquidation with certificates<br />
of deposit and other domestic deposit obligations. Bank notes, although nominally senior, are not<br />
deposit obligations. US law provides that foreign deposits and senior unsecured obligations, including<br />
bank notes, will rank behind domestic deposit obligations of US banks in the event of liquidation.<br />
Moody’s Other Senior Obligations (OSO) rating definitions parallel those for long-term and shortterm<br />
obligations, and may be assigned to foreign deposits and International Banking Facility deposits, as<br />
well as to other senior non-depository obligations, including bank notes, letter-of-credit supported obligations,<br />
federal funds and financial contracts. A rating distinction between domestic deposits and OSOs<br />
will be reflected in those cases where there is a material susceptibility for impairment at a future time.<br />
Bank subordinated notes will rank behind both domestic deposits and OSOs in a failed bank liquidation.<br />
Therefore, Moody’s will generally rate the subordinated debt of US banks substantially below the<br />
comparable deposit rating.<br />
Bank Financial Strength Ratings<br />
Moody’s Bank Financial Strength Ratings (BFSRs) represent Moody’s opinion of a bank’s intrinsic safety and<br />
soundness and, as such, exclude certain external credit risks and credit support elements that are<br />
addressed by Moody’s Bank Deposit Ratings. In addition to commercial banks, Moody’s BFSRs may also be<br />
assigned to other types of financial institutions such as multilateral development banks, government-sponsored<br />
financial institutions and national development financial institutions.<br />
Unlike Moody’s Bank Deposit Ratings, Bank Financial Strength Ratings do not address the probability<br />
of timely payment. Instead, Bank Financial Strength Ratings are a measure of the likelihood that a bank<br />
will require assistance from third parties such as its owners, its industry group, or official institutions.<br />
Bank Financial Strength Ratings do not take into account the probability that the bank will receive<br />
such external support, nor do they address risks arising from sovereign actions that may interfere with a<br />
bank’s ability to honor its domestic or foreign currency obligations.<br />
Factors considered in the assignment of Bank Financial Strength Ratings include bank-specific elements<br />
such as financial fundamentals, franchise value, and business and asset diversification. Although<br />
Bank Financial Strength Ratings exclude the external factors specified above, they do take into account<br />
other risk factors in the bank’s operating environment, including the strength and prospective performance<br />
of the economy, as well as the structure and relative fragility of the financial system, and the quality of<br />
banking regulation and supervision.<br />
Bank Financial Strength Rating Definitions<br />
A<br />
B<br />
C<br />
Banks rated A possess superior intrinsic financial strength. Typically, they will be<br />
institutions with highly valuable and defensible business franchises, strong financial<br />
fundamentals, and a very predictable and stable operating environment.<br />
Banks rated B possess strong intrinsic financial strength. Typically, they will be<br />
institutions with valuable and defensible business franchises, good financial fundamentals,<br />
and a predictable and stable operating environment.<br />
Banks rated C possess adequate intrinsic financial strength. Typically, they will be<br />
institutions with more limited but still valuable business franchises. These banks<br />
will display either acceptable financial fundamentals within a predictable and stable<br />
operating environment, or good financial fundamentals within a less predictable<br />
and stable operating environment.<br />
• xix •
D<br />
E<br />
Banks rated D display modest intrinsic financial strength, potentially requiring some<br />
outside support at times. Such institutions may be limited by one or more of the following<br />
factors: a weak business franchise; financial fundamentals that are deficient<br />
in one or more respects; or an unpredictable and unstable operating environment.<br />
Banks rated E display very modest intrinsic financial strength, with a higher likelihood<br />
of periodic outside support or an eventual need for outside assistance. Such<br />
institutions may be limited by one or more of the following factors: a weak and limited<br />
business franchise; financial fundamentals that are materially deficient in one<br />
or more respects; or a highly unpredictable or unstable operating environment.<br />
Note: Where appropriate, a “+” modifier will be appended to ratings below the “A” category and a “-”<br />
modifier will be appended to ratings above the “E” category to distinguish those banks that fall in<br />
intermediate categories.<br />
Insurance Financial Strength Ratings<br />
Moody’s Insurance Financial Strength Ratings are opinions of the ability of insurance companies to<br />
repay punctually senior policyholder claims and obligations. Specific obligations are considered unrated<br />
unless they are individually rated because the standing of a particular insurance obligation would<br />
depend on an assessment of its relative standing under those laws governing both the obligation and the<br />
insurance company.<br />
Insurance Financial Strength Ratings, shown in connection with property/casualty groups, represent<br />
the ratings of individual companies within those groups, as displayed in Moody’s insurance industry ratings<br />
list. The rating of an individual property/casualty company may be based on the benefit of its participation<br />
in an intercompany pooling agreement. Pooling agreements may or may not provide for continuation of inforce<br />
policyholder obligations by pool members in the event that the property/casualty insurer is sold to a<br />
third party or otherwise removed from the pooling agreement.<br />
Moody’s assumes in these ratings that the pooling agreement will not be modified by the members<br />
of the pool to reduce the benefits of pool participation, and that the insurer will remain in the pool.<br />
Moody’s makes no representation or warranty that such pooling agreement will not be modified over<br />
time, nor does Moody’s opine on the probability that the rated entity may be sold or otherwise removed<br />
from the pooling agreement.<br />
Long-Term Insurance Financial Strength Ratings<br />
Moody’s rating symbols for Insurance Financial Strength Ratings are identical to those used to indicate the<br />
credit quality of long-term obligations. These rating gradations provide investors with a system for measuring<br />
an insurance company’s ability to meet its senior policyholder claims and obligations.<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Insurance companies rated Aaa offer exceptional financial security. While the<br />
credit profile of these companies is likely to change, such changes as can be visualized<br />
are most unlikely to impair their fundamentally strong position.<br />
Insurance companies rated Aa offer excellent financial security. Together with the<br />
Aaa group, they constitute what are generally known as high-grade companies.<br />
They are rated lower than Aaa companies because long-term risks appear somewhat<br />
larger.<br />
Insurance companies rated A offer good financial security. However, elements may<br />
be present which suggest a susceptibility to impairment sometime in the future.<br />
Insurance companies rated Baa offer adequate financial security. However, certain<br />
protective elements may be lacking or may be characteristically unreliable over<br />
any great length of time.<br />
Insurance companies rated Ba offer questionable financial security. Often the ability<br />
of these companies to meet policyholder obligations may be very moderate and<br />
thereby not well safeguarded in the future.<br />
Insurance companies rated B offer poor financial security. Assurance of punctual<br />
payment of policyholder obligations over any long period of time is small.<br />
• xx •
Caa<br />
Ca<br />
C<br />
Insurance companies rated Caa offer very poor financial security. They may be in<br />
default on their policyholder obligations or there may be present elements of danger<br />
with respect to punctual payment of policyholder obligations and claims.<br />
Insurance companies rated Ca offer extremely poor financial security. Such companies<br />
are often in default on their policyholder obligations or have other<br />
marked shortcomings.<br />
Insurance companies rated C are the lowest-rated class of insurance company<br />
and can be regarded as having extremely poor prospects of ever offering financial<br />
security.<br />
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through<br />
Caa. Numeric modifiers are used to refer to the ranking within a group — with 1 being the highest and 3<br />
being the lowest. However, the financial strength of companies within a generic rating symbol (Aa, for<br />
example) is broadly the same.<br />
Short-Term Insurance Financial Strength Ratings<br />
Short-Term Insurance Financial Strength Ratings are opinions of the ability of the insurance company to<br />
repay punctually its short-term senior policyholder claims and obligations. The ratings apply to senior policyholder<br />
obligations that mature or are payable within one year or less.<br />
Specific obligations are considered unrated unless individually rated because the standing of a particular<br />
insurance obligation would depend on an assessment of its relative standing under those laws governing<br />
both the obligation and the insurance company.<br />
P-1<br />
P-2<br />
P-3<br />
NP<br />
Insurers (or supporting institutions) rated Prime-1 have a superior ability for<br />
repayment of senior short-term policyholder claims and obligations.<br />
Insurers (or supporting institutions) rated Prime-2 have a strong ability for<br />
repayment of senior short-term policyholder claims and obligations.<br />
Insurers (or supporting institutions) rated Prime-3 have an acceptable ability<br />
for repayment of senior short-term policyholder claims and obligations.<br />
Insurers (or supporting institutions) rated Not Prime (NP) do not fall within any<br />
of the Prime rating categories.<br />
When ratings are supported by the credit of another entity or entities, then the name or names of such<br />
supporting entity or entities are listed within parenthesis beneath the name of the insurer, or there is a footnote<br />
referring to the name or names of the supporting entity or entities.<br />
In assigning ratings to such insurers, Moody’s evaluates the financial strength of the affiliated insurance<br />
companies, commercial banks, corporations, foreign governments, or other entities, but only as one factor<br />
in the total rating assessment. Moody’s makes no representation and gives no opinion on the legal validity<br />
or enforceability of any support arrangement.<br />
• xxi •
Money Market and Bond Fund Ratings<br />
Moody’s Money Market and Bond Fund Ratings are opinions of the investment quality of shares in mutual<br />
funds and similar investment vehicles which principally invest in short-term and long-term fixed income<br />
obligations, respectively. As such, these ratings incorporate Moody’s assessment of a fund’s published<br />
investment objectives and policies, the creditworthiness of the assets held by the fund, as well as the management<br />
characteristics of the fund. The ratings are not intended to consider the prospective performance<br />
of a fund with respect to appreciation, volatility of net asset value, or yield.<br />
Aaa<br />
Aa<br />
A<br />
Baa<br />
Ba<br />
B<br />
Caa<br />
Ca<br />
C<br />
Money Market Funds and Bond Funds rated Aaa are judged to be of an investment<br />
quality similar to Aaa-rated fixed income obligations — that is, they are judged to<br />
be of the best quality.<br />
Money Market Funds and Bond Funds rated Aa are judged to be of an investment<br />
quality similar to Aa-rated fixed income obligations — that is, they are judged to<br />
be of high quality by all standards.<br />
Money Market Funds and Bond Funds rated A are judged to be of an investment<br />
quality similar to A-rated fixed income obligations — that is, they are judged to<br />
possess many favorable investment attributes and are considered as uppermedium-grade<br />
investment vehicles.<br />
Money Market Funds and Bond Funds rated Baa are judged to be of an investment<br />
quality similar to Baa-rated fixed income obligations — that is, they are considered<br />
as medium-grade investment vehicles.<br />
Money Market Funds and Bond Funds rated Ba are judged to be of an investment<br />
quality similar to Ba-rated fixed income obligations — that is, they are judged to<br />
have speculative elements.<br />
Money Market Funds and Bond Funds rated B are judged to be of an investment<br />
quality similar to B-rated fixed income obligations — that is, they generally lack<br />
characteristics of a desirable investment.<br />
Money Market Funds and Bond Funds rated Caa are judged to be of an investment<br />
quality similar to Caa-rated fixed income obligations — that is, they are of<br />
poor standing.<br />
Money Market Funds and Bond Funds rated Ca are judged to be of an investment<br />
quality similar to Ca-rated fixed income obligations — that is, they represent obligations<br />
that are speculative in a high degree.<br />
Money Market Funds and Bond Funds rated C are judged to be of an investment<br />
quality similar to C-rated fixed income obligations — that is, they are the lowestrated<br />
class of bonds.<br />
Note: Numerical modifiers 1, 2 and 3 may be appended to each rating classification from Aa to Caa. The<br />
modifier 1 indicates that the fund or similar investment vehicle ranks in the higher end of its generic rating<br />
category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the fund or similar<br />
investment vehicle ranks in the lower end of its letter rating category.<br />
• xxii •
National Scale Ratings<br />
Moody’s assigns national scale ratings in certain local capital markets in which investors have found the<br />
global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale<br />
already in common use in the country.<br />
Moody’s currently maintains national scale ratings for the following countries:<br />
• Argentina (.ar)<br />
• Bolivia (.bo)<br />
• Brazil (.br)<br />
• Chile (.cl)<br />
• Mexico (.mx)<br />
• Russia (.ru)<br />
• South Africa (.za)<br />
• Taiwan (.tw)<br />
• Uruguay (.uy)<br />
Relative Rankings<br />
Moody’s National Scale Ratings are opinions of the relative creditworthiness of issuers and issues within a<br />
particular country. While loss expectation will be an important differentiating factor in the ultimate rating<br />
assignment, it should be noted that loss expectation associated with National Scale Ratings can be<br />
expected to be significantly higher than apparently similar rating levels on Moody’s global scale.<br />
Moody’s National Scale Ratings rank issuers and issues in order of relative creditworthiness: higher ratings<br />
are associated with lower expected credit loss.<br />
Not Globally Comparable<br />
National Scale Ratings can be understood as a relative ranking of creditworthiness (including relevant<br />
external support) within a particular country. National Scale Ratings are not designed to be compared<br />
among countries; rather, they address relative credit risk within a given country. Use of National Scale Ratings<br />
by investors is only appropriate within that portion of a portfolio that is exposed to a given country’s<br />
local market, taking into consideration the various risks implied by that country’s foreign and local currency<br />
ratings.<br />
Rating Criteria<br />
National Scale Ratings take into account the intrinsic financial strength of the obligor, including such traditional<br />
credit factors as management quality, market position and diversity, financial flexibility, transparency,<br />
the regulatory environment, and the issuer’s ability to meet its financial obligations through the<br />
course of normal local business cycles. Issuer segments subject to an abrupt decline in creditworthiness<br />
will generally be rated lower than segments less exposed. Certain external support factors may be taken<br />
into consideration, including instrument-specific guarantees and indentures, and parent company or government<br />
support (if any).<br />
Treatment of Sovereign Risk<br />
National Scale Ratings take into account all credit risks that bear on timely and full payment of a debt obligation,<br />
including sovereign related risks such as relative vulnerability to political developments, national<br />
monetary and fiscal policies, and, in rare cases, foreign currency convertibility and transfer risk.<br />
Certain extreme events, such as a local currency payment system disruption, are largely extraneous<br />
to the analysis (at least as a differentiating factor) since all issuers would probably be equally affected by<br />
such a failure. In other extreme cases, such as a government rescheduling or moratorium on local or foreign<br />
currency debt obligations, issuers or issues with higher ratings should be relatively more insulated<br />
from such an event; nonetheless, in such a situation, even the highest-rated entities may be at risk of<br />
temporary default.<br />
For this reason, the traditional concept of “investment grade” that is applied in the international markets<br />
cannot necessarily be applied even to the highest national ratings. Although national governments are often<br />
in a position to receive the highest national credit ratings, it cannot, in Moody’s view, be taken for granted<br />
that a country’s national government is necessarily the best credit on a domestic scale, since it is possible<br />
for a government to default on its local currency obligations while other issuers continue to perform.<br />
• xxiii •
National Scale Long-Term Rating Definitions<br />
The rating definitions are as follows, with an “n” modifier signifying the relevant country, for example,<br />
Aaa.br for Brazil, or Aaa.tw for Taiwan.<br />
Aaa.n<br />
Aa.n<br />
A.n<br />
Baa.n<br />
Ba.n<br />
B.n<br />
Caa.n<br />
Ca.n<br />
C.n<br />
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to<br />
other domestic issuers.<br />
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to<br />
other domestic issuers.<br />
Issuers or issues rated A.n present above-average creditworthiness relative to other<br />
domestic issuers.<br />
Issuers or issues rated Baa.n represent average creditworthiness relative to other<br />
domestic issuers.<br />
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to<br />
other domestic issuers.<br />
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other<br />
domestic issuers.<br />
Issuers or issues rated Caa.n are speculative and demonstrate very weak creditworthiness<br />
relative to other domestic issuers.<br />
Issuers or issues rated Ca.n are highly speculative and demonstrate extremely weak<br />
creditworthiness relative to other domestic issuers.<br />
Issuers or issues rated C.n are extremely speculative and demonstrate the weakest<br />
creditworthiness relative to other domestic issuers.<br />
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through<br />
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the<br />
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that<br />
generic rating category.<br />
National Scale Short-Term Ratings<br />
Moody’s short-term national scale debt ratings are opinions of the ability of issuers in a given country, relative<br />
to other domestic issuers, to repay debt obligations that have an original maturity not exceeding one<br />
year. Moody’s short-term national scale ratings are a measure of relative risk within a single market.<br />
National scale ratings in one country should not be compared with national scale ratings in another, or<br />
with Moody’s global ratings. Loss expectations for a given national scale rating will generally be higher<br />
than for its global scale equivalent.<br />
There are four categories of short-term national scale ratings, generically denoted N-1 through N-4. In<br />
each specific country, the first two letters will change to indicate the country in which the issuer is located,<br />
i.e. BR-1 through BR-4 for Brazil and TW-1 through TW-4 for Taiwan.<br />
N-1<br />
N-2<br />
N-3<br />
N-4<br />
Issuers rated N-1 have the strongest ability to repay short-term senior unsecured<br />
debt obligations relative to other domestic issuers.<br />
Issuers rated N-2 have an above average ability to repay short-term senior unsecured<br />
debt obligations relative to other domestic issuers.<br />
Issuers rated N-3 have an average ability to repay short-term senior unsecured debt<br />
obligations relative to other domestic issuers.<br />
Issuers rated N-4 have a below average ability to repay short-term senior unsecured<br />
debt obligations relative to other domestic issuers.<br />
Note: The short-term rating symbols P-1.za, P-2.za, P-3.za and NP.za are used in South Africa.<br />
• xxiv •
COUNTRY CEILINGS AND GUIDELINES<br />
Country Ceilings for Foreign Currency Obligations<br />
Moody’s assigns a ceiling for foreign-currency bonds and notes to every country (or separate monetary<br />
area) in which there are rated obligors. The ceiling generally indicates the highest rating that can be<br />
assigned to a foreign-currency denominated security issued by an entity subject to the monetary sovereignty<br />
of that country or area. In most cases, the ceiling will be equivalent to the rating that is (or would be)<br />
assigned to foreign-currency denominated bonds of the government. Ratings that pierce the country ceiling<br />
may be permitted, however, for foreign-currency denominated securities benefiting from special characteristics<br />
that are judged to give them a lower risk of default than is indicated by the ceiling. Such<br />
characteristics may be intrinsic to the issuer and/or related to Moody’s view regarding the government’s<br />
likely policy actions during a foreign currency crisis.<br />
Country Ceilings for Foreign Currency Bank Deposits<br />
Moody’s assigns a ceiling for foreign-currency bank deposits and loans to every country (or distinct monetary<br />
area) in which there are rated obligors. The ceiling specifies the highest rating that can be assigned to<br />
foreign-currency denominated deposit obligations of 1) domestic and foreign branches of banks headquartered<br />
in that domicile (even if subsidiaries of foreign banks); and 2) domestic branches of foreign banks. In<br />
addition, this ceiling applies to foreign-currency denominated syndicated loans and other non-bond obligations<br />
of issuers subject to the authority of the government of that domicile.<br />
Country Guidelines for Local Currency Obligations<br />
Moody’s assigns local currency guidelines for many countries (or distinct monetary areas) in order to facilitate<br />
the assignment of local currency ratings to issues and/or issuers. Local currency ratings measure the<br />
credit performance of obligations denominated in the local currency and therefore exclude the transfer risk<br />
relevant for foreign-currency obligations. They are intended to be globally comparable.<br />
The country guidelines summarize the general country-level risks (excluding foreign-currency transfer<br />
risk) that should be taken into account in assigning local currency ratings to locally-domiciled obligors or<br />
locally-originated structured transactions. They indicate the rating level that will generally be assigned to<br />
the financially strongest obligations in the country, with the proviso that obligations benefiting from support<br />
mechanisms based outside the country (or area) may on occasion be rated higher.<br />
• xxv •
Non-Credit Ratings<br />
MUTUAL FUNDS<br />
Market Risk Ratings<br />
Moody’s Mutual Fund Market Risk (MR) ratings are opinions of the relative degree of volatility of a rated<br />
fund’s net asset value (NAV). In forming an opinion on the fund’s future price volatility, Moody’s analysts<br />
consider risk elements that may have an effect on a fund’s net asset value, such as interest rate risk, prepayment<br />
and extension risk, liquidity and concentration risks, currency risk, and derivatives risk. The ratings are<br />
not intended to reflect the prospective performance of a fund with respect to price appreciation or yield.<br />
MR1<br />
MR2<br />
MR3<br />
MR4<br />
MR5<br />
Money Market Funds and Bond Funds rated MR1 are judged to have very low sensitivity<br />
to changing interest rates and other market conditions.<br />
Money Market Funds and Bond Funds rated MR2 are judged to have low sensitivity<br />
to changing interest rates and other market conditions.<br />
Money Market Funds and Bond Funds rated MR3 are judged to have moderate<br />
sensitivity to changing interest rates and other market conditions.<br />
Money Market Funds and Bond Funds rated MR4 are judged to have high sensitivity<br />
to changing interest rates and other market conditions.<br />
Money Market Funds and Bond Funds rated MR5 are judged to have very high sensitivity<br />
to changing interest rates and other market conditions.<br />
Note: A “+” modifier appended to the MR1 rating category denotes constant NAV money market funds and<br />
other qualifying funds.<br />
• xxvi •
OTHER NON-CREDIT RATINGS<br />
Management Quality Ratings<br />
Moody’s Management Quality Ratings are opinions regarding an organization’s management characteristics<br />
and operational practices.<br />
The ratings incorporate Moody’s assessment of an entity’s organizational structure and other management<br />
characteristics, including, as applicable, its financial profile, risk management and controls, information<br />
technology, operational controls and procedures, regulatory and internal/external compliance<br />
activities and client servicing performance. The scope of Moody’s assessment applies to an entity’s sphere<br />
of operations and may vary somewhat from one operational unit to another.<br />
Moody’s Management Quality Ratings are different from traditional credit ratings, which assess the<br />
ability of the issuer to fulfill its long-term obligations with respect to principal and interest payments.<br />
These ratings do not apply to a company’s ability to repay a fixed financial obligation, or satisfy contractual<br />
financial obligations either in its own right or any that may have been entered into through actively<br />
managed portfolios.<br />
The ratings are not intended to consider the prospective performance of a portfolio, mutual fund or<br />
other investment vehicle with respect to appreciation, volatility of net asset value, or yield.<br />
Management Companies, Custodians and Other Administrative Service Providers<br />
In connection with asset management companies, custodian banks, other administrative service providers,<br />
Moody’s Management Quality ratings represent the agency’s opinions on the overall quality of an organization,<br />
its management abilities and operational practices. They also include an assessment of financial<br />
profile, risk management and controls, information technology, operational controls and procedures, regulatory<br />
and internal/external compliance activities and client servicing performance. The ratings express an<br />
opinion of the entity’s operations as defined by the jurisdiction in which the entity operates.<br />
Real Estate Entities<br />
Management Quality Ratings may be assigned to real estate investment advisors, general partners, or other<br />
entities engaged in the management of commingled open-ended and close-ended funds, unit trusts, partnerships,<br />
joint ventures and similar funds that invest in real property and/or mortgages on real property.<br />
US Affordable Housing Providers<br />
With regard to U.S. Affordable Housing Providers, Management Quality ratings are assigned to public<br />
housing authorities whose principal activity involves administering US Department of Housing and Urban<br />
Development (HUD) funds and managing public housing; or not-for-profit organizations whose principal<br />
activity involves administering government funds and managing low income housing.<br />
Management Quality Rating Definitions:<br />
MQ1<br />
MQ2<br />
MQ3<br />
MQ4<br />
MQ5<br />
Entities rated MQ1 are judged to exhibit an excellent management and<br />
control environment.<br />
Entities rated MQ2 are judged to exhibit a very good management and<br />
control environment.<br />
Entities rated MQ3 are judged to exhibit a good management and control<br />
environment.<br />
Entities rated MQ4 are judged to exhibit an adequate management and<br />
control environment.<br />
Entities rated MQ5 are judged to exhibit a questionable-to-poor management<br />
and control environment.<br />
• xxvii •
Portfolio Investment Quality Ratings<br />
Moody’s Portfolio Investment Quality Ratings reflect diverse quantitative and qualitative factors affecting a<br />
fund’s portfolio. These include evaluating the impact of economic trends, assessing asset quality, portfolio<br />
diversification and performance, and liquidity management.<br />
Moody’s employs a “top down and bottom up approach” when assigning Portfolio Investment Quality<br />
Ratings. Moody’s will first start with a macro analysis — examining broad economic trends — before assessing<br />
both the supply and demand fundamentals as well as the competitive position of the assets in the fund.<br />
The “bottom up” approach involves evaluating asset quality and moving to an examination of portfolio<br />
characteristics before drawing conclusions about overall risk profile and returns.<br />
The ratings are not intended to consider the prospective performance of a portfolio, mutual fund or<br />
other investment vehicle with respect to appreciation, volatility of net asset value, or yield.<br />
When used in conjunction with Management Quality Ratings, the two ratings will be separated by a<br />
fraction bar (“/”).<br />
Aaa(IQ)<br />
Aa(IQ)<br />
A(IQ)<br />
Baa(IQ)<br />
Ba(IQ)<br />
B(IQ)<br />
Portfolios rated Aaa(IQ) are judged to have excellent investment quality.<br />
Portfolios rated Aa(IQ) are judged to have very good investment quality.<br />
Portfolios rated A(IQ) are judged to have good investment quality.<br />
Portfolios rated Baa(IQ) are judged to have adequate investment quality.<br />
Portfolios rated Ba(IQ) are judged to have questionable investment quality.<br />
Portfolios rated B(IQ) are judged to have poor investment quality.<br />
Note: Numerical modifiers 1, 2 and 3 may be appended to each rating classification from Aa(IQ) to B(IQ).<br />
The modifier 1 indicates that the portfolio ranks in the higher end of its generic rating category; the modifier<br />
2 indicates a mid-range ranking; and the modifier 3 indicates that the portfolio ranks in the lower end of its<br />
letter rating category.<br />
Servicer Quality Ratings<br />
Moody’s Servicer Quality (SQ) ratings are opinions of the ability of a servicer to prevent or mitigate losses<br />
in a securitization. SQ ratings are provided for servicers who act as the Primary Servicer (servicing the<br />
assets from beginning to end), Special Servicer (servicing only the more delinquent assets), or Master Servicer<br />
(overseeing the performance and reporting from underlying servicers). For Primary Servicers, each<br />
SQ rating is assigned to a specific asset type.<br />
SQ ratings represent Moody’s assessment of a servicer’s ability to affect losses based on factors under<br />
the servicer’s control. The SQ approach works by separating a servicer’s performance from the credit quality<br />
of the assets being serviced. In doing this, Moody’s evaluates how effective a servicer is at preventing<br />
defaults and maximizing recoveries to a transaction when defaults occur.<br />
SQ ratings consider the operational and financial stability of a servicer as well as its ability to respond<br />
to changing market conditions. This assessment is based on the company’s organizational structure, management<br />
characteristics, financial profile, operational controls and procedures as well as its strategic goals.<br />
Moody’s SQ ratings are different from traditional debt ratings, which are opinions as to the credit quality<br />
of a specific instrument. SQ ratings do not apply to a company’s ability to repay a fixed financial obligation<br />
or satisfy contractual financial obligations other than, in limited circumstances, the obligation to<br />
advance on delinquent assets it services, when such amounts are believed to be recoverable.<br />
SQ1<br />
SQ2<br />
SQ3<br />
SQ4<br />
SQ5<br />
Strong combined servicing ability and servicing stability<br />
Above average combined servicing ability and servicing stability<br />
Average combined servicing ability and servicing stability<br />
Below average combined servicing ability and servicing stability<br />
Weak combined servicing ability and servicing stability<br />
Note: Where appropriate, a “+” or “-” modifier will be appended to the SQ2, SQ3, and SQ4 rating category<br />
and a “-” modifier will be appended to the SQ1 rating category. A “+” modifier indicates the servicer ranks in<br />
the higher end of the designated rating category. A “-” modifier indicates the servicer ranks in the lower end<br />
of the designated rating category.<br />
• xxviii •
Real Estate Portfolio Cash Flow Volatility Ratings<br />
Moody’s Real Estate Portfolio Cash Flow Volatility Ratings represent opinions of the degree of volatility of<br />
the net operating income (NOI) produced by a real estate portfolio. Cash flow is defined here as Net Operating<br />
Income (NOI) generated by a portfolio. Volatility is assessed quantitatively from a property database<br />
at <strong>Moody's</strong> Japan, taking into consideration individual real estate property characteristics and portfolio<br />
diversity effects. The ratings are Japanese domestic ones and used only in the domestic market. They do<br />
not represent the risks regarding property value volatility. As assessments of an existing portfolio, they are<br />
not monitored.<br />
CFV-1<br />
CFV-2<br />
CFV-3<br />
CFV-4<br />
CFV-5<br />
Portfolios rated CFV-1 are judged to have the most stable NOI, with minimal<br />
cash flow volatility risk.<br />
Portfolios rated CFV-2 are judged to have stable NOI, with low cash flow volatility<br />
risk.<br />
Portfolios rated CFV-3 are judged to have moderate cash flow volatility risk.<br />
Portfolios rated CFV-4 are judged to have substantial cash flow volatility risk.<br />
Portfolios rated CFV-5 are judged to have high cash flow volatility risk.<br />
Note: A “+” and “-” modifier may be appended to each rating classification from CFV-2 to CFV-5. The “+”<br />
modifier indicates that the portfolio ranks at the higher end of its generic rating category; and the “-” modifier<br />
indicates that it ranks at the lower end of its letter rating category. Ratings without modifiers indicate a midrange<br />
ranking.<br />
Lloyd’s Syndicate Performance and Volatility Ratings<br />
Moody’s Lloyd’s Syndicate Performance and Volatility Ratings have been developed in response to the<br />
needs of capital providers and insurance purchasers involved with the Lloyd’s Market to compare the relative<br />
attraction of individual syndicates. The desire to identify those syndicates with the potential to outperform<br />
over the medium to long term is coupled with the requirement to identify syndicates with whom<br />
insurance purchasers are content to build long-term business relationships. Moody’s Lloyd’s Syndicate Performance<br />
and Volatility Ratings aim to address these needs.<br />
Lloyd’s Syndicate Ratings<br />
Qualitative ratings for each syndicate, based on an assessment of both quantitative and qualitative information,<br />
indicate Moody’s view of the syndicate’s relative long-run potential performance based on currently<br />
known factors. The ratings are relative to the rest of the syndicates operating in the Lloyd’s market. It<br />
should be stressed that the ratings do not attempt to assess the security underlying Lloyd’s policies.<br />
The syndicate rating is forward looking, only using historical data as a basis for the assessment of the<br />
syndicate’s future potential. The emphasis is therefore on a given syndicate’s potential future performance<br />
rather than claims-paying ability.<br />
A+<br />
A<br />
A-<br />
B+<br />
Lloyd’s syndicates rated A+ for performance offer excellent performance and continuity<br />
characteristics, with a very high degree of likelihood that their potential future<br />
returns will significantly outperform the market average result over the cycle, and a<br />
very limited likelihood that their fundamentally strong position will be impaired.<br />
Lloyd’s syndicates rated A for performance offer very good performance and continuity<br />
characteristics, with a high degree of likelihood that their potential future<br />
returns will significantly outperform the market average result over the cycle. They<br />
are rated lower than A+ because longer-term risks appear somewhat larger.<br />
Lloyd’s syndicates rated A- for performance offer good performance and continuity<br />
characteristics, with a high degree of likelihood that their potential future returns<br />
will outperform the market average result over the cycle.<br />
Lloyd’s syndicates rated B+ for performance offer above-average performance and<br />
continuity characteristics, with a good degree of likelihood that their potential<br />
future returns will outperform the market average result over the cycle.<br />
• xxix •
B<br />
B-<br />
C+<br />
C<br />
C-<br />
Lloyd’s syndicates rated B for performance offer average performance and continuity<br />
characteristics, with the likelihood that their potential future returns will be in<br />
line with the market average result over the cycle.<br />
Lloyd’s syndicates rated B- for performance offer below average performance and<br />
continuity characteristics, with it being questionable whether their potential future<br />
returns will be in line with the market average result and the likelihood that they<br />
will perform below the market average result over the cycle and that they will offer<br />
below average continuity prospects to policyholders.<br />
Lloyd’s syndicates rated C+ for performance offer below-average performance and<br />
continuity characteristics, with a good degree of likelihood that their potential<br />
future returns will be below the market average result over the cycle and that they<br />
will offer below-average continuity prospects to policyholders.<br />
Lloyd’s syndicates rated C for performance offer below-average performance and<br />
continuity characteristics, with a good degree of likelihood that their potential future<br />
returns will be significantly below the market average result over the cycle and that<br />
they will offer significantly below-average continuity prospects to policyholders.<br />
Lloyd’s syndicates rated C- for performance offer below-average performance and<br />
continuity characteristics, with a high degree of likelihood that their potential future<br />
returns will be significantly below the market average result over the cycle and that<br />
they will offer significantly below-average continuity prospects to policyholders.<br />
Lloyd’s Volatility Ratings<br />
The volatility rating indicates Moody’s view of the potential variability of a syndicate’s underwriting returns<br />
over the insurance cycle based on the historical variability of pure year underwriting returns and the potential<br />
for catastrophe losses in the book currently underwritten, the ratings being relative to the rest of the<br />
syndicates operating in the Lloyd’s market.<br />
Extremely High<br />
Very High, High,<br />
Above Average,<br />
Average,<br />
Below Average<br />
Low<br />
Lloyd’s syndicates rated Extremely High for volatility demonstrate the<br />
potential for returns to vary significantly from their mean due to the<br />
nature of the book of business written. Syndicates in the Extremely<br />
High rating category include all those syndicates demonstrating<br />
potential volatility in their returns that is in excess of the six relative<br />
rating categories of Low to Very High, this category not being relative<br />
on an absolute basis to the underlying rating categories.<br />
Lloyd’s syndicates rated in these categories are considered to demonstrate<br />
the potential for their returns to be respectively up to two, three,<br />
four, five and six times more variable than those syndicates in the<br />
Low rating category, due to the nature of the book of business written.<br />
Lloyd’s syndicates rated Low for volatility demonstrate the lowest<br />
potential for returns to vary from their mean, relative to the other<br />
syndicates trading at Lloyd’s, due to the nature of the book of business<br />
written.<br />
• xxx •
Other Ratings, Policies and Procedures<br />
OTHER PUBLISHED RATINGS<br />
Provisional Ratings<br />
As a service to the market and typically at the request of an issuer, Moody’s will assign a provisional rating<br />
when it is highly likely that the rating will become final after all documents are received, or an obligation<br />
is issued into the market. A provisional rating is denoted by placing a (P) in front of the rating. Such ratings<br />
may also be assigned to shelf registrations under SEC rule 415.<br />
Underlying Ratings<br />
An underlying rating is Moody’s published assessment of a particular debt issue’s credit quality absent<br />
credit enhancement. Moody’s will assign and publicly release an underlying rating requested by an issuer<br />
for debt that is entirely credit enhanced. The rating scale is identical to the one used for Moody’s long-term<br />
obligation ratings.<br />
Withdrawn<br />
When Moody’s no longer rates an obligation on which it previously maintained a rating, the symbol WR<br />
is employed.<br />
Not Rated<br />
The symbol NR is assigned to unrated obligations, issuers and/or programs.<br />
• xxxi •
UNPUBLISHED RATINGS<br />
Estimated Ratings<br />
Estimated ratings are one-time opinions of the approximate credit quality of individual securities or financial<br />
contracts. They are opinions about overall credit quality and are generally used in conjunction with a<br />
securitization and as a precursor to indicative ratings.<br />
Indicative Ratings<br />
Indicative ratings are one-time opinions of the credit quality of individual securities or financial contracts<br />
that may be issued in the future, based on draft documentation and discussions early in the rating process.<br />
These ratings consider the general credit quality of the issuer as well as the specific attributes of the instrument.<br />
Indicators are communicated to the requesting party as a narrow range of ratings with the degree of<br />
specificity defined by the requesting party.<br />
Internal Ratings<br />
Moody’s internal ratings are unpublished credit assessments assigned to certain securities and issuers<br />
where the underlying credit components are not publicly rated but need to be evaluated to support other<br />
published ratings.<br />
Not Available<br />
An issue that Moody’s has not yet rated is denoted by the NAV symbol.<br />
Terminated Without Rating<br />
The symbol TWR applies primarily to issues that mature or are redeemed without having been rated.<br />
• xxxii •
POLICIES AND PROCEDURES<br />
Rating Outlooks<br />
A Moody’s rating outlook is an opinion regarding the likely direction of a rating over the medium term.<br />
Where assigned, rating outlooks fall into the following four categories: Positive (POS), Negative (NEG), Stable<br />
(STA), and Developing (DEV — contingent upon an event). In the few instances where an issuer has<br />
multiple outlooks of differing directions, an “(m)” modifier (indicating multiple, differing outlooks) will be<br />
displayed, and Moody’s written research will describe any differences and provide the rationale for these<br />
differences. A RUR (Rating(s) Under Review) designation indicates that the issuer has one or more ratings<br />
under review for possible change, and thus overrides the outlook designation. When an outlook has not<br />
been assigned to an eligible entity, NOO (No Outlook) may be displayed.<br />
Watchlist<br />
Moody’s uses the Watchlist to indicate that a rating is under review for possible change in the short-term. A<br />
rating can be placed on review for possible upgrade (UPG), on review for possible downgrade (DNG), or<br />
more rarely with direction uncertain (UNC). A credit is removed from the Watchlist when the rating is<br />
upgraded, downgraded or confirmed.<br />
Confirmation of a Rating<br />
A confirmation occurs when a rating is removed from Watchlist.<br />
Rating confirmations are formally entered in Moody’s databases and rating action lists (rating release<br />
sheets), and are communicated via a press release.<br />
Affirmation of a Rating<br />
Affirmations are used to indicate that the current rating remains in force. Affirmations are communicated<br />
through a press release and may occur:<br />
• following an informal review<br />
• following the release of new information by the issuer<br />
• following a major market event (such as regulatory changes, a major acquisition, and/or market<br />
turbulence, etc.)<br />
• in conjunction with an Outlook change<br />
There may be other situations in which ratings are affirmed.<br />
Corporate Equivalent Ratings<br />
Corporate Equivalent Ratings may be assigned to US municipal bond obligations issued into taxable bond<br />
markets. Such ratings represent an assessment of creditworthiness as measured against Moody’s General<br />
Long-term Obligation rating scale and provide a translation between the municipal and general rating<br />
scales.<br />
Refundeds<br />
Issues that are secured by escrowed funds held in trust, reinvested in direct, non-callable US government<br />
obligations or non-callable obligations unconditionally guaranteed by the US Government or Resolution<br />
Funding Corporation are identified with a # (hatch mark) symbol, e.g., #Aaa.<br />
• xxxiii •
Conditional Rating (*)<br />
Bonds for which the security depends on the completion of some act, or the fulfillment of some condition,<br />
are rated conditionally. These are bonds secured by a) earnings of projects under construction, b) earnings<br />
of projects unseasoned in operation experience, c) rentals which begin when facilities are completed, or d)<br />
payments to which some other limiting condition attaches. The parenthetical rating denotes probable<br />
credit stature upon completion of construction or elimination of the basis of the condition.<br />
Expected Ratings Indicator<br />
To address market demand for timely information on particular types of credit ratings, Moody’s has<br />
licensed to certain third parties the right to generate “Expected Ratings.” Expected Ratings are designated<br />
by an “e” after the rating code, and are intended to anticipate Moody’s forthcoming rating assignments<br />
based on reliable information from third party sources (such as the issuer or underwriter associated with<br />
the particular securities) or established Moody’s rating practices (i.e., medium term notes are typically, but<br />
not always, assigned the same rating as the note’s program rating). Expected Ratings will exist only until<br />
Moody’s confirms the Expected Rating, or issues a different rating for the relevant instrument. Moody’s<br />
encourages market participants to contact Moody’s Ratings Desk or visit www.moodys.com if they have<br />
questions regarding Expected Ratings, or wish Moody’s to confirm an Expected Rating.<br />
• xxxiv •
Rating Lists<br />
• xxxv •
PAGE INTENTIONALLY LEFT BLANK
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Access Roads Edmonton Ltd. Aa3 121 Senior Secured Annuity Notes, Series A Canada<br />
Adelaide Airport Limited/New Terminal Financing Company Pty Ltd Aaa/Baa3 131 Gtd Senior Secured Australian MTNs Australia<br />
Aeroporti di Roma S.p.A. Baa3 622 Senior Secured Bank Credit Facility Italy<br />
Aéroports de Montréal A2 797 Senior Secured Bonds Canada<br />
AES China Generating Co. Ltd. B1 175 Senior Unsecured Eurobonds China<br />
AES Corporation, (The) Ba2 200 Gtd Senior Secured Term Loan B US<br />
AES Corporation, (The) Ba2 450 Gtd Snr Sec Revolving Credit Facility US<br />
AES Corporation, (The) Ba3 1,800 Second Priority Snr Sec Global Notes US<br />
AES Corporation, (The) Ba2 427 Senior Secured Exch Notes US<br />
AES Corporation, (The) B1 3,100 Senior Unsecured Notes US<br />
AES Corporation, (The) B2 825 Senior Subordinated Notes US<br />
AES Corporation, (The) B2 150 Conv Jnr Subordinated Debentures US<br />
AES Corporation, (The) B2 250 Junior Subordinated Debentures US<br />
AES Corporation, (The) Multiple 3,200 Multiple Seniority US<br />
AES Eastern Energy, L.P. Ba1 550 Senior Secured Pass-Thru Ctfs US<br />
AES Eastern Energy, L.P. Ba1 50 Snr Secured Revolving Credit Facility US<br />
AES Ironwood, L.L.C. B2 309 Senior Secured Bonds US<br />
AES Puerto Rico, L.P./P.R. Ind Tour Ed Med & Env Ctl Facs Fin Auth Baa3 195 Snr Secured Industrial Revenue Bonds Puerto Rico<br />
AES Red Oak, L.L.C. B2 384 Senior Secured Bonds US<br />
AHA Access Health Abotsford Ltd. A1 276 Senior Secured Canadian Bonds Canada<br />
AHV Access Health Vancouver Ltd. A1 79 Senior Secured Canadian Bonds Canada<br />
Airport Motorway Trust A3 387 Senior Secured Bank Credit Facility Australia<br />
Alameda Corridor Transportation Authority, CA Aaa/A2 992 Senior Unsecured Revenue Bonds US<br />
Alameda Corridor Transportation Authority, CA Aaa/Baa1 171 Subordinated Revenue Bonds US<br />
Alis <strong>Finance</strong> A.r.l. Aaa/NA 450 Guaranteed Senior Secured Eurobonds France<br />
Allegheny Energy Supply Company, LLC Ba2 1,044 Senior Secured Term Loans US<br />
Allegheny Energy Supply Company, LLC Ba3 1,050 Senior Unsecured Global Notes US<br />
Alliance Pipeline L.P. A3 1,150 Senior Unsecured Debt US<br />
Alliance Pipeline Limited Partnership A3 1,193 Senior Unsecured Canadian Debt Canada<br />
AmerenEnergy Generating Company A3 225 Snr Unsecured Global Notes US<br />
AmerenEnergy Generating Company Baa2 475 Snr Unsecured Notes US<br />
American Municipal Power-Ohio, Inc./Omega JV 2 <strong>Project</strong> Aaa/A1 55 Senior Distrib Generation Rev Bonds US<br />
American Ref-fuel Company LLC Ba1 275 Senior Secured Notes US<br />
Annes Gate Property Plc Aaa/NA 391 Gtd Senior Secured Eurobonds UK<br />
Appalachian NPI, LLC. Baa1 251 Senior Secured Bonds US<br />
Artesian <strong>Finance</strong> Plc Aaa/NA 440 Gtd Snr Sec Index Linked Eurobonds UK<br />
Artesian <strong>Finance</strong> Plc - Southern Aaa/NA 273 Senior Secured Coll. Notes UK<br />
Artesian <strong>Finance</strong> II plc Aaa/NA 518 Senior Secured Coll. Notes UK<br />
Aruba Airport Authority N.V. Baa3 81 Senior Unsecured Revenue Bonds Aruba<br />
Austin Convention Enterprises Inc. Baa3 110 Snr First Tier Hotel Revenue Bonds US<br />
Austin Convention Enterprises Inc. A3 135 Gtd Second Tier Hotel Rev Bonds US<br />
Australia Pacific Airports (Melbourne) Pty Aaa/A3 590 Senior Secured Australian MTNs Australia<br />
Australia Pacific Airports (Melbourne) Pty A3 263 Senior Secured Bank Credit Facility Australia<br />
Autolink Concessionaires (M6) PLC Aaa/NA 202 Gtd Senior Secured Eurobonds UK<br />
Autopista del Mayab Baa3 118 Gtd Senior Unsecured Participation Ctfs Mexico<br />
Autopista del Mayab Ba1 22 Gtd Subordinated Participation Ctfs Mexico<br />
Autopista del Sol Baa2 135 Senior Unsecured Chilean Bonds Chile<br />
Autopistas de Leon, S.A.C.E. (Aulesa) Aaa/NA 36 Gtd Senior Unsecured Eurobonds Spain<br />
Autovía de los Viñedos, S.A. (AUVISA) Aaa/Baa3 124 Senior Unsecured Bank Credit Facility Spain<br />
Autovía de los Viñedos, S.A. (AUVISA) Aaa/Baa3 83 Senior Unsecured Pubilc Parity Bonds Spain<br />
Baglan Moor Healthcare PLC Aaa/NA 102 Gtd Snr Sec Index Linked Eurobonds UK<br />
Baltimore/Washington Int'l Airport Consolidated Rental Car Facility Aaa/A3 117 Snr Taxable Ltd Obligation Rev Bonds US<br />
Bauang Private Power Corp B1 85 Guaranteed Senior Secured Notes Philippines<br />
Bay Area Toll Authority, CA Aaa 100 Senior Toll Bridge Revenue Bonds US<br />
Bin-Istra d.d. Baa2 225 Senior Secured Eurobonds Croatia<br />
Borger Funding Corporation/Borger Energy Associates, L.P. Ba1 117 Senior Secured First Mortgage Bonds US<br />
Boston Generating Company B2 500 First Lien Bank Credit Facility US<br />
Boston Industrial Devt Financing Auth Crosstown Center <strong>Project</strong> Ba3 35 Senior Hotel Parking Revenue Bonds US<br />
Brilliant Power Corp. A1 39 Senior Secured Notes Canada<br />
Brilliant Power Corp. A1 88 Senior Unsecured Canadian Debentures Canada<br />
Brisbane Airport Corporation Limited Aaa/Baa1 245 Gtd Senior Secured Notes Australia<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xxxvii •
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Brisbane Airport Corporation Limited Aaa/Baa1 260 Gtd Senior Secured Australian MTNs Australia<br />
Brisbane Airport Corporation Limited Baa2 266 Senior Subordinated Australia<br />
Broadcast Australia <strong>Finance</strong> Pty Ltd Aaa/Baa2 369 Gtd Senior Secured Australian Debt Australia<br />
Broadcast Australia <strong>Finance</strong> Pty Ltd Baa2 280 Senior Secured Bank Credit Facility Australia<br />
Brooklyn Navy Yard Cogeneration Partners L.P. Ba1 100 Senior Secured Bonds US<br />
Brooklyn Navy Yard Cogeneration Partners L.P. Ba1 307 Snr Unsec Industrial Revenue Bonds US<br />
Caithness Coso Funding Corp. Baa3 375 Guaranteed Senior Secured Global Notes US<br />
Caithness Coso Funding Corp. Ba2 90 Guaranteed Subordinated Global Bonds US<br />
Caledonian Environmental Services Plc Aaa/NA 91 Guaranteed Senior Secured Bonds UK<br />
CalEnergy Capital Trust Ba1 104 Preferred Stock (Convertible TIDES) US<br />
California Petroleum Transport Corp Aa2 3 Gtd Snr Sec First Pfd Mortgage Notes US<br />
California Petroleum Transport Corp Baa2 118 Snr Sec First Pfd Mortgage Notes US<br />
Calpine Corporation Caa3 4,247 Senior Unsecured Notes US<br />
Calpine Corporation Caa3 400 Senior Unsecured Global Notes US<br />
Calpine Corporation Caa3 1,200 Convertible Senior Unsecured Notes US<br />
Calpine Generating Co LLC B2 200 Gtd Snr Sec 1st Priority Rev Credit Facility US<br />
Calpine Generating Co LLC B2 600 Gtd Snr Sec 1st Priority Term Loan US<br />
Calpine Generating Co LLC B2 235 Gtd Snr Sec 1st Priority Fltg Rt Global Notes US<br />
Calpine Generating Co LLC B3 100 Gtd Snr Sec 2nd Priority Term Loan US<br />
Calpine Generating Co LLC B3 640 Gtd Snr Sec 2nd Priority Fltg Rt Global Notes US<br />
Calpine Generating Co LLC Caa1 680 Gtd Snr Sec 3rd Priority Fltg Rt Global Notes US<br />
Calpine Generating Co LLC Caa1 150 Gtd Snr Sec 3rd Priority Global Notes US<br />
Carretera de Cuota Mexico-Toluca Aaa/NA 340 Senior Secured Certificados Bursatiles Mexico<br />
Catalyst Healthcare (Manchester) <strong>Finance</strong> plc Aaa/Baa3 337 Senior Secured Term Loan UK<br />
Catalyst Healthcare (Manchester) <strong>Finance</strong> plc Aaa/Baa3 347 Gtd Senior Secured Index Linked Eurobonds UK<br />
Catalyst Healthcare (Romford) Financing plc Aaa/Baa3 185 Gtd Senior Secured Bank Credit Facility UK<br />
Catalyst Healthcare (Romford) Financing plc Aaa/Baa3 237 Gtd Snr Sec Index Linked Eurobonds UK<br />
Catalyst Healthcare (Worcester) PLC Aaa/NA 160 Gtd Senior Secured Eurobonds UK<br />
CE Casecnan Water & Energy Company, Inc. B2 297 Guaranteed Senior Secured Notes Philippines<br />
CE Generation LLC. (CEG) Ba1 400 Senior Secured Bonds US<br />
Cedar Brakes I, L.L.C. Baa2 320 Senior Secured Bonds US<br />
Cedar Brakes II, L.L.C. Baa2 431 Senior Secured Bonds US<br />
Cerro Negro <strong>Finance</strong>, Ltd. Ba3 600 Gtd Senior Secured Global Notes Venezuela<br />
Chivor, SA ESP B1 170 Senior Secured Global Notes Colombia<br />
Choctaw Generation Limited Partnership Baa3 321 Senior Secured Pass-Thru Ctfs US<br />
CILCORP Inc. Baa2 502 Senior Unsecured Debt US<br />
City Aviation <strong>Finance</strong> Limited Baa2 165 Snr Secured Asset Backed Euronotes UK<br />
Cleco Evangeline LLC B1 218 Senior Secured Bonds US<br />
Cogentrix Delaware Holdings, Inc. Ba2 700 Senior Secured Term Loan US<br />
Cogentrix Delaware Holdings, Inc. Ba2 50 Senior Secured Revolving Credit Facility US<br />
Cogentrix Energy, Inc. Aa3 355 Guaranteed Senior Unsecured Notes US<br />
Coleto Creek WLE, LP Ba3 120 Senior Secured Bank Credit Facility US<br />
Coleto Creek WLE, LP Ba3 240 Senior Secured Term Loan B US<br />
Coleto Creek WLE, LP B1 150 Senior Secured 2nd Lien Term Loan US<br />
Colowyo Coal Funding Corp. Ba2 193 Senior Secured Recv Coll Bonds US<br />
Colver <strong>Project</strong> Aaa/Baa3 169 Senior Secured Industrial Revenue BondsUS<br />
Companhia de Saneamento do Parana - SANEPAR B1 98 Senior Unsecured Brazilian Debentures Brazil<br />
Companhia Petrolifera Marlim B1 1,000 Senior Secured MTN program Brazil<br />
Compañía de Alumbrado Eléctrico de San Salvador SA de CV Aaa/Baa3 120 Senior Secured Notes El Salvador<br />
Connect M77/GSO plc Aaa/NA 269 Guaranteed Senior Secured Eurobonds UK<br />
Conproca, S.A. de C.V. Baa3 370 Senior Secured Global Notes Mexico<br />
Consort Healthcare (Blackburn) Funding plc Aaa/NA 81 Gtd Senior Secured Bank Credit Facility UK<br />
Consort Healthcare (Blackburn) Funding plc Aaa/NA 106 Guaranteed Senior Secured Bonds UK<br />
Constructora Internacional de Infraestructura S.A. de C.V. Baa3 230 Senior Secured Global Notes Mexico<br />
Constructora Internacional de Infraestructura S.A. de C.V. Baa3 457 Senior Secured Bank Credit Facility Mexico<br />
Cordova Funding Corporation B3 225 Guaranteed Senior Secured Bonds US<br />
Criterion Healthcare PLC Aaa/NA 114 Gtd Snr Sec Index Linked Eurobonds UK<br />
Crockett Cogeneration, LP Baa3 295 Senior Secured Global Notes US<br />
Delek & Avner - Yam Tethys Ltd Baa3 275 Senior Secured Global Notes Israel<br />
Deer Park Refining Limited Partnership A2 201 Senior Unsecured Notes US<br />
Derby Healthcare plc Aaa/Baa3 701 Guaranteed Senior Secured Eurobonds UK<br />
DTE Energy Center, LLC Baa2 244 Senior Secured Global Notes US<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xxxviii •
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Dudley Summit PLC Aaa/NA 123 Gtd Snr Sec Index Linked Eurobonds UK<br />
Dwr Cymru (Financing) Limited Aaa/NA 1,424 Senior Secured Asset Backed Euronotes UK<br />
Dwr Cymru (Financing) Limited A3 108 Senior Secured Asset Backed Euronotes UK<br />
Dwr Cymru (Financing) Limited A3 939 Senior Subordinated Euronotes UK<br />
Dwr Cymru (Financing) Limited Baa2 356 Subordinated Asset Backed Euronotes UK<br />
E-470 Public Highway Authority, CO Aaa/Baa3 1,143 Senior Unsecured Revenue Bonds US<br />
East Coast Power, L.L.C. Baa3 404 Senior Secured Global Notes US<br />
Edison Mission Energy B1 1,600 Senior Unsecured Notes US<br />
Edison Mission Energy/Midwest Generation, LLC B1 1,147 Gtd Snr Secured Pass-Through Ctfs US<br />
Edison Mission Energy Funding Corporation Ba1 190 Guaranteed Senior Secured Notes US<br />
Edmonton Regional Airports Authority A1 165 Senior Secured Revenue Bonds Canada<br />
EES Coke Battery Company, Inc Ba2 75 Senior Secured Notes US<br />
El Habal Funding Trust Baa2 60 Senior Secured Notes Mexico<br />
ElectraNet Pty Ltd. Aaa/Baa1 144 Gtd Senior Secured Australian MTNs Australia<br />
Ellenbrook Developments plc Aaa/Baa2 85 Gtd Snr Sec Index Linked Eurobonds UK<br />
Elwood Energy LLC Ba2 402 Senior Secured Global Notes US<br />
Empresa Electrica Guacolda S.A. Baa3 150 Senior Secured Global Notes Chile<br />
Endeavour SCH PLC Aaa/NA 222 Gtd Snr Sec Index Linked Eurobonds UK<br />
Enterprise Civic Buildings Limited Aaa/NA 34 Guaranteed Senior Secured Eurobonds UK<br />
ESI Tractebel Acquisition Corp. Ba1 220 Gtd Senior Secured Bonds, Ser B US<br />
ESI Tractebel Funding Corporation Baa2 387 Gtd Senior Secured Bonds, Ser A US<br />
Excel Paralubes Funding Corporation Baa1 490 Guaranteed Senior Unsecured Notes US<br />
Exchequer Partnership Plc Aaa/NA 200 Gtd Snr Sec Index Linked Eurobonds UK<br />
Exchequer Partnership (No. 2) Plc Aaa/Baa2 265 Guaranteed Senior Secured Bonds UK<br />
Exelon Generation Company, LLC Baa1 1,200 Senior Unsecured Global Notes US<br />
Express Pipeline Limited Partnership Baa1 110 Senior Secured Global Notes US/Canada<br />
Express Pipeline Limited Partnership Baa1 150 Gtd Snr Secured Global Notes, Ser A US/Canada<br />
Express Pipeline Limited Partnership Baa3 250 Gtd Sec Sub Global Notes, Ser B US/Canada<br />
Fasttrax Limited Aaa 123 Guaranteed Senior Secured Bonds UK<br />
Fertinitro <strong>Finance</strong> Inc. B3 250 Guaranteed Senior Secured Bonds Venezuela<br />
Fideicomiso Petacalco Baa2 309 Senior Secured Global Notes Mexico<br />
Fixed Link <strong>Finance</strong> 2 B.V. Aaa/B1 949 Gtd Senior Secured Eurobonds, Cl G1 UK/France<br />
Fixed Link <strong>Finance</strong> 2 B.V. B1 184 Senior Secured Eurobonds, Cl A UK/France<br />
Florida Gas Transmission Company Baa2 725 Senior Unsecured Notes US<br />
FPL Energy American Wind, LLC Baa3 380 Gtd Senior Secured Global Notes US<br />
FPL Energy Caithness Funding Corporation Baa3 150 Guaranteed Senior Secured Bonds US<br />
FPL Energy National Wind, LLC Baa3 365 Senior Secured Global Notes US<br />
FPL Energy National Wind Portfolio, LLC Ba2 100 Senior Secured Global Notes US<br />
FPL Energy Virginia Funding Corporation Baa3 435 Gtd Senior Secured Global Notes US<br />
GH Water Supply (Holdings) Limited Ba3 698 Guaranteed Senior Secured Term Loans China<br />
Gilroy Energy Center, LLC Aaa/Baa3 302 Guaranteed Senior Secured Notes US<br />
Golden State Petroleum Transport Corporation Aa2 16 Gtd Snr Sec First Pfd Mortgage Notes US<br />
Golden State Petroleum Transport Corporation Baa2 127 Snr Sec First Pfd Mortgage Notes US<br />
Greater Toronto Airport Authority A2 4,088 Senior Secured Debt Canada<br />
Hamaca Holding LLC Ba3 329 Senior Secured Bank Credit Facility Venezuela<br />
Harris County-Houston Sports Authority, TX Aaa/Baa2 313 Senior Lien Revenue Bonds US<br />
Harris County-Houston Sports Authority, TX Aaa/Baa3 184 Junior Lien Special Revenue Bonds US<br />
Harris County-Houston Sports Authority, TX Aaa/Baa3 220 Junior Lien Revenue Bonds US<br />
Hawkeye Renewables LLC B2 185 Senior Secured Term Loan US<br />
Health Management (Carlisle) plc Aaa/NA 127 Guaranteed Senior Secured Bonds UK<br />
Healthcare Support (Newcastle) <strong>Finance</strong> Plc Aaa/Baa3 219 Senior Secured Term Loan UK<br />
Healthcare Support (Newcastle) <strong>Finance</strong> Plc Aaa/Baa3 377 Senior Secured Euronotes UK<br />
Hodgkins (Village of) IL/Metropolitan Biosolids Management, LLC A3 53 Environmental Revenue Bonds US<br />
Hospital Company (Dartford) Issuer Plc (The) Aaa/Baa2 240 Gtd Snr Sec Index Linked Eurobonds UK<br />
Houston (City of) TX, Airport Rental Car Facility Aaa/A3 130 Snr Special Facilities Revenue Bonds US<br />
Houston Intercont. Airport, People Mover <strong>Project</strong> Aaa/Baa3 74 Senior Unsecured Revenue Bonds US<br />
HOVENSA L.L.C. Baa3 150 Snr Unsecured Revolving Credit Facility USVI<br />
HOVENSA L.L.C. Baa3 191 Snr Unsecured Term Loan USVI<br />
HOVENSA L.L.C. Baa3 127 Senior Secured Bonds USVI<br />
HPC King's College Hospital PLC Aaa/NA 149 Gtd Snr Sec Index Linked Eurobonds UK<br />
Husky Terra Nova <strong>Finance</strong> Ltd. Baa2 107 Senior Secured Notes Canada<br />
Indiantown Cogeneration, L.P. Ba1 466 Senior Secured Bonds US<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xxxix •
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Indiantown Cogeneration, L.P./Martin (County of) FL, I.D.A. Ba1 125 Snr Sec Pollution Control Rev Bonds US<br />
Inmobiliaria Fumisa S.A. de C.V. Baa3 82 Senior Secured Participation Ctfs Mexico<br />
Integrated Accommodation Services PLC Aaa/Baa1 612 Gtd Senior Secured Eurobonds UK<br />
Interlink Roads Pty Ltd. A2 405 Senior Secured Term Loan Australia<br />
Intermodal Container Transfer Facility Jt Pwrs Auth Aaa/Baa1 43 Senior Unsecured Revenue Bonds US<br />
Investco S.A. Ba1 103 Gtd Subordinated Brazilian Debentures Brazil<br />
Investors in the Community (Buxton) Ltd Aaa 93 Gtd Snr Sec Index Linked Eurobonds UK<br />
Investors in the Community (Buxton) Ltd Aaa 7 Gtd Senior Secured Eurobonds UK<br />
Iroquois Gas Transmission System, L.P. Baa1 370 Senior Unsecured Notes US<br />
Juniper Generation, L.L.C. Baa3 206 Guaranteed Senior Secured Notes US<br />
KGen LLC B2 225 Gtd Snr Sec First Priority Term Loan US<br />
KGen LLC B3 250 Gtd Snr Sec Second Priority Term Loan US<br />
Kern River Funding Corporation A3 510 Gtd Senior Unsec Global Notes, Ser A US<br />
Kern River Funding Corporation A3 836 Gtd Senior Secured Global Notes, Ser B US<br />
Kincaid Generation, L.L.C. Baa3 265 Senior Secured Bonds US<br />
Kiowa Power Partners, L.L.C. Baa3 642 Senior Secured Global Notes US<br />
La Paloma Generating Company Ba3 370 Snr Sec First Lien Bank Credit Facility US<br />
La Paloma Generating Company B2 155 Snr Sec Second Lien Bank Credit Facility US<br />
Lane Cove Tunnel <strong>Finance</strong> Company Aaa/Baa3 859 Guaranteed Senior Secured Debt Australia<br />
Las Vegas Monorail Corporation, NV Aaa/Baa3 451 Senior First Tier Revenue Bonds US<br />
LS Power Funding Corporation Baa3 332 Senior Secured Bonds US<br />
LSP-Kendall Energy, LLC B1 412 Senior Secured Term Loan US<br />
LSP-Kendall Energy, LLC B1 10 Senior Secured Bank Credit Facility US<br />
Machadinho Energética S.A. (MAESA) Ba2 163 Gtd Subordinated Debentures Brazil<br />
Maritimes & Northeast Limited Partnership A2 176 Senior Secured First Mortgage Bonds US/Canada<br />
Maritimes & Northeast Pipeline, L.L.C. A2 240 Senior Secured First Mortgage Bonds US/Canada<br />
Market Place Redwood LP at Philadelphia Int'l Airport Aaa/Baa3 28 Senior Industrial Revenue Bonds US<br />
Massachusetts Port Authority/BOSFUEL <strong>Project</strong> (Logan Int'l Airport) Aaa/A3 111 Snr Unsec Special Facility Rev Bonds US<br />
Massachusetts Port Authority/Delta Air Lines Inc. <strong>Project</strong> Aaa/Caa2 496 Snr Special Facility Revenue Bonds US<br />
Merey Sweeny, L.P. Baa3 300 Senior Unsecured Notes US<br />
Metronet Rail BCV <strong>Finance</strong> Plc Aaa/NA 814 Gtd Senior Secured Eurobonds UK<br />
Metronet Rail BCV <strong>Finance</strong> Plc Baa3 806 Senior Secured Bank Credit Facility UK<br />
Metronet Rail SSL <strong>Finance</strong> Plc Aaa/NA 814 Gtd Senior Secured Eurobonds UK<br />
Metronet Rail SSL <strong>Finance</strong> Plc Baa3 806 Senior Secured Bank Credit Facility UK<br />
Michigan Public Power Agency Aaa/A2 35 Senior Combustion Turbine Rev Bds US<br />
MidAmerican Energy Holding Co. Baa3 3,260 Senior Unsecured Debt US<br />
MidAmerican Energy Holding Co. Multiple 880 Multiple Seniority Shelf US<br />
Midland Funding Corporation II Ba3 367 Sub Sec Lease Obligation Bonds US<br />
Midwest Generation, LLC Ba3 200 Snr Sec 1st Lien Revolving Credit FacilityUS<br />
Midwest Generation, LLC Ba3 700 Snr Sec 1st Lien Term Loan US<br />
Midwest Generation, LLC B1 1,000 Senior Secured 2nd Lien Notes US<br />
Minicentrales Dos, S. Com. p. A. Aaa/NA 25 Senior Unsecured Bank Credit Facility Spain<br />
Minicentrales Dos, S. Com. p.A. Aaa/NA 70 Gtd Senior Secured Eurobonds Spain<br />
Minicentrales Dos, S. Com. p. A. Aaa/NA 159 Gtd Senior Unsecured Spanish Bonds Spain<br />
Monterrey Power, S.A. de C.V. Baa2 236 Senior Secured Global Notes Mexico<br />
NATS (En Route) PLC Aaa/Baa1 962 Gtd Senior Secured Amortizing Bonds UK<br />
NAV CANADA Aa3 1,894 Senior Secured Revenue Bonds & MTNs Canada<br />
New York City Industrial Devt Agency, AIRIS JFK I LLC Baa3 153 Special Airport Facility Rev Bonds US<br />
Nordic Biofuels of Ravenna LLC B2 90 Gtd Senior Secured Term Loan US<br />
Northeast Generation Company Ba1 320 Senior Secured Bonds US<br />
Northwest Parkway Public Highway Authority, CO Aaa/B1 364 Senior Revenue Bonds US<br />
Northwest Parkway Public Highway Authority, CO B3 52 First Tier Subordinate Revenue Bonds US<br />
NPS LLC - Boston Patriots Stadium Aaa/NA 281 Snr Unsec <strong>Project</strong> Revenue Bonds US<br />
NRG Peaker <strong>Finance</strong> Company LLC Aaa 325 Senior Secured Floating Rate Notes US<br />
NSG Holdings II, LLC B1 150 Senior Secured Term Loan B US<br />
NSG Holdings II, LLC B1 10 Senior Secured Revolving Credit Facility US<br />
Oakmont Asset Trust Baa3 350 Senior Unsecured Notes US<br />
Ocean Rig Norway AS B3 225 Gtd Senior Secured Global Notes Norway<br />
Octagon Healthcare Funding plc Aaa/Baa3 534 Guaranteed Senior Secured Eurobonds UK<br />
Orange Cogeneration Funding Corporation Baa3 110 Guaranteed Senior Secured Bonds US<br />
Orion Power Holdings, Inc. B2 400 Senior Unsecured Notes US<br />
Ottawa Macdonald-Cartier Int'l Airport Auth. A1 173 Senior Unsecured Revenue Bonds Canada<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xl •
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Oxymar A3 165 Gtd Senior Unsecured Bonds US<br />
Paiton Energy Funding B.V. B2 180 Guaranteed Senior Secured Bonds Indonesia<br />
Panda-Rosemary Funding Corporation A3 111 Senior Secured Bonds US<br />
PDVSA <strong>Finance</strong> Ltd. B1 1,400 Snr Unsec Asset Bkd Global Notes Venezuela<br />
PDVSA <strong>Finance</strong> Ltd. B1 1,316 Senior Unsecured Global Notes Venezuela<br />
Pemex <strong>Finance</strong> Ltd. Aaa/Baa1 1,235 Guaranteed Senior Debt Mexico<br />
Pemex <strong>Finance</strong> Ltd. Baa1 2,630 Senior Global Notes Mexico<br />
Pennsylvania Econ Devt <strong>Finance</strong> Auth, Amtrak Transformer Station A3 100 Richmond Freq Converter Rev Bonds US<br />
Pennsylvania Econ Devt <strong>Finance</strong> Auth, Amtrak 30th Street<br />
Station Parking Garage <strong>Project</strong> Ba1 50 Senior Parking Revenue Bonds US<br />
Perth Airport/Westralia Airports Corporation Pty Limited Aaa/Baa3 95 Gtd Senior Secured Australian Bonds Australia<br />
Perth Airport/Westralia Airports Corporation Pty Limited Aaa/Baa3 150 Senior Secured Revenue Bonds Australia<br />
Petrozuata <strong>Finance</strong> Inc. B3 1,000 Gtd Senior Secured Eurobonds Venezuela<br />
Phoenix Park Funding Limited A3 110 Gtd Senior Secured Global Bonds Trinidad<br />
Phoenix Park Gas Processors Limited A3 41 Senior Secured Notes Trinidad<br />
Piney Creek Limited Partnership Aaa/NA 56 Senior Secured Industrial Revenue BondsUS<br />
Pittsburgh & Allegheny Country Sports and Exhibition Authority, PA Aaa/NA 17 Ticket Surcharge Revenue Bonds US<br />
Pocahontas Parkway Association, VA Ba3 318 Senior Unsecured Toll Road Rev Bonds US<br />
Pocahontas Parkway Association, VA B3 36 Subordinated Toll Road Rev Bonds US<br />
Port Arthur Coker Company L.P./Port Arthur <strong>Finance</strong> Corp Ba3 255 Guaranteed Senior Secured Notes US<br />
Port Authority of NY & NJ/JFK Int'l Arrivals Terminal Aaa/Ba1 934 Gtd Snr Unsec Spec Fac Rev Bonds US<br />
Power Contract Financing, L.L.C Baa2 802 Senior Secured Global Notes US<br />
Power Receivable <strong>Finance</strong>, LLC Baa2 432 Senior Secured Global Notes US<br />
Power Receivable <strong>Finance</strong>, LLC B1 22 Subordinated Notes US<br />
PPL Energy Supply, LLC Baa2 800 Senior Unsecured Notes US<br />
PPL Energy Supply, LLC Baa2 400 Gtd Senior Unsecured Conv Notes US<br />
PPL Energy Supply, LLC Baa2 1,100 Snr Unsecured Revolving Credit Facility US<br />
PPL Montana, LLC Baa3 338 Senior Secured Pass-Thru Ctfs US<br />
Premier Transmission Financing plc Aaa/A1 190 Guaranteed Senior Secured Euronotes UK<br />
Primary Energy <strong>Finance</strong> LLC Ba2 150 Senior Secured Term Loan B US<br />
<strong>Project</strong> Funding Corporation I Multiple 594 Asset Backed Global Notes US<br />
Proyectos de Energia, S.A. de C.V. Baa2 100 Senior Secured Notes Mexico<br />
PSEG Power LLC Baa1 3,200 Gtd Senior Unsecured Global Notes US<br />
PSEG Power LLC/Indiana County Industrial Development Auth., PA Baa1 19 Snr Unsec Pollution Control Rev Bds US<br />
PSEG Power LLC/New Jersey Economic Development Authority Baa1 66 Snr Unsec Pollution Control Rev Bds US<br />
PSEG Power LLC/Salem (County of) NJ, Pollution Ctrl Fin Auth Baa1 25 Snr Unsec Pollution Control Rev Bds US<br />
PSEG Power LLC/York County Industrial Development Auth., PA Baa1 14 Snr Unsec Pollution Control Rev Bds US<br />
Quezon Power (Philippines), Limited Co. B3 210 Senior Secured Bonds Philippines<br />
Ras Laffan Liquefied Natural Gas Company Ltd. A1 1,865 Senior Secured First Mortgage Bonds Qatar<br />
Ras Laffan Liquefied Natural Gas Co Ltd (II) A1 1,400 Gtd. Senior Secured Global Bonds Qatar<br />
Ras Laffan Liquefied Natural Gas Co Ltd (3) A1 850 Gtd. Senior Secured Global Bonds Qatar<br />
Reliant Energy Mid-Atlantic Power Holdings, LLC B1 641 Senior Secured Pass-Thru Ctfs US<br />
Road Management Consolidated PLC Aaa/NA 251 Gtd Senior Secured Eurobonds UK<br />
Road Management Services (A13) plc Aaa/NA 177 Gtd Snr Sec Floating Rate Eurobonds UK<br />
Road Management Services (<strong>Finance</strong>) plc Aaa/NA 178 Gtd Senior Secured Eurobonds UK<br />
Romulus <strong>Finance</strong> s.r.l. Aaa/Baa3 1,281 Gtd Senior Secured Eurobonds UK<br />
Romulus <strong>Finance</strong> s.r.l. Baa3 70 Gtd Snr Sec Floating Rate Euronotes UK<br />
RMPA Services PLC Aaa/Baa3 1,249 Guaranteed Senior Secured Bonds UK<br />
Ruta 5 Tramo Talca Chillan, S.A. Aaa/NA 155 Gtd Senior Unsecured Bonds Chile<br />
Rutas del Pacifico, S.A. Baa2 271 Senior Unsecured Chilean Bonds Chile<br />
Salton Sea Funding Corporation Ba1 456 Guaranteed Senior Secured Bonds US<br />
San Francisco Airport Commission, SFO Fuel Company LLC Aaa/A3 125 Senior Unsecured Revenue Bonds US<br />
San Francisco Bay Area Rapid Transit District, CA Aaa/A3 485 Senior SFO Extension Bonds US<br />
San Joaquin Hills Transportation Corridor Agency, CA Aaa/Ba2 1,448 Snr Lien Toll Road Revenue Bonds US<br />
Santa Rosa Bay Bridge Authority B1 95 Snr Unsec Toll Facility Rev Bonds US<br />
SCL Terminal Aéreo Santiago S.A. Aaa/Ba3 199 Senior Unsecured Revenue Bonds Chile<br />
SCL Terminal Aéreo Santiago S.A. Aaa/NA 85 Senior Unsecured Notes Chile<br />
Selkirk Cogen Funding Corporation Baa3 387 Senior Secured Bonds US<br />
Sincrudos de Oriente SINCOR C.A. Ba3 1,200 Senior Secured Term Loan Venezuela<br />
Sithe/Independence Funding Corporation Ba2 532 Guaranteed Senior Secured Bonds US<br />
Snowy Hydro Limited Aaa/NA 196 Gtd Senior Unsecured Australian MTNs Australia<br />
Snowy Hydro Limited A3 101 Senior Unsecured Australian MTNs Australia<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xli •
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Ratings<br />
As of November 2005<br />
Issuer/<strong>Project</strong><br />
Long-Term<br />
Rating<br />
Issue Size<br />
($mil) Issue Type Country<br />
Sociedad Concesionaria Vespucio Norte Express, S.A. Baa3 432 Senior Secured Chilean Bonds Chile<br />
Sociedad Concesionaria Autopista Central Aaa/Baa3 617 Guaranteed Senior Secured Debt Chile<br />
Sociedad Concesionaria Costanera Norte Baa2 219 Senior Secured Chilean Bonds Chile<br />
Societe Marseilaise du Tunnel Prado-Carenage Aaa/NA 82 Gtd Senior Secured Bank Credit Facility France<br />
South Jersey Transportation Authority Aaa/A3 205 Snr Transportation System Rev Bds US<br />
Southern Cross Airports Corporation Pty Ltd Aaa/Baa2 821 Gtd Senior Secured Australian Debt Australia<br />
Southern Cross Airports Holdings Ltd Baa3 341 Senior Unsecured FLIERS Australia<br />
Southern Cross FLIERS Trust Baa3 341 Senior Unsecured Trust Units Australia<br />
Southern Power Company Baa1 650 Snr Unsecured Revolving Credit Facility US<br />
Southern Power Company Baa1 1,150 Senior Unsecured Global Notes US<br />
St. Louis Industrial Devt Agy, MO, Convention Center HQ Hotel<br />
<strong>Project</strong> Aaa/NA 40 Senior Compound Interest Rev Bonds US<br />
Stirling Water Seafield <strong>Finance</strong> PLC Aaa/NA 177 Gtd Senior Secured Eurobonds UK<br />
Summit <strong>Finance</strong> (Law) plc Aaa/NA 229 Gtd Senior Secured Eurobonds UK<br />
Sutton Bridge Financing Limited Baa3 470 Gtd Senior Secured Global Notes UK<br />
Tenaska Alabama II Partners, L.P. B1 361 Senior Secured Global Notes US<br />
Tenaska Alabama II Partners, L.P. Baa3 411 Guaranteed Senior Secured Bonds US<br />
Tenaska Georgia Partners, L.P. Baa3 275 Senior Secured Bonds US<br />
Tenaska Oklahoma I L.P. Ba2 73 Senior Secured Notes US<br />
Tenaska Virginia Partners, L.P. Baa3 484 Senior Secured Global Notes US<br />
Tenaska Washington Partners, L.P. Baa2 189 Senior Secured Bonds US<br />
Tengizchevroil <strong>Finance</strong> Company S.ar.l. Baa3 1,100 Gtd Senior Unsecured Global Bonds Kazakhstan<br />
Terasen Pipelines (Corridor) Inc. A2 245 Senior Unsecured Canadian Debentures Canada<br />
Texas Turnpike Authority, Central Texas Turnpike System Aaa/Aa3 900 Second Tier Bond Aniticipation Notes US<br />
Texas Turnpike Authority, Central Texas Turnpike System Aaa/Baa1 1,139 First Tier Revenue Bonds US<br />
Thermal North America, Inc. Ba3 247 Guaranteed Senior Secured Term Loan US<br />
Thermal North America, Inc. Ba3 35 Gtd Senior Secured Revolving Credit Facility US<br />
Thermal North America, Inc. Ba3 30 Gtd Senior Secured Letter of Credit Facility US<br />
Tietê Certificates Grantor Trust Caa2 300 Senior Secured Certificates Brazil<br />
Toll Road Investors, L.P. Aaa/Baa3 333 Senior Unsecured Revenue Bonds US<br />
Trans-Elect NTD Holdings Path 15, LLC Ba3 56 Senior Secured Bonds US<br />
Trans-Elect NTD Path 15, LLC Ba1 95 Senior Secured Bonds US<br />
Transform Schools (N.Lanarkshire) Funding plc Aaa 127 Gtd Senior Secured Term Loan UK<br />
Transform Schools (N.Lanarkshire) Funding plc Aaa 160 Gtd Senior Secured Index Linked Bonds UK<br />
Transurban <strong>Finance</strong> Company Pty Ltd Aaa/A3 458 Gtd Senior Secured Australian MTNs Australia<br />
Transurban <strong>Finance</strong> Company Pty Ltd A3 191 Senior Secured Australian MTNs Australia<br />
Transurban <strong>Finance</strong> Company Pty Ltd A3 278 Senior Secured Bank Credit Facility Australia<br />
Tyseley <strong>Finance</strong> PLC Aaa/NA 144 Gtd Senior Secured Eurobonds UK<br />
UAE Mecklenburg Cogeneration LP A3 120 Senior Unsecured Bonds US<br />
UAE Mecklenburg Cogeneration LP/Mecklenburg (County of) VA,<br />
Ind. Dev. Auth. A3 25 Senior Unsecured Industrial Rev Bonds US<br />
United Healthcare (Bromley) Ltd Aaa/NA 238 Gtd Snr Secured Index Linked Euro MTNsUK<br />
Utility Contract Funding, L.L.C. Baa1 829 Senior Secured Notes US<br />
Windsor Petroleum Transportation Corporation Aa1 60 Guaranteed Senior Secured Notes US<br />
Windsor Petroleum Transportation Corporation Baa2 239 Senior Secured Term Bonds US<br />
Winnipeg Airports Authority Inc A1 212 Revenue Bonds, Series A Canada<br />
Issuers carrying Aaa ratings are insured transactions. Dual ratings indicate the Aaa insured rating and the public underlying rating.<br />
NA refers to unpublished underlying ratings.<br />
• xlii •
Global Power Rating List by Operating Relationship<br />
As of December 2005<br />
Senior<br />
Secured<br />
Senior<br />
Unsecured<br />
Subord.<br />
Preferred<br />
Stock<br />
Commercial<br />
Paper<br />
AES Corporation, (The) Ba3 B1 B2*** — —<br />
AES China Generating Co. Ltd. — B1 — — —<br />
AES Sul Distribuidora Gaucha de Energia S.A. Ca — — — —<br />
IPALCO Enterprises, Inc. Ba1 — — — —<br />
Indianapolis Power & Light Company Baa2 — — Ba2 —<br />
AES Eastern Energy, L.P. Ba1 — — — —<br />
AES Gener S.A. — Ba3 — — —<br />
Empresa Electrica Guacolda S.A. Baa3 — — — —<br />
AES Ironwood, L.L.C. B2 — — — —<br />
AES Puerto Rico, L.P. Baa3 — — — —<br />
AES Red Oak, L.L.C. B2 — — — —<br />
ALLETE, Inc. Baa1 (P)Baa2 — (P)Ba1 —<br />
Allegheny Energy, Inc. — Ba2 (P)Ba3 — NP<br />
Allegheny Energy Supply Company, LLC Ba2 Ba3 — — NP<br />
Allegheny Generating Company — Ba3 — — —<br />
Monongahela Power Company Baa3 Ba1 — — —<br />
Potomac Edison Company (The) Baa2 Baa3 — — —<br />
West Penn Power Company — Baa3 — — —<br />
Alliance Pipeline L.P. — A3 — — —<br />
Alliant Energy Corporation — — — — P-2<br />
Interstate Power and Light Company A3 Baa1 — Baa3 P-2<br />
Iowa Electric Light and Power Company (P)A3 — — — —<br />
Iowa Southern Utilities Company (P)A3 — — — —<br />
Wisconsin Power and Light Company A1 A2 — Baa1 P-1<br />
Ameren Corporation — Baa1 (P)Baa2 (P)Baa2 P-2<br />
AmerenEnergy Generating Company — Baa2 — — —<br />
CILCORP Inc. — Baa3 — — —<br />
Central Illinois Light Company A3 — — Baa3 —<br />
Central Illinois Public Service Company A3 (P)Baa1 — Baa3 —<br />
Illinois Power Company Baa2 — — Ba2 —<br />
Union Electric Company A1 (P)A2 A3 Baa1 P-1<br />
American Electric Power Company, Inc. — Baa2 — — P-2<br />
AEP Texas Central Company Baa1 Baa2 — Ba1 —<br />
AEP Texas North Company A3 Baa1 — Baa3 —<br />
Appalachian Power Company Baa1 Baa2 — — —<br />
Columbus Southern Power Company — A3 — Baa2 —<br />
Indiana Michigan Power Company — Baa2 — Ba1 —<br />
Kentucky Power Company — Baa2 — — —<br />
Ohio Power Company — A3 — Baa2 —<br />
Public Service Company of Oklahoma A3 Baa1 — Baa3 —<br />
Southwestern Electric Power Company A3 Baa1 — Baa3 —<br />
American Transmission Company LLC — A1 — — P-1<br />
Aquila, Inc. Ba3 B2 Caa1 — —<br />
Arkansas Electric Cooperative Corporation — A2 — — —<br />
Avista Corp. Baa3 Ba1 — Ba3 —<br />
Avon Energy Partners Holdings — A3 — — —<br />
Black Hills Corporation — Baa3 (P)Ba1 (P)Ba2 —<br />
Black Hills Power, Inc. Baa1 — — — —<br />
Brooklyn Navy Yard Cogeneration Partners L.P. Ba1 — — — —<br />
CE Generation LLC. Ba1 — — — —<br />
CH Energy Group, Inc. — — — — —<br />
Central Hudson Gas & Electric Corporation — A2 — Baa1 —<br />
CLP Holdings Limited — — — — P-1<br />
CLP Power Hong Kong Limited — Aa3 — — P-1<br />
CMS Energy Corporation Ba3 B1 B3 Caa1 —<br />
Consumers Energy Company Baa3 (P)Ba1 (P)Ba2 — —<br />
Caithness Coso Funding Corp. Baa3 — Ba2 — —<br />
Calpine Corporation — Ca (P)C (P)C —<br />
Cedar Brakes I, L.L.C. Baa2 — — — —<br />
Cedar Brakes II, L.L.C. Baa2 — — — —<br />
* Secured lease obligation bonds<br />
** Lease obligation bonds<br />
*** Senior subordinated<br />
• xliii •
Global Power Rating List by Operating Relationship<br />
As of December 2005<br />
Senior<br />
Secured<br />
Senior<br />
Unsecured<br />
Subord.<br />
Preferred<br />
Stock<br />
Commercial<br />
Paper<br />
CenterPoint Energy, Inc. — Ba1 — (P)Ba2 NP<br />
CenterPoint Energy Houston Electric, LLC Baa2 Baa3 — — —<br />
CenterPoint Energy Resources Corp. — Baa3 Ba1 — —<br />
Central Vermont Public Service Corp. — — — Ba2 —<br />
Chugoku Electric Power Co., Inc. A1 — — — —<br />
Cinergy Corp. — Baa2 (P)Baa3 (P)Ba1 —<br />
Cincinnati Gas & Electric Company (The) (P)A3 Baa1 — Baa3 P-2<br />
Union Light, Heat & Power Company (The) (P)A3 Baa1 — — —<br />
PSI Energy, Inc. A3 Baa1 — Baa3 P-2<br />
Cleco Corporation — Baa3 (P)Ba1 (P)Ba2 —<br />
Cleco Power LLC A3 Baa1 — Baa3 —<br />
Cleco Evangeline LLC B1 — — — —<br />
Companhia Energetica de Brasilia - CEB — Ba3 — — —<br />
Consolidated Edison, Inc. — A2 (P)A3 (P)Baa1 P-1<br />
Consolidated Edison Company of New York, Inc. — Aaa A2 — P-1<br />
Orange and Rockland Utilities, Inc. — A1 (P)A2 — P-1<br />
Rockland Electric Company A1 — — — —<br />
Constellation Energy Group, Inc. — Baa1 — (P)Baa2 P-2<br />
Baltimore Gas and Electric Company A1 A2 — Baa1 P-1<br />
DPL Inc. — Ba1 — — —<br />
Dayton Power & Light Company Baa1 — — Ba1 P-2<br />
DTE Energy Company — Baa2 (P)Baa3 — P-2<br />
Detroit Edison Company (The) A3 (P)Baa1 (P)Baa2 — P-2<br />
Dominion Resources Inc. — Baa1 — (P)Baa3 P-2<br />
Virginia Electric and Power Company A2 A3 — Baa2 P-1<br />
Duke Energy Corporation A3 Baa1 — Baa3 P-2<br />
Duke Capital, LLC — Baa3 — — P-3<br />
PanEnergy Corp. — Baa3 — — —<br />
Texas Eastern Transmission L.P. — Baa2 — — —<br />
Duke Energy Field Services, LLC — Baa2 — — P-2<br />
Duquesne Light Holdings, Inc. — Baa3 — (P)Ba3 —<br />
Duquesne Light Company Baa1 Baa2 — Ba1 P-2<br />
Dynegy Inc. — (P)Caa1 (P)Caa2 (P)Caa3 —<br />
Dynegy Holdings Inc. — B2 (P)B3 (P)Caa1 —<br />
E.ON AG — Aa3 — — —<br />
EES Coke Battery Company, Inc. Ba2 — — — —<br />
ENEL S.p.A. — Aa3 — — —<br />
EVN AG — Aa3 — — —<br />
East Coast Power L.L.C. Baa3 — — — —<br />
Edison International — (P)Baa3 (P)Ba1 (P)Ba1 —<br />
Edison Capital — — — — —<br />
Edison Funding Company — Ba1 — — —<br />
Mission Energy Holding Company B2 — — — —<br />
Edison Mission Energy — B1 — — —<br />
Midwest Generation, LLC Ba3 — — — —<br />
Southern California Edison Company A3 Baa1 (P)Baa2 Baa3 P-2<br />
Edison S.p.A. — Baa2 — — —<br />
Eesti Energia AS — A1 — — P-1<br />
El Paso Electric Company Baa2 Baa3 — (P)Ba2 —<br />
Electricite de France — Aa1 — — P-1<br />
EDF Energy Group Holdings plc — — — — —<br />
EDF Energy plc — A3 — — P-2<br />
CSW Investments — A3 — — —<br />
EDF Energy (South East) plc — — — — P-2<br />
EDF Energy Networks (SPN) plc — A3 — — P-2<br />
EDF Energy Networks (EPN) plc — A2 — — P-1<br />
EDF Energy Networks (LPN) plc — A2 — — P-1<br />
Empire District Electric Company (The) Baa1 Baa2 (P)Baa3 (P)Ba1 P-2<br />
Endesa S.A. — A3 — — P-2<br />
Enersis S.A. — Ba1 — — —<br />
Empresa Nacional de Electricidad, S.A.(Chile — Ba1 — — —<br />
* Secured lease obligation bonds<br />
** Lease obligation bonds<br />
*** Senior subordinated<br />
• xliv •
Global Power Rating List by Operating Relationship<br />
As of December 2005<br />
Senior<br />
Secured<br />
Senior<br />
Unsecured<br />
Subord.<br />
Preferred<br />
Stock<br />
Commercial<br />
Paper<br />
Energias de Portugal, S.A. — A2 — — P-1<br />
EDP <strong>Finance</strong> B.V. — A2 — — —<br />
Espirito Santo Centrais Eletricas - ESCELSA — B2 — — —<br />
Hidroelectrica del Cantabrico, S.A. — — — — P-2<br />
Energy East Corporation — Baa2 — (P)Ba1 P-2<br />
CMP Group, Inc. — — — — —<br />
Central Maine Power Company — A3 — Baa2 —<br />
Connecticut Energy Corp — — — — —<br />
Enron Corp. — — — — —<br />
Portland General Electric Company Baa1 Baa2 — Ba1 P-2<br />
Entergy Corporation — Baa3 — — —<br />
Entergy Arkansas, Inc. Baa1 (P)Baa2 — Ba1 —<br />
Entergy Gulf States, Inc. Baa3 — — Ba3 —<br />
Entergy Louisiana, LLC Baa1 Baa2 — Ba1 —<br />
Entergy Mississippi, Inc. Baa2 (P)Baa3 — Ba2 —<br />
System Energy Resources, Inc. Baa3 (P)Ba1 — — —<br />
Eskom Holdings Ltd — A1 — — —<br />
Essent N.V. — A2 — — P-1<br />
Essent Nederland B.V. — A2 — — P-1<br />
Exelon Corporation — Baa2 (P)Baa3 (P)Ba1 P-2<br />
Commonwealth Edison Company Baa1 Baa2 — Ba1 P-2<br />
Exelon Generation Company, LLC — Baa1 — — P-2<br />
PECO Energy Company A2 — (P)Baa2 Baa2 P-1<br />
FPL Group, Inc. — — — (P)Baa1 —<br />
Florida Power & Light Company Aa3 — — A3 P-1<br />
FirstEnergy Corp. — Baa3 — — —<br />
Cleveland Electric Illuminating Company Baa2 Baa3 — Ba2 —<br />
Jersey Central Power & Light Company Baa1 — — Ba1 —<br />
Metropolitan Edison Company Baa1 Baa2 — (P)Ba1 —<br />
Ohio Edison Company Baa1 Baa2 — Ba1 —<br />
Pennsylvania Power Co. Baa1 — — Ba1 —<br />
Pennsylvania Electric Company Baa1 Baa2 — — —<br />
Toledo Edison Company Baa2 — — Ba2 —<br />
Georgia Transmission Corporation — — — — P-2<br />
Great Plains Energy Incorporated — Baa2 (P)Baa3 Ba1 —<br />
Kansas City Power & Light Company A2 A3 (P)Baa1 — P-2<br />
Green Mountain Power Corporation Baa1 — — — —<br />
Hawaiian Electric Industries, Inc. — Baa2 — — —<br />
Hokkaido Electric Power Co., Inc. A1 — — — P-1<br />
Hokuriku Electric Power Co., Inc. A1 — — — P-1<br />
IDACORP, Inc. — Baa2 — — P-2<br />
Idaho Power Company A3 Baa1 — — P-2<br />
Israel Electric Corporation Limited (The) — Baa2 — — —<br />
Juniper Generation, L.L.C. Baa3 — — — —<br />
Kansai Electric Power Co., Inc. Aa3 — — — —<br />
KeySpan Corporation — A3 (P)Baa1 (P)Baa2 P-2<br />
Eastern Enterprises — — — — —<br />
Kincaid Generation, L.L.C. Baa3 — — — —<br />
Korea Electric Power Corporation — A2 — — —<br />
Korea Hydro and Nuclear Power Company Limited — A2 — — —<br />
Kyushu Electric Power Company, Inc. A1 — — — —<br />
LS Power Funding Corporation Baa3 — — — —<br />
MidAmerican Energy Holding Co. — Baa3 — (P)Ba2 —<br />
CE Electric UK Funding Company — Baa2 — — —<br />
MidAmerican Energy Company — A3 (P)Baa1 Baa2 P-1<br />
Iowa-Illinois Gas and Electric Company — — — Baa2 —<br />
MidAmerican Funding, LLC Baa1 Baa1 — — —<br />
Midwest Power Systems Inc. — — — Baa2 —<br />
NSTAR — A2 — — P-1<br />
Boston Edison Company — A1 — A3 P-1<br />
* Secured lease obligation bonds<br />
** Lease obligation bonds<br />
*** Senior subordinated<br />
• xlv •
Global Power Rating List by Operating Relationship<br />
As of December 2005<br />
Senior<br />
Secured<br />
Senior<br />
Unsecured<br />
Subord.<br />
Preferred<br />
Stock<br />
Commercial<br />
Paper<br />
National Grid Plc — Baa1 — — P-2<br />
National Grid Holdings One plc — — — — —<br />
National Grid Electricity Transmission plc — A2 — — P-1<br />
National Grid USA — — — — —<br />
Massachusetts Electric Company A1 — — — P-1<br />
Narragansett Electric Company A1 — — Baa1 —<br />
New England Power Company — — — Baa1 P-1<br />
Niagara Mohawk Power Corporation A3 Baa1 — Baa3 —<br />
National Rural Utilities Coop. <strong>Finance</strong> Corp. A1 A2 A3 — P-1<br />
National Thermal Power Corporation — NR — — —<br />
Northeast Generation Company Ba1 — — — —<br />
Northeast Utilities — Baa2 — — —<br />
Connecticut Light and Power Company A3 — — Baa3 —<br />
Public Service Company of New Hampshire A3 — — — —<br />
Western Massachusetts Electric Company — Baa2 — — —<br />
Nuon N.V. — — — — P-1<br />
OGE Energy Corp. — Baa1 Baa2 — P-2<br />
Oklahoma Gas & Electric Company — A2 — — P-1<br />
Oglethorpe Power Corporation — — — — P-2<br />
Old Dominion Electric Cooperative A3 — — — —<br />
Otter Tail Corporation — A3 — (P)Baa2 —<br />
PG&E Corporation — Baa3 — — —<br />
Pacific Gas & Electric Company — Baa1 — Baa3 —<br />
PPL Corporation — — — (P)Ba1 —<br />
PPL Electric Utilities Corporation Baa1 Baa2 — Ba1 P-2<br />
PPL Energy Supply, LLC — Baa2 — (P)Ba1 P-2<br />
Western Power Distribution Holdings Limited — Baa3 — — —<br />
Western Power Distribution LLP — Baa2 NR — —<br />
Western Power Distribution (South Wales) — Baa1 — — —<br />
Western Power Distribution (South West) — Baa1 — — P-2<br />
PPL Montana, LLC Baa3 — — — —<br />
PUBLIC POWER CORPORATION S.A. — A2 — — —<br />
Pepco Holdings, Inc. — Baa2 — — P-2<br />
Atlantic Energy, Inc. — — — — —<br />
Atlantic City Electric Company A3 Baa1 — Baa3 P-2<br />
Conectiv — — — — —<br />
Delmarva Power & Light Company A3 Baa1 — Baa3 P-2<br />
Potomac Electric Power Company A3 Baa1 — Baa3 P-2<br />
Pinnacle West Capital Corporation — Baa2 (P)Baa3 (P)Ba1 P-2<br />
Arizona Public Service Company — Baa1 (P)Baa2 — P-2<br />
Powergen Ltd — — — — P-2<br />
Powergen US Holdings Ltd — — — — P-2<br />
E. ON U.S. LLC — — — — —<br />
Kentucky Utilities Co. A1 — — — —<br />
Louisville Gas & Electric Company — — — Baa1 —<br />
Progress Energy, Inc. — Baa2 — (P)Ba1 P-2<br />
Florida Progress Corporation — — — — —<br />
Progress Capital Holdings, Inc. — Baa1 — — —<br />
Progress Energy Florida, Inc. A2 A3 (P)Baa1 Baa2 P-2<br />
Progress Energy Carolinas, Inc. A3 Baa1 Baa2 Baa3 P-2<br />
Public Service Enterprise Group Incorporated — Baa2 (P)Baa3 (P)Ba1 P-2<br />
PSEG Energy Holdings L.L.C. — Ba3 — — —<br />
PSEG Power L.L.C. — Baa1 — — —<br />
Public Service Electric and Gas Company A3 Baa1 (P)Baa2 Baa3 P-2<br />
Puget Energy, Inc. — — — — —<br />
Puget Sound Energy, Inc. Baa2 — — — P-2<br />
Quezon Power (Philippines), Limited Co. B3 — — — —<br />
RWE AG — A1 — — P-1<br />
RWE Power plc — Baa1 — — —<br />
Reliant Energy Inc. B1 (P)B2 B3*** (P)B3 NP<br />
Orion Power Holdings, Inc. — B2 — — —<br />
Reliant Energy Mid-Atlantic Power Hldgs., LLC B1 — — — —<br />
* Secured lease obligation bonds<br />
** Lease obligation bonds<br />
*** Senior subordinated<br />
• xlvi •
Global Power Rating List by Operating Relationship<br />
As of December 2005<br />
Senior<br />
Secured<br />
Senior<br />
Unsecured<br />
Subord.<br />
Preferred<br />
Stock<br />
Commercial<br />
Paper<br />
SCANA Corporation — A3 — — —<br />
Public Service Co. of North Carolina, Inc. — A2 — — P-1<br />
South Carolina Electric & Gas Company A1 — — Baa1 P-1<br />
Scottish Power plc — Baa1 — — —<br />
PacifiCorp A3 Baa1 (P)Baa2 Baa3 P-2<br />
Utah Power & Light Co — — — Baa3 —<br />
Scottish Power UK Holdings Ltd. — — — — —<br />
Scottish Power UK plc — A3 — — P-2<br />
Scottish and Southern Energy plc — Aa3 — — P-1<br />
Southern Electric Power Distribution plc — Aa3 — — —<br />
Sempra Energy — Baa1 (P)Baa2 (P)Baa3 —<br />
Pacific Enterprises — — — — —<br />
San Diego Gas & Electric Company A1 (P)A2 — Baa1 P-1<br />
Shikoku Electric Power Company, Inc. A1 — — — —<br />
Sierra Pacific Resources — B1 (P)B2 — —<br />
Nevada Power Company Ba1 — — (P)B2 —<br />
Sierra Pacific Power Company Ba1 — — B2 —<br />
Southern Company (The) — A3 — — P-1<br />
Alabama Power Company A1 A2 — Baa1 P-1<br />
Georgia Power Company A1 A2 — Baa1 —<br />
Gulf Power Company A1 A2 — Baa1 —<br />
Mississippi Power Company Aa3 A1 — A3 —<br />
Savannah Electric and Power Company A1 A2 — Baa1 —<br />
Southern Company Funding Corporation — — — — P-1<br />
Southern Power Company — Baa1 — — P-2<br />
Square Butte Electric Cooperative A3 — — — —<br />
TECO Energy, Inc. — Ba2 (P)Ba3 (P)B1 —<br />
Tampa Electric Company (P)Baa1 Baa2 — — —<br />
TXU Corp. — Ba1 — (P)Ba3 —<br />
TXU International, Inc. — — — — —<br />
TXU Europe Ltd. — Ca C — —<br />
TXU US Holdings Company — — — — —<br />
TXU Electric Delivery Company — Baa2 — — P-2<br />
TXU Energy Company LLC — Baa2 — — P-2<br />
Tata Power — Ba2 — — —<br />
Tenaga Nasional Berhad — Baa1 — — —<br />
Tenaska Georgia Partners, L.P. Baa3 — — — —<br />
Tenaska Washington Partners, L.P. Baa2 — — — —<br />
Tennessee Valley Authority — Aaa — — —<br />
Tiete Certificates Grantor Trust Caa2 — — — —<br />
Tohoku Electric Power Company, Inc. A1 — — — —<br />
Tokyo Electric Power Company, Inc. Aa3 — — — P-1<br />
Transpower New Zealand Limited — Aa2 — — P-1<br />
Tri-State G&T Association Inc. Baa2 — — — —<br />
UIL Holdings Corporation — — — — —<br />
United Illuminating Company — Baa2 — — —<br />
Union Fenosa S.A. — — — — P-2<br />
United Utilities PLC — A3 — — P-2<br />
United Utilities Electricity Plc — A2 — — P-1<br />
Utility Contract Funding, L.L.C. Baa1 — — — —<br />
Vattenfall AB — A2 A3 — —<br />
WPS Resources Corporation — A1 (P)A2 — P-1<br />
Wisconsin Public Service Corporation Aa2 Aa3 — A2 P-1<br />
Westar Energy, Inc. Baa3 Ba1 — Ba3 —<br />
Kansas Gas & Electric Co. Baa3 — — — —<br />
Wisconsin Energy Corporation — A3 — — —<br />
Wisconsin Electric Power Company Aa3 A1 — A3 P-1<br />
Xcel Energy Inc. — Baa1 — Baa3 P-2<br />
Northern States Power Company (Minnesota) A2 A3 — — P-2<br />
Northern States Power Company (Wisconsin) A2 A3 — — —<br />
Public Service Company of Colorado A3 Baa1 — — P-2<br />
Southwestern Public Service Company — Baa1 — — P-2<br />
* Secured lease obligation bonds<br />
** Lease obligation bonds<br />
*** Senior subordinated<br />
• xlvii •
Government Bonds & Country Ceilings<br />
December 2005<br />
Government Bonds<br />
Country Ceilings for Foreign Currency<br />
Foreign<br />
Currency<br />
Domestic<br />
Currency Bonds and Notes Bank Deposits<br />
Long-Term Long-Term Outlook Long-Term [1] Short-Term Long-Term [1] Short-Term<br />
Alderney — — — Aaa P-1 Aaa P-1<br />
Andorra — — — — [2] — [2] — [2] — [2]<br />
Argentina B3 B3 STA B3 NP Caa1 NP<br />
Australia Aaa Aaa STA Aaa P-1 Aaa P-1<br />
Austria Aaa Aaa STA — [2] — [2] — [2] — [2]<br />
Bahamas A3 A1 STA A3 P-2 A3 P-2<br />
Bahamas-Off Shore Banking Center [3] — — — Aaa P-1 Aaa P-1<br />
Bahrain Baa1 [4] Baa1 [4] STA Baa1 P-2 Baa1 P-2<br />
Bahrain-Off Shore Banking Center [3] — — — Aa3 P-1 Aa3 P-1<br />
Barbados Baa2 A3 STA Baa2 P-2 Baa2 P-2<br />
Belgium Aa1 Aa1 STA — [2] — [2] — [2] — [2]<br />
Belize Caa3 Caa3 STA Caa3 NP Caa3 NP<br />
Bermuda Aa1 [4] Aaa [4] STA Aa1 P-1 Aa1 P-1<br />
Bolivia B3 B3 [4] STA B3 NP Caa1 NP<br />
Bosnia and Herzegovina B3 [4] B3 [4] POS B3 NP Caa1 NP<br />
Botswana A2 [4] A1 STA A2 P-1 A2 P-1<br />
Brazil Ba3 Ba3 POS Ba3 NP B1 NP<br />
Bulgaria Ba1 [5] Ba1 [5] RUR Ba1 [5] NP [5] Ba1 [5] NP [5]<br />
Canada Aaa Aaa STA Aaa P-1 Aaa P-1<br />
Cayman Islands Aa3 [4] — STA Aa3 P-1 Aa3 P-1<br />
Cayman Islands-Off Shore Bnk Ctr [3] — — — Aaa P-1 Aaa P-1<br />
Chile Baa1 A1 POS(m) Baa1 P-2 Baa1 P-2<br />
China A2 — STA A2 P-1 A2 P-1<br />
Colombia Ba2 Baa2 NEG Ba2 — Ba3 NP<br />
Costa Rica Ba1 Ba1 [4] NEG Ba1 NP Ba2 NP<br />
Croatia Baa3 Baa1 STA Baa3 P-3 Ba1 NP<br />
Cuba Caa1 [4] NR [4] STA Caa1 NP Caa2 NP<br />
Cyprus A2 A2 STA A2 P-1 A2 P-1<br />
Czech Republic A1 A1 STA A1 P-1 A1 P-1<br />
Denmark Aaa Aaa STA Aaa P-1 Aaa P-1<br />
Dominican Republic B3 B3 [4] STA B3 NP Caa1 NP<br />
Ecuador Caa1 B3 STA Caa1 NP Caa2 NP<br />
Egypt Ba1 Baa3 [4] STA(m) Ba1 NP Ba2 NP<br />
El Salvador Baa3 Baa2 [4] STA Baa3 P-3 Baa3 P-3<br />
Estonia A1 A1 [4] STA A1 P-1 A1 P-1<br />
Eurozone — — — Aaa P-1 Aaa P-1<br />
Fiji Islands Ba2 [4] Ba2 STA Ba2 NP Ba3 NP<br />
Finland Aaa Aaa STA — [2] — [2] — [2] — [2]<br />
France Aaa [4] Aaa STA — [2] — [2] — [2] — [2]<br />
Germany Aaa Aaa STA — [2] — [2] — [2] — [2]<br />
Greece A1 A1 STA — [2] — [2] — [2] — [2]<br />
Guatemala Ba2 Ba1 [4] STA Ba2 NP Ba3 NP<br />
Guernsey — — — Aaa P-1 Aaa P-1<br />
Honduras B2 [4] B2 STA B2 NP B3 NP<br />
Hong Kong A1 Aa3 STA A1 P-1 A1 P-1<br />
Hungary A1 A1 STA A1 P-1 A1 P-1<br />
Iceland Aaa Aaa STA Aaa P-1 Aaa P-1<br />
India Baa3 [4] Ba2 STA(m) Baa3 NP Ba2 NP<br />
Indonesia B2 B2 POS B2 NP B3 NP<br />
Ireland Aaa Aaa STA — [2] — [2] — [2] — [2]<br />
Isle of Man Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
Israel A2 A2 STA A2 P-1 A2 P-1<br />
Italy Aa2 Aa2 STA — [2] — [2] — [2] — [2]<br />
Jamaica B1 Ba2 STA B1 NP B2 NP<br />
Japan Aaa [4] A2 STA Aaa P-1 Aaa P-1<br />
Jersey — — — Aaa P-1 Aaa P-1<br />
Jordan Ba2 [4] Baa3 [4] STA Ba2 NP Ba3 NP<br />
Kazakhstan Baa3 Baa1 POS Baa3 NP Ba1 NP<br />
Korea A3 A3 STA A3 P-2 A3 P-2<br />
Kuwait A2 [4] A2 [4] STA A2 P-1 A2 P-1<br />
• xlviii •
Government Bonds & Country Ceilings<br />
December 2005<br />
Government Bonds<br />
Country Ceilings for Foreign Currency<br />
Foreign<br />
Currency<br />
Domestic<br />
Currency Bonds and Notes Bank Deposits<br />
Long-Term Long-Term Outlook Long-Term [1] Short-Term Long-Term [1] Short-Term<br />
Latvia A2 A2 STA A2 P-1 A2 P-1<br />
Lebanon B3 B3 [4] STA B3 NP B3 NP<br />
Liechtenstein — — — Aaa P-1 Aaa P-1<br />
Lithuania A3 A3 POS A3 P-2 A3 P-2<br />
Luxembourg Aaa [4] Aaa STA — [2] — [2] — [2] — [2]<br />
Macao A1 [4] A1 [4] STA A1 P-1 A1 P-1<br />
Malaysia A3 A3 STA A3 P-1 A3 P-1<br />
Malta A3 [4] A3 [4] STA A3 P-2 A3 P-2<br />
Mauritius Baa2 [4] A2 [4] NEG Baa2 P-2 Baa2 P-2<br />
Mexico Baa1 Baa1 STA Baa1 P-2 Baa1 P-2<br />
Moldova Caa1 Caa1 [4] STA Caa1 NP Caa2 NP<br />
Monaco — — — — [2] — [2] — [2] — [2]<br />
Mongolia B1 [4] B1 [4] STA B1 NP B2 NP<br />
Morocco Ba1 Ba1 STA Ba1 NP Ba2 NP<br />
Netherlands Aaa [4] Aaa STA — [2] — [2] — [2] — [2]<br />
New Zealand Aaa Aaa STA Aaa P-1 Aaa P-1<br />
Nicaragua Caa1 [4] B3 STA Caa1 NP Caa2 NP<br />
Norway Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
Oman Baa1 [4] Baa1 [4] STA Baa1 P-2 Baa1 P-2<br />
Pakistan B2 B2 POS B2 NP B2 NP<br />
Panama Ba1 — STA Baa1 P-2 Baa2 P-2<br />
Panama -Off Shore Banking Center [3] — — — Aa2 P-1 Aa2 P-1<br />
Papua New Guinea B1 [4] B1 [4] STA B1 NP B2 NP<br />
Paraguay Caa1 [4] Caa1 [4] STA Caa1 NP Caa2 NP<br />
Peru Ba3 Baa3 [4] STA Ba3 NP B1 NP<br />
Philippines B1 B1 NEG B1 NP B1 NP<br />
Poland A2 A2 STA A2 P-1 A2 P-1<br />
Portugal Aa2 Aa2 STA — [2] — [2] — [2] — [2]<br />
Qatar A1 A1 [4] STA A1 P-1 A1 P-1<br />
Romania Ba1 Ba1 POS Ba1 NP Ba2 NP<br />
Russia Baa2 Baa2 STA Baa2 P-2 Baa2 P-2<br />
San Marino — — — — [2] — [2] — [2] — [2]<br />
Sark — — — Aaa P-1 Aaa P-1<br />
Saudi Arabia A3 [4] A3 STA A3 P-2 A3 P-2<br />
Singapore Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
Slovakia A2 A2 POS A2 P-1 A2 P-1<br />
Slovenia Aa3 Aa3 STA Aa3 P-1 Aa3 P-1<br />
South Africa Baa1 A2 STA Baa1 P-2 Baa1 P-2<br />
Spain Aaa Aaa STA — [2] — [2] — [2] — [2]<br />
Suriname B1 [4] Ba3 [4] STA B1 NP B2 NP<br />
Sweden Aaa Aaa STA Aaa P-1 Aaa P-1<br />
Switzerland Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
Taiwan Aa3 [4] Aa3 STA Aa3 P-1 Aa3 P-1<br />
Thailand Baa1 Baa1 STA Baa1 P-2 Baa1 P-2<br />
Trinidad & Tobago Baa2 Baa1 STA Baa2 P-3 Baa2 P-3<br />
Tunisia Baa2 [4] Baa2 [4] STA Baa2 — Baa2 P-2<br />
Turkey Ba3 Ba3 STA Ba3 NP B1 NP<br />
Turkmenistan B2 [4] B2 [4] STA B2 NP B3 NP<br />
Ukraine B1 B1 STA B1 NP B2 NP<br />
United Arab Emirates A1 [4] — STA A1 P-1 A1 P-1<br />
United Kingdom Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
United States of America Aaa [4] Aaa STA Aaa P-1 Aaa P-1<br />
Uruguay B3 B3 STA B3 NP Caa1 NP<br />
Venezuela B2 B1 STA B2 NP B3 NP<br />
Vietnam Ba3 — STA Ba3 NP B1 NP<br />
[1] Commercial Paper of Banks/Bank Holding Companies fall under the Bank Deposit Ceiling.<br />
[2] See Eurozone.<br />
[3] Ceilings apply only to banks licensed or designated as: "non-resident" in the Bahamas; "Offshore Banking Units" in Bahrain; license "B" banks in the Cayman Islands; and banks with an<br />
"international license in Panama.<br />
[4] Issuer Rating.<br />
[5] On review for possible upgrade.<br />
[6] On review for possible downgrade.<br />
• xlix •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
ARGENTINA Argentina, Government of STA B3 B3 NP<br />
Buenos Aires, City of STA B3 B1 —<br />
Buenos Aires, Province of STA Ca — NP<br />
Chaco, Provincia del STA Ca [1] Ca [2] —<br />
Formosa, Province of STA Ca [1] Ca [2] —<br />
Mendoza, Province of STA B3 — —<br />
Santiago del Estero, Province of STA Caa3 [1] Caa3 [2] —<br />
Tucuman, Province of — — — —<br />
AUSTRALIA Australia, Government of STA Aaa Aaa —<br />
Australian Ind. Devel. Corp. STA Aaa [3] Aaa [3] —<br />
Export <strong>Finance</strong> and Ins. Corp. STA Aaa [3] Aaa [3] P-1 [3]<br />
New South Wales Treasury Corp. STA Aaa [3] Aaa [3] P-1 [3]<br />
Northern Territory Treasury Corp STA Aa2 [3] — —<br />
Queensland Treasury Corporation STA Aaa [3] Aaa P-1 [3]<br />
South Aus. Gov't Fin. Auth. STA — Aaa [3] —<br />
State Electricity Comm. Victoria STA — Aaa [3] —<br />
Tasmanian Public Fin. Corp. STA Aa1 Aa1 [3] P-1 [3]<br />
Treasury Corp. of Victoria STA Aaa [3] Aaa [3] P-1 [3]<br />
Western Australian Treasury Corp STA Aaa [3] Aaa [3] P-1 [3]<br />
AUSTRIA Austria, Government of STA Aaa Aaa P-1<br />
Autobahnen-Und Schnell STA Aaa [3] Aaa [3] —<br />
Bundesimmobiliengesellschaft mbH STA Aaa Aaa P-1<br />
Vienna, City of STA Aaa — —<br />
BAHAMAS Bahamas, Government of STA A3 A1 —<br />
BAHRAIN Bahrain, Government of STA Baa1 [2] Baa1 [2] —<br />
BARBADOS Barbados, Government of STA Baa2 A3 —<br />
BELGIUM Aquafin NV STA — Aa1 [2] —<br />
Belgium, Government of STA Aa1 Aa1 P-1<br />
Communaute Francaise De Belgique STA Aa1 [2] Aa1 P-1 [2]<br />
Flanders, the Community of STA — Aa1 P-1<br />
Railway <strong>Infrastructure</strong> Fund — Aa1 [3] Aa1 [3] —<br />
Walloon Region STA — Aa3 P-1<br />
BELIZE Belize, Government of STA Caa3 Caa3 —<br />
BERMUDA Bermuda, Government of STA Aa1 [2] Aaa [2] —<br />
BOLIVIA Bolivia, Government of STA B3 B3 [2] —<br />
BOSNIA AND HERZEGOVINA Bosnia and Herzegovina, Govt of POS B3 [2] B3 [2] —<br />
BOTSWANA Botswana, Government of STA A2 [2] A1 —<br />
BRAZIL Brazil, Government of POS Ba3 Ba3 —<br />
Ceara, State of POS Ba3 [2] — —<br />
Curitiba, City of POS(m) Ba3 [2] Ba1 [2] —<br />
Minas Gerais, State of POS B2 [2] B2 [2] —<br />
Rio de Janeiro, City of STA Ba3 [2] — —<br />
BULGARIA Bulgaria, Government of RUR Ba1 [4] Ba1 [4] —<br />
Pazardjik, City of STA Ba3 [2] Ba3 [2] —<br />
Varna, City of POS B1 [2] — —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• l •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
CANADA Alberta Capital Fin. Authority STA — Aaa [3] —<br />
Alberta, Province of STA Aaa Aaa P-1<br />
ATB Financial STA — Aaa [2] —<br />
British Columbia, Province of STA Aa1 Aa1 P-1<br />
Business Development Bk Canada STA Aaa Aaa P-1 [3]<br />
Canada Housing Trust No.1 STA — Aaa [3] —<br />
Canada Mtge. and Hsg. Corp. STA Aaa Aaa P-1<br />
Canada, Government of STA Aaa Aaa —<br />
Canadian Wheat Board STA Aaa [3] Aaa [3] P-1<br />
Cornwall, City of STA — Aa3 —<br />
Durham, Regional Municipality of STA — Aaa —<br />
Export Development Canada STA Aaa Aaa P-1 [3]<br />
Farm Credit Canada STA Aaa Aaa P-1<br />
<strong>Finance</strong>ment-Quebec POS A1 [3] A1 [3] P-1 [2]<br />
Halton, Regional Municipality of STA — Aaa —<br />
Immobiliere SHQ STA — Aaa [3] —<br />
London, City of STA — Aaa —<br />
Manitoba, Province of STA Aa2 Aa2 —<br />
Montreal Urban Community STA A1 [3] A1 [3] —<br />
Montreal, City of STA A1 A1 —<br />
Montreal, City of (Old) STA Aaa [3] A1 [3] —<br />
Mun Fin Auth of British Columbia STA — Aaa P-1<br />
New Brunswick Electric Fin.Corp STA Aa3 [3] Aa3 [3] —<br />
New Brunswick, Province of STA Aa3 Aa3 —<br />
Newfoundland & Labrador, Prov.of STA A3 A3 —<br />
North Bay, City of STA — Aa3 —<br />
Northwest Territories STA Aa3 [2] Aa3 [2] —<br />
Nova Scotia, Province of POS A2 A2 —<br />
Ontario School Boards Fin. Co. STA — Aa3 —<br />
Ontario, Province of STA Aa2 Aa2 P-1<br />
OSIFA STA — Aa2 P-1<br />
Ottawa (City of) Ontario, Canada STA — Aaa —<br />
Petro-Canada Ltd. NOO Aaa [3] — —<br />
Prince Edward Island, Prov. of STA — A2 —<br />
Quebec Urban Community STA A2 [2] — —<br />
Quebec, Province of POS A1 A1 P-1<br />
Saskatchewan, Province of STA Aa2 Aa2 —<br />
Saskferco STA Aa2 [3] — —<br />
Strait Crossing <strong>Finance</strong>, Inc. STA — Aaa [3] —<br />
Toronto, City of STA — Aa1 P-1<br />
Universite du Quebec a Montreal POS — A1 —<br />
Vancouver, City of STA — Aaa —<br />
Waterloo, Regional Municipality STA — Aaa —<br />
Winnipeg, City of STA — Aa2 —<br />
York, Regional Municipality of STA — Aaa —<br />
CAYMAN ISLANDS Cayman Islands, Govt. of STA Aa3 [2] — —<br />
CHILE Central Bank of Chile STA — A1 —<br />
Chile, Government of POS(m) Baa1 A1 —<br />
CHINA China, Government of STA A2 — —<br />
COLOMBIA Bogota, Distrito Capital STA(m) Ba2 [2] Baa3 [2] —<br />
Colombia, Government of NEG Ba2 Baa2 —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• li •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
COSTA RICA Costa Rica, Government of NEG Ba1 Ba1 [2] —<br />
CROATIA Croatia, Government of STA Baa3 Baa1 —<br />
Zagreb, City of STA Baa3 [2] — —<br />
CUBA Cuba, Government of STA Caa1 [2] NR [2] —<br />
CYPRUS Cyprus, Government of STA A2 A2 P-1<br />
CZECH REPUBLIC Brno, City of STA A3 A3 P-2<br />
Czech Republic, Government of STA A1 A1 P-1<br />
Moravian-Silesian, Region of STA A3 [2] A3 [2] —<br />
Ostrava, City of STA A3 [2] — —<br />
Prague, City of STA A2 [2] A2 [2] —<br />
DENMARK Copenhagen, City of STA Aa1 — —<br />
Denmark, Government of STA Aaa Aaa P-1<br />
Dong A/S STA Baa1 — —<br />
DONG Naturgas A/S STA Baa1 [2] — —<br />
Great Belt A/S STA Aaa Aaa [3] —<br />
KommuneKredit STA Aaa Aaa P-1<br />
Mortgage Bank of Denmark, The STA Aaa [3] Aaa [3] —<br />
DOMINICAN REPUBLIC Dominican Republic, Govt of STA B3 B3 [2] —<br />
ECUADOR Ecuador, Government of STA Caa1 B3 —<br />
EGYPT Egypt, Government of STA(m) Ba1 Baa3 [2] —<br />
EL SALVADOR El Salvador, Government of STA Baa3 Baa2 [2] —<br />
ESTONIA Estonia, Government of STA A1 A1 [2] —<br />
Tallinn, City of STA A3 [2] — —<br />
FIJI Fiji Islands, Government of STA Ba2 [2] Ba2 —<br />
FINLAND Finland, Government of STA Aaa Aaa —<br />
Municipal Guarantee Board STA — Aaa [2] —<br />
Municipal Housing <strong>Finance</strong> plc. STA Aaa [3] Aaa [3] P-1 [3]<br />
Municipality <strong>Finance</strong> Plc STA Aaa Aaa P-1 [3]<br />
Municipality <strong>Finance</strong> Plc (Old) STA Aaa [3] Aaa [3] P-1 [3]<br />
FRANCE Agence Francaise de Dvlopmnt. STA Aaa [3] Aaa [3] —<br />
CADES STA Aaa Aaa P-1<br />
Caisse Nationale des Auto. STA Aaa Aaa —<br />
Centre, Region of STA Aa2 [2] — —<br />
Champagne-Ardenne, Region of STA Aa2 [2] Aa2 P-1 [2]<br />
France Telecom STA A3 A3 P-2<br />
France, Government of STA Aaa [2] Aaa —<br />
Ile-de-France, Region STA Aaa Aaa P-1<br />
Lille, Communaute Urbaine de STA Aaa [3] Aaa [3] —<br />
Lot-et-Garonne, Departement du STA A2 [2] — —<br />
Lyon, City of STA Aa2 [2] — P-1 [2]<br />
Manche, Departement de la STA Aa1 [2] — —<br />
Marne, Departement de la STA — Aaa [3] —<br />
Marseille, City of STA — Aaa [3] —<br />
Meuse, Departement de la STA — Aaa [3] —<br />
Narbonne, City of STA Aa3 [2] — —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• lii •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
OSEO bdpme STA — Aaa [3] —<br />
Plan-de-Cuques, City of STA Aa1 [2] — —<br />
Regie Auto. des Trans. Paris. STA — Aaa P-1<br />
Rhone-Alpes, Region of STA Aaa [2] — P-1 [2]<br />
Saint Mande, City of STA Aa2 [2] — —<br />
UNEDIC STA — Aaa [3] P-1<br />
Villeurbanne, Ville de STA Aa1 [2] — —<br />
GERMANY Baden-Wuerttemberg, Land of STA Aaa [2] — —<br />
Bavaria, Free State of STA Aaa [2] — —<br />
Berlin, Land of STA Aa3 [2] Aa3 —<br />
Brandenburg, Land STA Aa2 [2] Aa2 —<br />
Duesseldorf, City of STA — Aa1 [2] —<br />
Germany, Government of STA Aaa Aaa —<br />
Nordrhein-Westfalen, Land of STA Aa2 Aa2 P-1<br />
Saxony-Anhalt, Land STA Aa3 Aa3 P-1<br />
Treuhandanstalt STA — Aaa —<br />
GREECE Amaroussion, Municipality of STA Baa2 [2] — —<br />
Athens, City of STA A2 [2] A2 [2] —<br />
Bank of Greece STA A2 — —<br />
Greece, Government of STA A1 A1 P-1<br />
GUATEMALA Guatemala, Government of STA Ba2 Ba1 [2] —<br />
HONDURAS Honduras, Government of STA B2 [2] B2 —<br />
HONG KONG CITIC Hong Kong <strong>Finance</strong> Ltd. STA — Ba1 [3] —<br />
CITIC Pacific Limited STA Baa3 [2] — —<br />
Hong Kong Mortgage Corp.Ltd(The) STA A1 [2] Aa3 P-1 [2]<br />
Hong Kong, Government of STA A1 Aa3 —<br />
Kowloon-Canton Railway Corp. STA Aa3 Aa3 P-1<br />
MTR Corporation Limited STA Aa3 Aa3 P-1<br />
HUNGARY Budapest, City of STA A3 [2] A3 [2] —<br />
Hungary, Government of STA A1 A1 —<br />
National Bank of Hungary STA A1 — —<br />
ICELAND Iceland, Government of STA Aaa Aaa P-1<br />
INDIA IFCI Limited STA Baa3 [2] — —<br />
India, Government of STA(m) Baa3 [2] Ba2 NP<br />
Indian Railway <strong>Finance</strong> Corp. STA Baa3 — —<br />
Industrial Devel. Bank of India STA Baa3 — —<br />
Power <strong>Finance</strong> Corporation Ltd. STA Baa3 — —<br />
INDONESIA Indonesia, Government of POS B2 B2 —<br />
IRELAND Housing <strong>Finance</strong> Agency p.l.c. STA — — P-1 [3]<br />
Ireland, Government of STA Aaa Aaa P-1<br />
ISLE OF MAN Isle of Man, Government of STA Aaa [2] Aaa —<br />
ISRAEL Israel, Government of STA A2 A2 —<br />
ITALY Abruzzo, Region of STA A1 [2] A1 —<br />
Arezzo, Province of STA — Aa3 [2] —<br />
Bari, City of STA Aa3 [2] Aa3 [2] —<br />
Basilicata, Region of STA — A1 [2] —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• liii •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
Bologna, City of STA — Aa2 —<br />
Bologna, Province of STA Aa3 [2] — —<br />
Bolzano, Autonomous Province of STA — Aa1 [2] —<br />
Calabria, Region of STA — A2 [2] —<br />
Campania, Region of STA A3 [2] — —<br />
Catania, City of STA — A2 [2] —<br />
Civitavecchia, City of STA A1 [2] A1 —<br />
Emilia Romagna, Region of STA Aa2 [2] Aa2 —<br />
Florence, City of STA Aa2 Aa2 —<br />
Foggia, Province of STA A2 [2] A2 [2] —<br />
Genoa, Province of STA — Aa3 —<br />
Italy, Government of STA Aa2 Aa2 P-1<br />
L'Aquila, City of STA A1 [2] — —<br />
La Spezia, City of STA A1 [2] — —<br />
Lazio, Region of NEG A1 A1 —<br />
Lecce, City of STA A2 [2] A2 [2] —<br />
Liguria, Region of STA Aa3 Aa3 —<br />
Lombardy, Region of STA Aa1 Aa1 —<br />
Marche, Region of STA Aa3 Aa3 —<br />
MIlan, City of STA Aa2 [2] Aa2 —<br />
Milan, Province of STA Aa3 [2] Aa3 —<br />
Molise, Region of STA — A2 —<br />
Naples, City of STA A1 A1 —<br />
Naples, Province of STA — Aa3 —<br />
Palermo, City of STA Aa3 [2] — —<br />
Palermo, Province of STA A1 [2] — —<br />
Puglia, Region of STA — A2 —<br />
Rimini, CIty of STA — Aa3 [2] —<br />
Rimini, Province of STA Aa3 [2] — —<br />
Sardinia, Autonomous Region of NEG A2 A2 —<br />
Sicily, Autonomous Region of STA A2 [2] A1 —<br />
Trento, Autonomous Province of STA Aa1 [2] Aa1 —<br />
Treviso, Province of STA Aa3 [2] Aa3 —<br />
Turin, Province of STA Aa3 [2] Aa3 —<br />
Tuscany, Region of STA Aa2 [2] Aa2 —<br />
Umbria, Region of STA Aa3 [2] Aa3 —<br />
Veneto, Region of STA Aa2 [2] Aa2 —<br />
Venice, City of STA — Aa2 —<br />
JAMAICA Jamaica, Government of STA B1 Ba2 —<br />
JAPAN Development Bank of Japan STA Aaa [3] Aaa [3] —<br />
Japan Bank for Int'l. Coop. STA Aaa [3] Aaa [3] —<br />
Japan Fin Corp for Muni Enterpr STA Aaa [3] Aaa [3] —<br />
Japan Fin Corp for Small&Med Ent STA Aaa [3] Aaa [3] —<br />
Japan, Government of STA Aaa [2] A2 —<br />
Tokyo (Metropolis of) STA Aaa [3] — —<br />
JORDAN Dev & Inv Proj Fund Jordan Army STA Ba2 [3] — —<br />
Jordan, Government of STA Ba2 [2] Baa3 [2] —<br />
KAZAKHSTAN Almaty, City of POS Ba1 [2] Ba1 [2] —<br />
Astana, City of STA Ba1 [2] Ba1 [2] —<br />
Kazakhstan, Government of POS Baa3 Baa1 —<br />
KOREA Korea Rail Network Authority STA A3 [2] — —<br />
Korea, Government of STA A3 A3 —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• liv •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
KUWAIT Kuwait, Government of STA A2 [2] A2 [2] —<br />
LATVIA Latvia, Government of STA A2 A2 —<br />
LEBANON Lebanon, Government of STA B3 B3 [2] NP<br />
LITHUANIA Lithuania, Government of POS A3 A3 P-2<br />
LUXEMBOURG Luxembourg, Government of STA Aaa [2] Aaa —<br />
MACAU Macao, Government of STA A1 [2] A1 [2] —<br />
MALAYSIA Khazanah Nasional Bhd. STA — A3 [3] —<br />
Malaysia, Government of STA A3 A3 —<br />
Sarawak Economic Develop't Co. STA Baa1 [2] — —<br />
Sarawak International Inc. STA Baa1 [3] — —<br />
Sarawak, State of STA Baa1 [2] — —<br />
SGOS Capital Holdings Sdn. Bhd. STA Baa1 [2] — —<br />
MALTA Freeport Termin. (Malta) Ltd. STA A3 [3] — —<br />
Malta, Government of STA A3 [2] A3 [2] —<br />
MAURITIUS Mauritius, Government of NEG Baa2 [2] A2 [2] —<br />
MEXICO Aguascalientes, Municipality of STA — Baa2 [2] —<br />
Ahome, Municipality of STA — Ba3 [2] —<br />
Atizapan de Zaragoza, Muni. of STA — Ba2 [2] —<br />
Baja California, State of STA — Baa3 [2] —<br />
Centro, Municip. (Villahermosa) STA — Ba2 [2] —<br />
Chalco, Municipality of STA — B1 [2] —<br />
Chiapas, State of STA — Ba2 [2] —<br />
Chicoloapan de Juarez, Mun. of STA — B1 [2] —<br />
Chihuahua, State of STA — Baa3 [2] —<br />
Coacalco, Municipality of STA — B1 [2] —<br />
Coatzacoalcos, Municipality of STA — Ba1 [2] —<br />
Colima, Municipality of STA — Ba3 [2] —<br />
Cuautitlan Izcalli, Municipality STA — Ba3 [2] —<br />
Culiacan, Municipality of STA — Ba3 [2] —<br />
Distrito Federal, Mexico STA — Baa1 [3] —<br />
Durango, Municipality of STA — Ba3 [2] —<br />
Durnago, State Of STA — Ba2 [2] —<br />
Ecatepec de Morelos, Municipal. STA — B1 [2] —<br />
Guanajuato, State of STA — Baa1 [2] —<br />
Guasave, Municipality of STA — B1 [2] —<br />
Guerrero, State of STA — Ba2 [2] —<br />
Huixquilucan, Municipality of NEG — B1 [2] —<br />
Ixtlahuaca, Municipality of STA — Ba3 [2] —<br />
Leon, Municipality of STA — Baa3 [2] —<br />
Manzanillo, Municipality of STA — Ba1 [2] —<br />
Merida, Municipality of STA — Baa3 [2] —<br />
Metepec, Municipality of STA — Baa3 [2] —<br />
Mexicali, Municipality of STA — Ba3 [2] —<br />
Mexico, Government of STA Baa1 Baa1 —<br />
Mexico, State of STA — B3 [2] —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• lv •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
Michoacan de Ocampo, State of STA — Ba1 [2] —<br />
Monterrey, Municipality of STA — Ba1 [2] —<br />
Morelos, State of STA — Ba2 [2] —<br />
Nayarit, State of STA — Baa3 [2] —<br />
Nuevo Leon, State of STA — Ba3 [2] —<br />
Oaxaca de Juarez,Municipality of STA — Ba3 [2] —<br />
Oaxaca, State of STA — Ba2 [2] —<br />
OPDM de Tlalnepantla NEG — B1 [2] —<br />
Puebla, State of STA — Baa3 [2] —<br />
Puerto Penasco, Municipality of STA — B1 [2] —<br />
Queretaro, Municipality of STA — Baa1 [2] —<br />
Queretaro, State of STA — Baa3 [2] —<br />
Quintana Roo, State of STA — Ba1 [2] —<br />
San Pedro Garza Garcia, Muni. STA — Baa3 [2] —<br />
SIDEAPA STA — B1 [2] —<br />
Sinaloa, State of STA — Ba2 [2] —<br />
Sociedad Hipotecaria Federal,SNC STA Baa1 [2] Baa1 [3] P-2<br />
Solidaridad, Municipality of STA — B1 [2] —<br />
Tabasco, State of STA — Baa3 [2] —<br />
Tamaulipas, State of STA — Baa2 [2] —<br />
Tampico, Municipality of STA — Ba2 [2] —<br />
Tecamac, Municipality of STA — Ba3 [2] —<br />
Tepatitlan de Morelos, Municipal STA — Ba2 [2] —<br />
Tepic, Municipality of STA — Ba3 [2] —<br />
Texcoco, Municipality of STA — Ba3 [2] —<br />
Tlalnepantla, Municipality of NEG(m) — Ba2 [2] —<br />
Tlaxcala, State of STA — Baa3 [2] —<br />
Toluca, Municipality of STA — Baa3 [2] —<br />
Tonala, Municiaplity of STA — Ba3 [2] —<br />
Tuxtla Gutierrez, Municipality STA — Ba3 [2] —<br />
Uruapan, Municipality of NEG — Ba2 [2] —<br />
Veracruz, State of STA — Ba1 [2] —<br />
Yucatan, State of STA — Ba2 [2] —<br />
Zacatecas, State of STA — Ba2 [2] —<br />
Zapopan, Municipality of STA — Baa3 [2] —<br />
Zapotlan el Grande, Municipality STA — B2 [2] —<br />
Zitacuaro, Municipality of POS — B1 [2] —<br />
MOLDOVA Moldova, Government of STA Caa1 Caa1 [2] —<br />
MONGOLIA Mongolia, Government of STA B1 [2] B1 [2] NP [2]<br />
MOROCCO Morocco, Government of STA Ba1 Ba1 —<br />
NETHERLANDS N.V. Luchthaven Schiphol STA — Aa3 —<br />
Netherlands, Government of STA Aaa [2] Aaa —<br />
Waarborgfonds Sociale Woningbouw STA Aaa [2] — —<br />
NEW ZEALAND New Zealand, Government of STA Aaa Aaa P-1<br />
NICARAGUA Nicaragua, Government of STA Caa1 [2] B3 —<br />
NORWAY Kommunalbanken AS STA Aaa Aaa P-1<br />
Norway, Government of STA Aaa [2] Aaa —<br />
Oslo, City of STA Aa1 [2] — —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• lvi •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
OMAN Oman, Government of STA Baa1 [2] Baa1 [2] —<br />
PAKISTAN Pakistan, Government of POS B2 B2 —<br />
PANAMA Panama, Government of STA Ba1 — —<br />
PAPUA NEW GUINEA Papua New Guinea, Govt of STA B1 [2] B1 [2] —<br />
PARAGUAY Paraguay, Government of STA Caa1 [2] Caa1 [2] —<br />
PERU Peru, Government of STA Ba3 Baa3 [2] —<br />
PHILIPPINES Philippines, Government of NEG B1 B1 —<br />
POLAND Poland, Government of STA A2 A2 —<br />
Poznan, City of STA Baa1 [2] — —<br />
PORTUGAL Azores, Autonomous Region of STA Aa3 Aa3 [2] —<br />
Lisbon, City of STA Aa2 [2] — —<br />
Madeira, Region Of STA Aa3 [2] — —<br />
Portugal, Government of STA Aa2 Aa2 P-1<br />
Rede Ferroviaria Nacional-REFER STA Aa2 [2] Aa2 —<br />
Sintra, City of STA Aa2 [2] — —<br />
QATAR Qatar, Government of STA A1 A1 [2] —<br />
ROMANIA Romania, Government of POS Ba1 Ba1 —<br />
RUSSIA Bashkortostan, Republic of STA Ba1 [2] Ba1 —<br />
Komi, Republic of STA Ba3 [2] Ba3 [2] —<br />
Moscow, City of STA Baa2 Baa2 [2] —<br />
Moscow, Oblast of STA Ba3 [2] Ba3 [2] —<br />
Perm, Oblast of STA Ba1 [2] Ba1 [2] —<br />
Russia, Government of STA Baa2 Baa2 P-2<br />
Samara, Oblast of STA Ba2 [2] — —<br />
St. Petersburg, City of STA Baa2 [2] — —<br />
Tatarstan, Republic of STA Ba1 [2] — —<br />
SAUDI ARABIA Saudi Arabia, Government of STA A3 [2] A3 —<br />
SINGAPORE Singapore, Government of STA Aaa [2] Aaa —<br />
SLOVAK REPUBLIC Slovakia, Government of POS A2 A2 —<br />
Vodohospodarska vystavba, s.p. POS A2 [3] — —<br />
SLOVENIA Slovenia, Government of STA Aa3 Aa3 —<br />
SOUTH AFRICA Industrial Dev. Corp of S.Africa STA Baa1 [2] — —<br />
South Africa, Government of STA Baa1 A2 P-2<br />
SPAIN Andalucia, Junta de STA Aa3 Aa3 —<br />
Barcelona, City of STA — Aa2 —<br />
Basque Country (The) STA — Aaa —<br />
Cantabria, Comunidad Autonoma STA — Aa3 —<br />
Castilla y Leon, Junta de POS Aa2 [2] Aa2 —<br />
Castilla-La Mancha POS Aa2 Aa2 —<br />
Catalunya, Generalitat de STA Aa3 Aa3 —<br />
Extremadura, Junta de STA Aa2 [2] — —<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• lvii •
Government and Government-Related Issuers<br />
December 2005<br />
Country Issuer Outlook<br />
Foreign<br />
Currency<br />
Long-Term<br />
Domestic<br />
Currency<br />
Short-Term<br />
Galicia, Comunidad Autonoma de POS Aa3 [2] — —<br />
Guipuzcoa, Diputacion Foral de STA — Aaa [2] —<br />
Instituto de Credito Oficial STA Aaa [3] Aaa [3] P-1 [3]<br />
Madrid, Comunidad Autonoma de STA — Aa2 [2] —<br />
Murcia, Comunidad Auto. de STA Aa2 [2] — —<br />
Spain, Government of STA Aaa Aaa P-1<br />
Tenerife, Cabildo de STA Aa2 [2] — —<br />
Valencia, Generalitat de STA Aa3 Aa3 P-1<br />
SURINAME Suriname, Government of STA B1 [2] Ba3 [2] —<br />
SWEDEN Gothenburg, City of STA Aa2 Aa2 P-1<br />
Kommuninvest i Sverige AB STA Aaa Aaa P-1 [3]<br />
Stockholm, City of POS Aa1 Aa1 P-1<br />
Sweden, Government of STA Aaa Aaa P-1<br />
SWITZERLAND Emissions. Schweizer Gemeinden STA — Aaa —<br />
Neuchatel, City of STA Aa3 [2] — —<br />
Switzerland, Government of STA Aaa [2] Aaa —<br />
TAIWAN Taiwan, Government of STA Aa3 [2] Aa3 —<br />
THAILAND Bank of Thailand STA — Baa1 —<br />
Expressway & Rpd Tran Auth Thail STA — Baa1 [3] —<br />
Thailand, Government of STA Baa1 Baa1 —<br />
TRINIDAD & TOBAGO Trinidad & Tobago, Government of STA Baa2 Baa1 —<br />
TUNISIA Central Bank of Tunisia STA Baa2 — —<br />
Tunisia, Government of STA Baa2 [2] Baa2 [2] —<br />
TURKEY Istanbul, Metropolitan Muni. Of POS B1 [2] — —<br />
Turkey, Government of STA Ba3 Ba3 —<br />
TURKMENISTAN Turkmenistan, Government of STA B2 [2] B2 [2] —<br />
UKRAINE Kharkiv, City of STA B2 [2] B2 [2] —<br />
Kyiv, City of STA B2 B2 [2] —<br />
Ukraine, Government of STA B1 B1 —<br />
UNITED ARAB EMIRATES United Arab Emirates, Govt. of STA A1 [2] — —<br />
UNITED KINGDOM LCR <strong>Finance</strong> plc STA — Aaa [3] —<br />
North British Housing Limited STA — Aa2 [2] —<br />
United Kingdom, Government of STA Aaa [2] Aaa —<br />
UNITED STATES United States of Amer, Govt. STA Aaa [2] Aaa —<br />
URUGUAY Uruguay, Government of STA B3 B3 —<br />
VENEZUELA Venezuela, Government of STA B2 B1 —<br />
VIETNAM Vietnam, Government of STA Ba3 — —<br />
NOTE: Moody’s ratings are subject to change. Because of the possible time lapse between Moody’s assignment or change of a rating and your use of this publication, we suggest you verify<br />
the current rating on any security or issuer in which you are interested, by contacting your local Moody’s office.<br />
[1] Senior Secured.<br />
[2] Issuer Rating.<br />
[3] Backed rating.<br />
[4] On review for possible upgrade.<br />
[5] On review for possible downgrade.<br />
• lviii •
Supranationals<br />
December 2005<br />
Long-Term<br />
Outlook Senior Subordinate<br />
Short-Term<br />
African Development Bank STA Aaa Aa1 P-1<br />
Asian Development Bank STA Aaa — P-1<br />
Black Sea Trade & Develop. Bank STA Baa2 [1] — P-2 [1]<br />
Caribbean Development Bank STA Aaa — —<br />
Central Amer.Bk for Econ. Integr STA A2 — P-1 [1]<br />
Council of Europe Develop. Bank STA Aaa Aa1 P-1<br />
Eurofima STA Aaa Aa1 P-1<br />
European Atomic Energy Community STA Aaa — P-1<br />
European Bank for Rec. & Dev. STA Aaa — P-1 [1]<br />
European Central Bank STA Aaa [1] — —<br />
European Coal & Steel Community STA Aaa — P-1<br />
European Community STA Aaa — P-1<br />
European Investment Bank STA Aaa — P-1<br />
European Investment Fund STA Aaa [1] — —<br />
European Union STA Aaa [1] — —<br />
IBRD (World Bank) STA Aaa Aaa —<br />
Inter-American Development Bank STA Aaa — P-1 [1]<br />
Inter-American Investment Corp STA Aa2 [1] — —<br />
International <strong>Finance</strong> Corp STA Aaa — P-1<br />
Nordic Investment Bank STA Aaa — P-1<br />
[1] Issuer Rating.<br />
[2] Backed rating.<br />
[3] On review for possible downgrade.<br />
• lix •
Country Guidelines for Local Currency Obligations<br />
December 2005<br />
Country Domestic Currency Guideline Country Domestic Currency Guideline<br />
Alderney Aaa Kuwait Aa2<br />
Andorra Aaa Latvia Aaa<br />
Argentina Ba1 Lebanon Ba1<br />
Australia Aaa Liechtenstein Aaa<br />
Austria Aaa Lithuania Aaa<br />
Bahamas Aaa Luxembourg Aaa<br />
Bahrain Aa2 Macao Aa1<br />
Barbados Aa2 Malaysia Aa2<br />
Belgium Aaa Malta Aaa<br />
Belize A1 Mauritius Aa2<br />
Bermuda Aaa Mexico Aaa<br />
Bolivia Ba1 Moldova Ba2<br />
Bosnia and Herzegovina Ba1 Monaco Aaa<br />
Botswana Aa3 Morocco A3<br />
Brazil A3 Netherlands Aaa<br />
Bulgaria Aa3 New Zealand Aaa<br />
Canada Aaa Nicaragua Ba2<br />
Cayman Islands Aaa Norway Aaa<br />
Chile Aaa Oman Aa2<br />
China A2 Pakistan Baa2<br />
Colombia A1 Panama Baa1<br />
Costa Rica Aa2 Papua New Guinea A1<br />
Croatia Aa1 Paraguay Ba1<br />
Cuba Ba3 Peru A3<br />
Cyprus Aaa Philippines A1<br />
Czech Republic Aaa Poland Aaa<br />
Denmark Aaa Portugal Aaa<br />
Dominican Republic A1 Qatar Aa2<br />
Ecuador Ba2 Romania Aa3<br />
Egypt A3 Russia A1<br />
El Salvador Baa3 San Marino Aaa<br />
Estonia Aaa Sark Aaa<br />
Fiji Islands A1 Saudi Arabia A1<br />
Finland Aaa Singapore Aaa<br />
France Aaa Slovakia Aaa<br />
Germany Aaa Slovenia Aaa<br />
Greece Aaa South Africa Aaa<br />
Guatemala A3 Spain Aaa<br />
Guernsey Aaa Suriname A3<br />
Honduras A3 Sweden Aaa<br />
Hong Kong Aa1 Switzerland Aaa<br />
Hungary Aaa Taiwan Aa3<br />
Iceland Aaa Thailand Aa2<br />
India Aa3 Trinidad & Tobago Aa3<br />
Indonesia Baa2 Tunisia Aa2<br />
Ireland Aaa Turkey A2<br />
Isle of Man Aaa Turkmenistan Ba1<br />
Israel Aa1 Ukraine A3<br />
Italy Aaa United Arab Emirates Aa2<br />
Jamaica A3 United Kingdom Aaa<br />
Japan Aaa United States of America Aaa<br />
Jersey Aaa Uruguay A3<br />
Jordan A3 Venezuela A3<br />
Kazakhstan A1 Vietnam Ba1<br />
Korea<br />
Aaa<br />
Moody’s assigns local currency ratings to issues and issuers which are debt ratings which incorporate all relevant factors that may influence performance and which are intended to be<br />
globally comparable. In order to facilitate the assignment of such ratings, Moody’s maintains and publishes Country Guidelines for Local Currency Obligations.<br />
Such guidelines assess the general country-level risks (not transfer risk) that should be reflected in the ratings of locally domiciled obligors or locally originated structured transactions<br />
denominated in local currency. While not acting as a rigid ceiling, they indicate the rating level that might be assigned to the financially strongest obligations in the country.<br />
• lx •
Bibliography of Pre-Sale/<strong>Project</strong> Reports<br />
Over the past year, Moody’s has published individual reports on the project financings listed<br />
below. For a copy of these reports, please visit our website at www.moodys.com/projectfinance<br />
Academic Ambulatory Care Centre <strong>Project</strong> Financing (ACCESS HEALTH VANCOUVER LTD.).........December 22, 2004<br />
Metronet Rail BCV <strong>Finance</strong> plc ........................................................................................... January 6, 2005<br />
Metronet Rail SSL <strong>Finance</strong> plc ........................................................................................... January 6, 2005<br />
FPL Energy National Wind, LLC.......................................................................................February 14, 2005<br />
Delek & Avner – Yam Tethys Ltd .....................................................................................February 18, 2005<br />
Premier Transmission Financing plc................................................................................February 25, 2005<br />
Crocket Generation...............................................................................................................March 1, 2005<br />
Abbotsford Regional Hospital and Cancer Centre (AHA ACCESS HEALTH ABBOTSFORD LTD.)........... April 14, 2005<br />
Healthcare Support (Newcastle) <strong>Finance</strong> plc ......................................................................... April 14, 2005<br />
ACCESS ROADS EDMONTON LTD. Anthony Henday Drive Ring Road Financing ..................... April 14, 2005<br />
BG Trust, Inc.......................................................................................................................... May 10, 2005<br />
Tenaska Alabama Partners, L.P. .............................................................................................. June 7, 2005<br />
Ras Laffan Liquefied Natural Gas Company Limited (II) and Ras Laffan Liquefied Natural<br />
Gas Company Limited (3) ................................................................................................... July 25, 2005<br />
Caithness Coso Funding Corp. ............................................................................................... July 26, 2005<br />
Talca Chillan Sociedad Concessionaria S.A. .........................................................................August 3, 2005<br />
Primary Energy <strong>Finance</strong>.....................................................................................................August 10, 2005<br />
Central Nottinghamshire Hospitals plc ............................................................................November 7, 2005<br />
Wolf Hollow I, LP...........................................................................................................December 14, 2005<br />
• lxi •
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research<br />
1999-2004<br />
Financial Guarantor Prospects for International <strong>Infrastructure</strong> Financings<br />
Characteristics and Performance of <strong>Moody's</strong>-Rated U.S. Syndicated Bank Loans<br />
U.S. Nuclear Assets Remain Attractive Acquisition Targets; With Potentially Favorable Credit<br />
Implications For Efficient Operators<br />
Credit Issues Resurface As New Electric Generation <strong>Project</strong>s By Public Power Utilities Take Center Stage<br />
Uncertainties Remain With Respect To The Restructuring of the Texas Electric Utility Industry<br />
Debt Restructuring in the IPP Sector: NRG Emerges From Bankruptcy<br />
Nuclear Power Trends In The United States<br />
European Utilities<br />
Stable Rating Outlook for Asia Pacific Oil & Gas Sector<br />
Latin America's Oil and Gas Industry Faces Rising Energy Demand and Sizeable Investment<br />
Needs, But Political Risks Could Limit Capital Inflows<br />
<strong>Moody's</strong> Approach to Rating the Petroleum Industry<br />
Oil & Gas Industry Update<br />
U.S. Ports Sector Outlook<br />
U.S. Airport Sector Outlook<br />
Australia/New Zealand Airport Outlook: Stable, but Over-Geared with a Need to De-Leverage<br />
European Toll Road Network Operators: Very Low Business Risk, But Ultimate<br />
Debt Capacity Usage Remains Key<br />
<strong>Moody's</strong> Outlook For The Second Generation Of Mexican Toll Roads<br />
The Role and Function of Rating Agencies: Evolving Perceptions and the Implications for<br />
Regulatory Oversight<br />
Measuring the Performance of Corporate Bond Ratings<br />
What Happens To Fallen Angels? A Statistical Review 1982-2003<br />
European Electric Utilities<br />
TVA Municipal Electricity Distributors Credit Outlook Stable; Potential Credit Risk Stems from<br />
TVA’s Uncertain Future Role in a Restructured Electric Industry<br />
The Credit Implications of Power Sector Asset Sales<br />
Moody’s Comments on Recent Rating Actions and Trends within the European Utility Sector<br />
Credit Consequences of the Power Blackout for the Electric Utility Sector<br />
Petroleos Mexicanos (PEMEX): Lack of Fiscal Autonomy Constrains Production Growth and Raises<br />
Financial Leverage<br />
Petroleos de Venezuela: Recent Rating Actions and Situation Update<br />
Leveraged <strong>Finance</strong> Industry Updates: Gas and Oil<br />
Diversification Risk Impacts Credit Quality of Gas Distribution Companies<br />
Global Airport Sector<br />
• lxii •
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research<br />
1999-2004<br />
Toll Road Sector Outlook<br />
Moody’s View of Consultants’ Reports in <strong>Project</strong> <strong>Finance</strong><br />
Moody’s Outlook on U.S. Ports is Stable<br />
<strong>Project</strong> <strong>Finance</strong> Crystal Ball Becomes Cloudier<br />
Moody’s Analysis of US Corporate Rating Triggers Heightens Need for Increased Disclosure<br />
Understanding Moody’s Corporate Bond Ratings and Rating Process<br />
Revised Country Ceiling Policy<br />
A Look at How Regulators Support U.S. Electric Utilities in States That Have Yet to Restructure<br />
U.S. Electric Utilities — 2002<br />
State Restructuring Initiatives and Credit Implications for U.S. Electric Utilities<br />
UK Power <strong>Project</strong> <strong>Finance</strong>: No Fundamental Changes in Moody’s Approach Despite New Considerations and<br />
Risks Introduced by NETA<br />
UK Electricity Sector — Business Separation Under the UK Utilities Act 2000<br />
European Electric Utilities<br />
US Natural Gas Deregulation Stalls As Industry Faces Heightened Regulatory Scrutiny<br />
HOVENSA L.L.C.<br />
Moody’s View on Energy Merchants: Long on Debt — Short on Cash Flow Restructuring Expected<br />
Investment Grade Oil & Gas Industry Update: Most Sector Ratings Stable Amid Price Uncertainty and Consolidation<br />
Acquisition Trends In The Oil & Gas Industry<br />
Petróleo Brasileiro (Petrobras): Heavy Fuel Oil Export Securitization<br />
Global Airport Sector<br />
Latin American and Caribbean Airports’ Near Term Credit Outlook is Negative<br />
Why The Airport Downgrades?<br />
Philadelphia Authority for Industrial Development<br />
Mexican Tollroads — Historically Problematic Tollroads Pose New Opportunities for Investors<br />
Toll Road Sector Outlook<br />
Moody’s Assigns Baa3 and Ba1 (Global Scale Rating) and Aa2.Mx and Aa3.Mx (National Scale Rating) to<br />
Series A and Series B Respectively of the Certificados de Participación Ordinarios Amortizables of<br />
Autopista del Mayab<br />
Moody’s Methodology for Rating Sports-Related Enterprises<br />
Impacta of Covanta Bankruptcy on Solid Waste <strong>Project</strong> Bonds<br />
Moody’s Response to the Basel Committee Proposal on an Internal Rating-Based Capital Adequacy<br />
Approach for <strong>Project</strong> <strong>Finance</strong><br />
Debt Financing of <strong>Project</strong>s in Emerging Economies: Lessons from Asia<br />
Weaker Credit Trends Ahead for <strong>Project</strong> Companies Lacking Third Party Surety for Construction Obligations<br />
• lxiii •
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research<br />
1999-2004<br />
New York State’s Energy Supply Situation: Credit Concerns Not Nearly as Grave as California<br />
NETA: The Early Days<br />
Deregulation of Asian Electric Utilities: Sovereign Ratings Not to Be Assumed<br />
The Italian Electricity Industry: Radical Changes Are Dramatically Shaping the Italian Power Market<br />
The Pennsylvania-New Jersey-Maryland Region’s Energy Supply Situation<br />
The [U.S] Northwest Region’s Energy Supply Situation<br />
Good Times Continue for Canadian Oil and Gas Producers, But Challenges Remain<br />
Oil Industry Update: Stable-to-Positive Outlooks in Strong Pricing Environment, But Event Risk Lingers<br />
Moody’s Revises Rating Outlook on Various European Airports Citing Downturn in Traffic and<br />
Airline Industry Troubles<br />
Moody’s Affirms Credit Ratings of GFAA, ERAA, and NavCanada Though Outlooks Are Revised to<br />
Negative for the Airports<br />
Moody’s Revises Outlook on Major U.S. International Gateway Airports and Large Airline Hubs to Negative<br />
Citing Financial Impact of Marked Decline in Service<br />
Australian Airport Outlook: Domestic and International Events Combine to Pressure Underlying Ratings<br />
North American Airport Industry Facing Difficult Credit Period<br />
Global Airports Industry Outlook<br />
Moody’s Perspective on Major Credit Issues in the Emerging Brazilian Telecommunications Industry<br />
Moody’s Approach to Rating Middle East Telecommunications Companies<br />
Mind the Gap! CLECs Struggle to Manage Funding Gaps<br />
“Hard Times Ahead”: Key Credit Considerations in Rating Competitive Local Exchange Carriers in Europe<br />
An Investor Road-Map to European Telecom<br />
The UK Water Sector: Moody’s Approach to Rating Highly-Leveraged Structures for Asset Ownership<br />
Port Privatizations and <strong>Infrastructure</strong> <strong>Project</strong> Financings<br />
Easy Come-Easy Go: The Credit Implications of Electronic Toll Collection<br />
Implications of Mergers and Acquisitions on Asia-Pacific Telecommunication Ratings<br />
The Growing Impact Of Regulation On The UK Electricity Sector<br />
Moody’s Talks With Investors About GSE Credit<br />
Credit Implications of Power Supply Risk<br />
Energy <strong>Project</strong>s In Venezuela<br />
The Latin American Upstream Energy Sector: Long on Oil & Gas Reserves, Short on Capital<br />
Moody’s Portfolio Risk Model For Financial Guarantors<br />
Sovereign Debt: What Happens If A Sovereign Defaults?<br />
European Telecommunications: Will UMTS And The Evolution Of Wireless Into<br />
Advanced Data Transmission Applications Leave Credit Quality In The Dust?<br />
• lxiv •
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research<br />
1999-2004<br />
Public-Private Partnership <strong>Project</strong>s in Europe: Lessons from UK PFI<br />
Heightened Construction Risk for Complex <strong>Project</strong>s: Welcome to the Billion Dollar Club!<br />
<strong>Project</strong> <strong>Finance</strong> Recognizes Benefits Of Bank Loan Ratings<br />
New Low-Cost Airlines Could Impact The Credit Quality Of Canadian And Australian Airports<br />
Outlook Brightens For Canadian Oil And Gas Producers<br />
A Notch Above The Rest? Bank Loan Ratings In Australia<br />
Australian Lateritic Nickel <strong>Project</strong>s: “Victims Of Their Own Success?”<br />
Mass Transit<br />
Consolidation Will Pressure Ratings Of The Water Utilities<br />
Worldwide Airport Industry<br />
Rating Bank Loans In Europe<br />
Start-Up Toll Roads<br />
Merchant Power Risk: Why Discount To Break-Even Is Better Than Debt Service Coverage Ratios<br />
Moody’s Methodology For Rating Emerging Market Telecommunications Carriers<br />
How Moody’s Evaluates Support Mechanisms Provided By Parents, Affiliates Or Other Related Entities<br />
Integrated Oil<br />
Solid Waste Sector<br />
Electric Utility Companies in Europe<br />
Water And Sewer Sector Outlook<br />
European Telecommunications<br />
Moody’s Approach to Rating Privatized Student Housing <strong>Project</strong> Financings<br />
Analytical Framework for Solid Waste Ratings<br />
Water and Sewer Rating Methodology<br />
European Electric Utility Rating Methodology<br />
The Importance of Being Economic: Credit Risks of US Merchant Power Plants<br />
Moody’s Sovereign Ratings: A Ratings Guide<br />
Analytical Framework for Port Ratings<br />
Moody’s Approach to Rating the Petroleum Industry<br />
Government-Sponsored Enterprises<br />
Key Credit Risks of <strong>Project</strong> <strong>Finance</strong><br />
Peering into the Crystal Ball: Predicting Power Rates<br />
Mexican Electric Reform Creates New Investment Opportunities<br />
Bond Defaults in Emerging Markets: The Slide Down a Slippery Slope<br />
European Telecommunications Presentation<br />
• lxv •
Bibliography of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Research<br />
1999-2004<br />
OPIC’s New Political Risk Insurance Policy For Fixed Income Securities: A Way To Pierce The Country Ceiling<br />
Is the World Financial Crisis Over?<br />
Is Asia Inc. Unraveling?<br />
Airport Industry Outlook<br />
East Asian Independent Power Producers — Resilient But Not Immune to the Crisis<br />
Deregulaton Poses Higher Credit Risks for Japan’s Electric Utilities<br />
Chinese <strong>Infrastructure</strong> in 1999: Liquidity Vital in Turbulent Times<br />
Petroleos de Venezuela S.A. (PDVSA) A First Look Under the Chavez Regime<br />
Toll Road Sector Outlook<br />
• lxvi •
Special Reports<br />
• lxvii •
PAGE INTENTIONALLY LEFT BLANK
October 2005<br />
Contact<br />
Phone<br />
New York<br />
Steven Wood 1.212.553.1653<br />
John Diaz<br />
Thomas S. Coleman<br />
Alexandra S. Parker<br />
Andrew Oram<br />
Michael Doss<br />
Kenneth Austin<br />
London<br />
Philipp Lotter 44.20.7772.5454<br />
Stuart Lawton<br />
Sydney<br />
Terry Fanous 61.2.9270.8100<br />
Brian Cahill<br />
Hong Kong<br />
Helen Li 852.2916.1120<br />
Global Independent Exploration<br />
and Production (E&P) Industry<br />
Summary<br />
The purpose of this methodology is to provide investors and other interested parties with a clear understanding of how<br />
Moody’s assigns ratings to issuers and their obligations in the global independent exploration and production (E&P)<br />
sector. For the purpose of this methodology, we define E&P companies as those engaged in exploring for, acquiring,<br />
developing and producing oil and natural gas assets. Our goal is to help the market understand the qualitative and<br />
quantitative factors we consider most important for this sector and how they map to rating outcomes. Readers should<br />
be able to use this report to gauge a company’s ratings within two notches.<br />
This methodology is not an exhaustive treatment of all the factors reflected in Moody’s ratings of the E&P sector,<br />
but should enable the reader to understand the key considerations, operating metrics and financial ratios used by<br />
Moody’s in determining ratings in this sector.<br />
Moody’s analysis of E&P companies focuses on four primary rating factors:<br />
1. Reserves and Production Characteristics<br />
2. Re-investment Risk<br />
3. Operating and Capital Efficiency<br />
4. Leverage and Cash Flow Coverage<br />
Moody’s also reviews significant non-E&P operations as these provide additional business risk, cash flow diversification,<br />
and possible support for a company’s leverage. We also review other factors that are common across all industries,<br />
such as liquidity, corporate governance, political risk, event risk and public vs. private ownership 1 .<br />
We believe that this methodology will enable the reader to gain insight into Moody’s rating criteria. However, our<br />
rating process involves a degree of judgment that from time to time will cause a rating outcome to fall outside the<br />
expected range of outcomes based on strict application of the factors presented herein. In these situations, we explain<br />
the differences and rationale in our credit opinions and company-specific analyses.<br />
1. Please refer to Moody’s Special Comment “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005).<br />
• lxix •
Industry Overview<br />
ABOUT THE RATED UNIVERSE<br />
Moody’s rates 53 publicly traded independent E&P companies with total rated debt of approximately $70 billion as<br />
well as several private companies. The companies discussed in this report are shown in the following table.<br />
Independent Exploration And Production Industry - Rated Companies<br />
Company<br />
Senior Unsecured or<br />
Corporate Family Rating Outlook Domicile Production (Mboe/d)<br />
BG Energy A2 Stable UK 458<br />
CNOOC 3 (A2)* Stable China 382<br />
PTT Exploration & Production 4 (A2)* Stable Thailand 154<br />
Apache A3 Stable US 470<br />
Burlington A3 Stable US 480<br />
Occidental A3 Stable US 530<br />
Anadarko Baa1 Stable US 425<br />
Canadian Natural Baa1 Stable Canada 456<br />
EOG Baa1 Stable US 235<br />
Murphy Baa1 Negative US 129<br />
Talisman Baa1 Stable Canada 367<br />
Woodside Baa1 Stable Australia 154<br />
Devon Baa2 Stable US 640<br />
EnCana Baa2 Stable Canada 766<br />
Husky Baa2 Stable Canada 264<br />
Nexen Baa2 Negative Canada 180<br />
Noble Baa2 Negative US 165<br />
PetroCanada Baa2 Stable Canada 323<br />
Pioneer Baa3 RUR Down US 183<br />
XTO Energy Baa3 Stable US 217<br />
Amerada Hess Ba1 Stable US 359<br />
Chesapeake Ba2 Stable US 216<br />
Newfield Ba2 Stable US 123<br />
Petrobras Energia 5 (Ba2)* Stable Argentina 170<br />
Plains E&P Ba2 Stable US 66<br />
Pogo Ba2 Stable US 106<br />
Southwestern Ba2 Stable US 27<br />
Vintage Ba2 RUR Up US 75<br />
Cimarex Ba3 Stable US 78<br />
Denbury Ba3 Stable US 30<br />
Encore Acquisition Ba3 Positive US 27<br />
Forest Ba3 Negative US 45<br />
Houston Exploration Ba3 Stable US 54<br />
Kerr-McGee Ba3 Stable US 361<br />
Swift Ba3 Stable US 29<br />
Whiting Ba3 Stable US 41<br />
Baytex B1 Stable Canada 34<br />
Compton B1 Stable Canada 21<br />
Comstock B1 Stable US 18<br />
EXCO Resources B1 Developing US 11<br />
PT Medco Energi B1 Stable Indonesia 90<br />
Range B1 Positive US 38<br />
Stone B1 Negative US 48<br />
Clayton Williams B2 Stable US 26<br />
Energy Partners B2 Negative US 34<br />
HET B2 Stable Canada 18<br />
KCS Energy B2 Stable US 16<br />
Delta B3 Stable US 7<br />
El Paso Production B3 Stable US 68<br />
Paramount B3 Negative Canada 17<br />
Belden & Blake Caa1 Developing US 8<br />
Petrohawk Caa1 Stable US 22<br />
PetroQuest Energy Caa1 Stable US 8<br />
* Numerical rating reflects baseline credit assessment per <strong>Moody's</strong> Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating<br />
or Foreign Currency rating in cases where there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special<br />
Comment entitled “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005)<br />
• lxx •
Most of the rated companies are in North America and the majority of these are U.S. based. This reflects the private<br />
(i.e., non-government) ownership of oil and natural gas reserves in North America and relatively low barriers to<br />
entry. Outside of North America, almost all of the world’s oil and gas resources are owned or controlled by stateowned<br />
national oil companies. This geographic concentration in North America also reflects consolidation in the<br />
E&P industry, particularly in Europe, over the past quarter century. Overall, we rate ten E&P companies in Canada,<br />
four in Asia, one in Latin America, one in Europe and the remaining 37 are in the U.S.<br />
The weighted average rating, by amount of rated debt, is Baa3, while the average rating by number of issuers is<br />
Ba2. There are no Moody’s-rated E&P companies in the Aa or Aaa category. Ratings tend to be in the single A category<br />
and lower, with concentrations in Baa and below. The following chart shows the distribution of ratings among<br />
these 53 E&P companies.<br />
10<br />
Global E&P Ratings<br />
8<br />
Number of issuers<br />
6<br />
4<br />
2<br />
0<br />
A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1<br />
INDUSTRY CHARACTERISTICS<br />
The global oil and natural gas industry explores for underground hydrocarbon reservoirs, develops these resources by<br />
drilling wells and produces oil and gas through these wells.<br />
• Produced natural gas is gathered and processed, separating the gas (methane) from natural gas liquids<br />
(NGL’s – ethane, propane, butane and natural gasolines); liquids are fractionated into their component<br />
parts; and the gas and the fractionated liquids are stored, transported and marketed.<br />
• Oil is transported to refineries, where it is converted to products that include gasoline, diesel, heating oil<br />
and jet fuel. These products are marketed to wholesale and retail customers.<br />
Exploration and production are considered the “upstream” portion of the industry, and companies that conduct<br />
these activities are the focus of this methodology. 2<br />
We note that there are essentially two strategies of reserves replacement, which are important in understanding<br />
and assessing the risks an E&P company is taking. The first strategy, commonly referred to as organic or drill bit<br />
reserves replacement, involves finding new sources of oil and gas. This includes some combination of exploration,<br />
which is typically higher risk, exploitation of previously discovered reservoirs, which is lower risk, and improved recovery,<br />
which includes supplemental recovery methods such as waterflooding, with a risk level in between exploration and<br />
exploitation. The second strategy of reserves replacement, commonly called acquire and exploit, involves buying<br />
properties from another company or buying an entire company. Acquiring reserves includes a wide range of risks<br />
depending on the maturity of the acquired assets along the spectrum of a reservoir’s life cycle.<br />
2. The remaining activities are part of the “midstream” sector (gathering, processing, fractionating, transportation and storage) and the “downstream” sector (refining<br />
and marketing). Refining and marketing companies are discussed in a companion methodology, Global Refining and Marketing Industry, October 2005. Companies<br />
that conduct all of these activities (vertically integrated) are discussed in a third methodology, Global Integrated Oi & Gas Industry, October 2005.<br />
• lxxi •
Finite Assets with Commodity Price Risk<br />
Our credit assessment of companies in the E&P industry is shaped by the fact that these companies’ assets are finite<br />
depleting resources subject to unpredictable commodity prices.<br />
As when rating other companies, Moody’s evaluates historical operating and financial performance, cash flow, debt<br />
service coverage and leverage. However, while financial results and ratios are important to credit ratings, an E&P<br />
company’s future prospects are not entirely or directly captured in its reported financial statements. Oil and natural<br />
gas assets are finite resources that deplete and decline over time. To be successful and remain in business, an E&P<br />
company must reinvest substantial capital each year to find new reserves and replace production. Furthermore, the oil<br />
and gas industry is a commodity business, where producers are price takers who cannot control commodity prices.<br />
To better assess a company’s future performance we evaluate a variety of oil and natural gas reserves related measures.<br />
Reserves data are provided in supplemental disclosures and petroleum engineering reports. Companies that file<br />
with the U.S. Securities and Exchange Commission (SEC) comply with its guidelines for reporting reserves. FAS 69<br />
requires annual disclosure of certain information regarding total proved and proved developed reserves as well as the<br />
costs incurred in reserves replacement activities.<br />
We also focus on cost structure and operating efficiency, which are factors that companies can better control. The<br />
combination of depleting assets, technical challenges and unpredictable commodity prices require that E&P companies<br />
maintain appropriate capital structures and avoid high financial leverage.<br />
CURRENT INDUSTRY TRENDS AND RISK FACTORS<br />
High Oil and Natural Gas Prices<br />
Currently, oil and natural gas prices are at their highest levels since the oil shocks of the 1970’s. Our expectation is that<br />
they will remain at high levels for the foreseeable future based on continued growth in demand, particularly from Asia,<br />
combined with a relatively small cushion of spare production capacity within OPEC. Prices are further supported by<br />
relatively tight refining capacity around the world, particularly for the conversion of heavier crudes. (Please see sidebar<br />
for a discussion of how we factor prices into our methodology).<br />
The sharp rise in oil and gas prices has led to a windfall increase in earnings and cash flow for independent E&P<br />
companies. As a result, most companies are showing robust credit metrics, with reduced financial leverage and a buildup<br />
of cash on their balance sheets. The excess cash flow requires management to make decisions as how to best deal<br />
with the surplus. Many are returning cash to their shareholders through increased dividends and more aggressive stock<br />
repurchase programs.<br />
Rising Cost Structures<br />
The fundamental driver behind the current record oil and gas prices is the increasing difficulty and expense associated<br />
with replacing oil and gas reserves around the globe. As a result, finding and development (F&D) costs are rising, and<br />
with them, the value of oil and gas properties.<br />
The prices paid for property acquisitions have risen sharply in the past several years, with typical transactions now<br />
exceeding $10 per barrel of oil equivalent (boe) reserve added, up from $6-7 per boe in 2000. At the same time, operating<br />
costs are rising, driven by higher energy related expenses and oilfield services costs.<br />
The net result: despite higher oil and gas prices, the projected return on investment – as measured by the leveraged<br />
full-cycle ratio – has not increased meaningfully for the sector as a whole. Furthermore, rising cost structures create<br />
the risk that an unforeseen reversal of high energy prices will result in reduced financial flexibility for some<br />
companies, particularly those that have relied on debt to fund expansion.<br />
Political Risk<br />
Tight supply/demand conditions result not only in record high oil and gas prices but they also tend to increase global<br />
political risk for the independent producers operating within those countries. When producing countries, many in the<br />
developing world, perceive greater value to their properties they may push for an increased share of the windfall. In<br />
some cases, governments may curtail access to future properties or deny access altogether. Countries with large and<br />
growing energy needs (e.g., China and India) may undertake strategic decisions to acquire properties and thus become<br />
formidable competitors. In the extreme case that a physical shortage develops, the specter of nationalism and expropriation<br />
could impact the credit dynamics of the industry.<br />
• lxxii •
Event Risk<br />
Event risk is the risk that an unforeseen or unquantifiable<br />
event will occur that will result in a rating change beyond<br />
the scope that would be reasonably expected. Event risk<br />
remains high for the oil and gas industry.<br />
The driver of today’s high oil and natural gas prices –<br />
specifically the relative lack of low-cost re-investment<br />
opportunities – creates the question of what to do with<br />
the excess cash being generated. We expect stock repurchases<br />
to be a core activity for most companies in the<br />
near term, but companies that cannot grow production at<br />
a level to satisfy the stock market will come under pressure<br />
to undertake large stock repurchases or recapitalizations<br />
that affect their credit profiles negatively. Some<br />
independent E&P companies will be tempted to engage<br />
in or increase their overseas expansions, where they will<br />
take on political risk. Moreover, if oil and gas prices<br />
retreat to more moderate levels, we could see a wave of<br />
consolidation as companies feel pressure to maintain<br />
their returns.<br />
KEY RATING ISSUES INTO THE NEXT DECADE<br />
Sustainability of High Oil and Gas Prices<br />
The oil and gas industry is currently experiencing record<br />
commodity prices, which are leading to strong, often<br />
record, earnings and cash flow. Oil doubled in price<br />
between the end of 2003 and August 2005, while natural<br />
gas, which began rising before oil, increased from the<br />
mid-single digits (U.S.$ per million Btu) to the high single<br />
digits.<br />
More significantly, the entire forward price curve (as<br />
opposed simply to near term prices) has moved up, with<br />
oil and gas prices remaining high through the end of the<br />
decade. Historically, oil and gas prices have been cyclical,<br />
rising and falling with economic activity as well as shifting<br />
supply and demand. In spite of these cycles, prices<br />
have tended to revert to mean levels over time. At question<br />
is whether we are observing a cyclical high (in which<br />
case prices will return to historical averages), or whether<br />
there has been a structural change in the price level. As<br />
noted, we are currently evaluating companies using<br />
somewhat higher prices than we have historically used;<br />
however, it is not clear whether higher prices have<br />
improved the industry’s fundamental credit quality.<br />
Incorporating Commodity Price Risk<br />
In analyzing the E&P industry, Moody’s looks to maintain<br />
some consistency of ratings during periods of both high<br />
and low oil and gas prices. Therefore, we need to take into<br />
account commodity price volatility and incorporate an<br />
expected range of oil and gas price fluctuations. We do not,<br />
however, seek to forecast energy prices precisely. Rather,<br />
our price assumptions are derived through: an examination<br />
of macroeconomic trends, including oil and gas supply and<br />
demand factors; discussions with issuers and market<br />
participants across the full spectrum of the industry; and<br />
our own element of pragmatism and conservatism.<br />
Our current price assumptions are as follows:<br />
Oil: Using West Texas Intermediate (WTI) as the<br />
benchmark, we expect that for the next twelve<br />
months oil will average in the high U.S. $40’s per<br />
barrel range. Over the medium term (a three year<br />
view), we expect that oil will average in the low<br />
U.S. $30’s range. Our stress test case uses the low<br />
U.S. $20’s range.<br />
North American Natural Gas: Using Henry Hub as<br />
the benchmark, we expect that for the next twelve<br />
months North American natural gas will average in<br />
the U.S. $5-$7 per million Btu range. Over the<br />
medium term (a three year view), we expect that it<br />
will average in the U.S. $4-$6 range. Our stress<br />
test case uses the U.S. $3-$3.50 range.<br />
Our price assumptions are used to help us project a<br />
company’s earnings, cash flow and base level capital<br />
spending over the medium term. We ask companies to give<br />
us their plan using our base case assumptions. They are<br />
free to use other assumptions as well, but if they do not<br />
use our price deck we will sensitize their numbers. We look<br />
at the one year projection to help us analyze a company’s<br />
liquidity, which we incorporate into our Liquidity Risk<br />
Assessments (LRA) for investment grade companies and<br />
into our Speculative Grade Liquidity Ratings (SGL) for noninvestment<br />
grade companies.<br />
We use the stress test analysis to examine whether<br />
companies can remain profitable at the stressed price<br />
levels, what levels of cash flow they can be expected to<br />
generate, and whether they would be able to reinvest<br />
sufficient capital to replace and/or grow production.<br />
Ability to Replace Reserves and Grow Production<br />
E&P companies are finding it increasingly challenging to replace their reserves and grow production, especially<br />
organically or through the drill bit. The oil and gas industry, particularly in North America, is becoming more<br />
mature, with virtually all major onshore basins and the Gulf of Mexico shelf in decline. As conventional oil and gas<br />
opportunities become scarcer, companies are drilling in ever deeper water offshore, conducting more exploration and<br />
development operations internationally, and putting more focus on unconventional natural gas reservoirs and oil<br />
sands, which introduces geologic, technology and execution risk.<br />
In response, more E&P companies are acquiring oil and gas assets, as well as entire companies, rather than<br />
exploring for and developing reserves.<br />
• lxxiii •
Also challenging reserves replacement is restricted access to many prospective drilling areas, including much of the<br />
U.S. offshore and parts of Alaska. Internationally, most potential oil and gas acreage is controlled by national oil companies.<br />
As a result of North America’s maturity and limited access to drilling opportunities, competition among E&P companies<br />
has intensified. Independent E&P companies are competing with the major integrated oil companies as well as<br />
with national oil companies, both of which tend to be larger and better capitalized. Companies with less durable portfolios<br />
of oil and gas assets will be challenged to replace reserves, grow production and maintain their ratings.<br />
Increasing Costs<br />
As commodity prices increase, companies’ cost structures, both capital and operating, have come under considerable<br />
pressure. Capital costs are rising because of acquisitions, many at historically high prices. In addition, capital costs<br />
have been rising because of increased competition among producers for drilling rigs, workover and completion rigs,<br />
and other oilfield services. As noted, E&P companies, challenged to replace production, are drilling in ever deeper<br />
waters, drilling deeper and longer wells, often horizontally, and employing more technically complex completion techniques,<br />
all of which are increasing capital costs.<br />
In addition to higher capital expenses, higher commodity prices are also having a direct impact on cash operating<br />
costs, including production and severance taxes, electricity, gas compression and supplemental recovery such as thermal<br />
and carbon dioxide flooding. If there is significant softening in commodity prices, companies with higher cost<br />
structures will be challenged and their ratings could be pressured.<br />
Industry Consolidation<br />
We expect to see continued consolidation in the industry following a number of transactions in which larger independents<br />
bought smaller E&P companies focused on Rocky Mountain natural gas. We also anticipate more acquisitions<br />
of independent E&P companies by major integrated oil companies. A potential emerging theme is one in which<br />
small- to mid-cap independents combine to build scale. Along with the usual merger challenges of management, culture<br />
and integration, these companies face difficult valuation issues. As noted, companies have generally been paying<br />
historically high prices often leading to increased leverage. Event risk around such acquisitions will be a ratings consideration<br />
as well.<br />
About This Methodology<br />
Moody’s rating methodology for independent E&P companies includes the following steps:<br />
1. IDENTIFICATION OF KEY RATING FACTORS<br />
Moody’s has identified four key rating factors for our analysis of E&P companies:<br />
1. Reserves and Production Characteristics<br />
2. Re-investment Risk<br />
3. Operating and Capital Efficiency<br />
4. Leverage and Cash Flow Coverage<br />
These four broad categories capture the fundamental issues we evaluate in assigning our ratings. We discuss why<br />
each rating factor is important in our assessment, as well as the issues and challenges associated with that factor. Later<br />
in this report, we discuss other rating considerations including non-E&P businesses, liquidity, and political risk that –<br />
while important – do not carry as much weight as the key factors.<br />
The four key rating factors are ordered to reflect how we typically think about E&P companies. We start with a<br />
description of the company in terms of scale, areas of operations and diversification (Reserves and Production Characteristics);<br />
followed by analysis of how well a company replaces its reserves and how economically and efficiently it manages<br />
its capital spending (Re-investment Risk); then turn to the company’s cost structure and its returns on investment<br />
(Operating and Capital Efficiency); and finally we look at how a company is capitalized, the debt burden that must be<br />
supported by its oil and gas reserves, and how well its post-maintenance capex cash flow covers its debt obligations<br />
(Leverage and Cash Flow Coverage).<br />
• lxxiv •
2. MEASUREMENT OF THE FOUR KEY RATING FACTORS<br />
Within each rating factor we present the specific metrics and ratios that we use to quantify that factor. There are a<br />
total of 11 metrics among these four rating factors. These metrics are based primarily on oil and natural gas reserves<br />
data provided in supplemental disclosures to companies’ financial statements. Because many of these metrics are<br />
industry specific, we explain where we obtain the data, how we measure the metric and discuss issues around measurement<br />
criteria. In addition, we discuss other metrics and ratios that we evaluate as part of the ratings process but do not<br />
explicitly map in the methodology.<br />
3. MAPPING TO THE KEY RATING FACTORS<br />
For each of the 11 measurement criteria, we describe appropriate ranges for Moody’s broad rating categories (i.e., Aa,<br />
A, Baa, Ba, B and Caa). As an example, for total production, one of our Reserves and Production Characteristics metrics,<br />
we identify the range that is consistent with a Baa rating versus a Ba rating and so forth. Although there are no<br />
E&P companies rated Aa, a number of companies display characteristics consistent with this rating level.<br />
4. THE RATING METHODOLOGY APPLIED: COMPANY MAPPING FOR EACH FACTOR<br />
We rate each E&P issuer for its performance on each of the 11 metrics. We also show how these mapped ratings compare<br />
to an issuer’s actual senior unsecured rating for investment grade companies or its corporate family rating for<br />
non-investment grade companies.<br />
Within each rating factor, we identify positive and negative outliers for each metric in a table. Outliers are defined<br />
as instances in which a company’s performance on a particular metric differs from the issuer’s actual rating by at least<br />
one rating category (i.e. whole letter rating).<br />
Positive outliers are those companies whose performance on a given metric is higher than its actual rating. Negative<br />
outliers are those for which performance is lower than the actual rating. For each rating factor, we discuss themes<br />
that explain why an individual issuer’s metrics might be higher or lower than its actual rating. The final rating is ultimately<br />
a composite of all of the mapped factors and other considerations discussed herein.<br />
Exploration and Production Industry - Mapping Grid<br />
Rating Factors and Sub-factors Aaa Aa A Baa Ba B Caa<br />
Sub-factor<br />
Weighting<br />
Factor 1: Reserves & Production Characteristics (36% weighting)<br />
Production (Million boe/yr) > 1,000 400 - 1,000 200 - 400 50 - 200 20 - 50 10 - 20 < 10 10%<br />
Proved Developed Reserves<br />
(Million boe) > 8,000 4,000 - 8,000 1,500 - 4,000 300 - 1,500 100 - 300 20 - 100 < 20 10%<br />
Total Proved Reserves (Million<br />
boe) > 10,000 5,000 - 10,000 2,000 - 5,000 500 - 2,000 100 - 500 30 - 100 < 30 8%<br />
Diversification High Medium Low 8%<br />
Factor 2: Re-investment Risk (16% weighting)<br />
3-year all-sources F&D ($/boe) < $5 $5 - $6 $6 - $8 $8 - $10 $10 - $12 $12 - $15 > $15 8%<br />
3-year drillbit F&D costs<br />
including revisions ($/boe) < $4 $4 - $5 $5 - $7 $7 - $9 $9 - $11 $11 - $14 > $14 8%<br />
Factor 3: Operating & Capital Efficiency (18% weighting)<br />
Full-cycle cost ($/boe) < $10 $10 - $12 $12 - $16 $16 - $20 $20 - $25 $25 - $30 > $30 9%<br />
Leveraged full-cycle ratio > 6x 4x - 6x 3x - 4x 2x - 3x 1.5x - 2.5x 1x - 2x < 1x 9%<br />
Factor 4: Leverage & Cash Flow Coverage (30% weighting)<br />
Debt / PD boe reserves < $1.0 $1 - $2 $2 - $3 $3 - $5 $5 - $6 $6 - $8 > $8 10%<br />
(Debt + Future Development<br />
Capex) / Total Reserves < $1.0 $1 - $2.50 $2.50 - $4 $4 - $6 $6 - $8 $8 - $10 > $10 10%<br />
(Retained Cash Flow -<br />
Sustaining Capex) / Debt >100% 80% - 100% 50% - 80% 30% - 50% 10% - 30% 0% - 10% < 0% 10%<br />
• lxxv •
The Four Key Rating Factors<br />
FACTOR 1: RESERVES AND PRODUCTION CHARACTERISTICS<br />
Why it Matters<br />
The most valuable assets an E&P company has are its oil and natural gas reserves. Proved reserves represent a store of<br />
value that can be quantified and compared across companies. Proved developed (PD) reserves are critically important<br />
because they are the source of oil and gas production and cash flow. Proved undeveloped (PUD) reserves require capital<br />
spending in order to convert them to PD reserves. 3<br />
Reserves and production are a better measure of size than financial metrics such as assets, revenue and cash flow,<br />
which are affected by accounting differences and directly linked to changes in commodity prices. The Reserves and<br />
Production Characteristics rating factor provides a snapshot of an E&P company’s oil and gas asset portfolio at a point<br />
in time.<br />
Size, as measured by reserves and production volumes, is important and it is clear from our ratings that higher<br />
rated companies tend to be larger than lower rated companies. Larger companies typically have greater resources,<br />
liquidity and economies of scale that enable them to withstand shocks or downturns better than smaller firms. In the<br />
E&P industry, these shocks include weaker commodity prices, higher differentials to benchmark prices (which lower<br />
realized prices), greater than expected geologic risk, increased costs from oilfield services companies during times of<br />
tight capacity, weather, or limited access to midstream gas services and downstream processing.<br />
Size is often correlated with geographic diversification, which in turn implies a certain degree of cash flow durability.<br />
Larger E&P companies tend to be in a broader range of geographic areas and geologic basins, which provide some<br />
protection from the types of aforementioned shocks.<br />
Positive Rating Indicators<br />
• Increasing production volumes and lower volatility of production<br />
• Generally increasing total proved reserves and PD reserves<br />
• A higher percentage of PD reserves relative to total proved reserves<br />
• Greater diversification among geologic basins, geographic areas and political regimes<br />
• Higher percentage of reserves and production in OECD countries<br />
Measurement Criteria<br />
• Production (million boe per year)<br />
• Proved Developed Reserves (million boe)<br />
• Total Proved Reserves (million boe)<br />
• Diversification (High, Medium, Low)<br />
Notes on Measurement Criteria<br />
While knowing a company’s reserves at a point in time or its production for a particular quarter is important, we are<br />
more interested in the company’s reserves and production trends over a multi-year period. We discuss this in more<br />
detail in our discussion of the Re-investment Risk factor, but for now we wish to emphasize that we evaluate companies<br />
dynamically rather than statically. To this end, we look at the overall trend in reserves and production (whether both<br />
are generally increasing or decreasing and the reasons why).<br />
Reserves: The greatest challenge when measuring reserves lies in the fact that companies are required only to disclose<br />
their reserves once per year. Intra-year changes in reserves are more challenging to determine as companies are<br />
not required to disclose this data. As we get further through the year, the prior year-end reserves volumes become<br />
increasingly more stale. For significant acquisitions or divestitures, we add or deduct volumes disclosed by E&P companies<br />
in a press release to the prior year-end reserves volumes for a pro forma intra-year reserves number.<br />
3. Reserves are estimated by petroleum engineers, who are either employees of the company or outside independent petroleum engineers (IPE), a process that is generally<br />
conducted annually.<br />
• lxxvi •
A further challenge is to balance the reserves information provided with the appropriate context and understanding<br />
of its subjectivity and limitations 4 . The term “proved reserves” implies something that is known with certainty,<br />
when in fact proved reserves cannot be measured directly. Moody’s attempts to strike an appropriate balance by qualitatively<br />
considering the company’s policies and procedures for developing its proved reserves estimates, including the<br />
degree of use of independent petroleum engineers, and the critical assumptions and estimates made by management.<br />
FAS 69 does not require disclosure of how long the PUD reserves have been on the books or when the company<br />
expects to develop these reserves, both of which would be meaningful disclosures. 5<br />
Production: The FAS 69 disclosure provides an annual production figure for oil and natural gas. During the year,<br />
production volumes are reported quarterly, which are used to calculate last-twelve-months (LTM) production volumes.<br />
Production is measured more accurately than reserves volumes as they underpin sales data. Industry and regulatory<br />
standards define how volumes of oil and natural gas are measured, which also provides a greater degree of<br />
reliability and transparency.<br />
In addition to the overall trend, we consider the volatility of a company’s production. Oil and gas production<br />
translates directly into revenue so production volatility implies cash flow volatility, which is important to creditors.<br />
Lower production volatility means greater consistency and durability of the company’s cash flow.<br />
Note on Net versus Gross for Production and Reserves Calculations: The U.S. convention is to report<br />
reserves and production after royalties are paid, or net, whereas the Canadian convention is to report gross reserves<br />
volumes, which are before royalties are paid. Because reserves and production volumes associated with royalties do not<br />
affect an E&P company’s financial performance, we believe it is more appropriate to calculate our metrics using net<br />
volumes. We therefore ask companies that do not report net volumes to provide this information to us for our analysis.<br />
Diversification: Our diversification measurement typically includes an assessment of geologic basin concentration,<br />
number of different basins (a measure of geographic diversification), percentage of oil versus natural gas, onshore<br />
versus offshore, and number of wells. For companies with international operations, we look at potential country concentrations<br />
to assess political risk, including operations in OECD versus non-OECD countries.<br />
Comment on Integration of the Reserve Life Index: 6 RLI is an important analytic metric that,<br />
conceptually, measures how quickly a company’s reserves are running off, and presents a picture of<br />
the challenge a company faces in replacing its production. We focus primarily on PD reserves to<br />
develop a PD RLI. The production volume used in the calculation is typically a LTM value although<br />
we also look at the most recent quarterly production on an annualized basis to view the leading edge<br />
reserve life.<br />
While we analyze companies’ reserve lives, we do not map this as a metric because of the narrow<br />
range of its effectiveness. A RLI of below 4-5 years is extremely short and implies very little margin<br />
of error for the company, given the rapid reserve runoff, whereas a RLI of beyond 8-10 years quickly<br />
reaches the point of diminishing returns in terms of credit value. Longer reserve lives may indicate<br />
that reserves are overbooked (the numerator – reserves – is too large) or underdeveloped (the denominator<br />
– production – is too small).<br />
Factor Mapping: Reserves & Production Characteristics<br />
Aaa Aa A Baa Ba B Caa<br />
Production (Million boe/yr) > 1,000 400 - 1,000 200 - 400 50 - 200 20 - 50 10 - 20 < 10<br />
Proved Developed Reserves (Million boe) > 8,000 4,000 - 8,000 1,500 - 4,000 300 - 1,500 100 - 300 20 - 100 < 20<br />
Total Proved Reserves (Million boe) > 10,000 5,000 - 10,000 2,000 - 5,000 500 - 2,000 100 - 500 30 - 100 < 30<br />
Diversification High Medium Low<br />
4. FAS 69 disclosures were intended to supplement the financial statements and are not audited by the company’s independent accountants. Some E&P companies<br />
hire independent petroleum engineers to prepare, review or audit the proved reserves estimated volumes and related disclosures, either voluntarily or to meet the<br />
requirements of creditors or other stakeholders. Utilization of IPEs tends to be higher with smaller E&P companies.<br />
5. For more information, please see our discussion of reserves issues in the Oil & Gas Exploration and Production Industry Financial Reporting Assessment (September<br />
2004).<br />
6. The reserve life index or reserves to production ratio (RLI or R/P) is defined as reserves divided by annual production. The units are in years and this metric represents<br />
how long it theoretically would take a company to produce its reserves if it continued to produce at the current rate.<br />
• lxxvii •
Company Mapping: Reserves & Production Characteristics<br />
Senior Unsecured<br />
or Corporate<br />
Family Rating<br />
Proved<br />
Developed<br />
Reserves<br />
Annual<br />
Total Proved<br />
Company<br />
Outlook Production<br />
Reserves<br />
BG Energy A2 Stable Baa Baa A A<br />
CNOOC 3 (A2)* Stable Baa Baa A B<br />
PTT Exploration & Production 4 (A2)* Stable Ba Baa Baa B<br />
Apache A3 Stable Baa Baa Baa A<br />
Burlington A3 Stable Baa Baa A A<br />
Occidental A3 Stable A A A A<br />
Anadarko Baa1 Stable Baa Baa A Baa<br />
Canadian Natural Baa1 Stable Baa Baa Baa Baa<br />
EOG Baa1 Stable Baa Baa Baa Baa<br />
Murphy Baa1 Negative Baa Baa Baa Ba<br />
Talisman Baa1 Stable Baa Baa Baa A<br />
Woodside Baa1 Stable Baa Ba Baa B<br />
Devon Baa2 Stable A A A A<br />
EnCana Baa2 Stable A Baa Baa A<br />
Husky Baa2 Stable Baa Baa Baa Ba<br />
Nexen Baa2 Negative Baa Baa Baa Ba<br />
Noble Baa2 Negative Baa Baa Baa Baa<br />
PetroCanada Baa2 Stable Baa Baa Baa Baa<br />
Pioneer Baa3 RUR Down Baa Baa Baa Ba<br />
XTO Energy Baa3 Stable Baa Baa Baa Ba<br />
Amerada Hess Ba1 Stable Baa Baa Baa Baa<br />
Chesapeake Ba2 Stable Baa Baa Baa Ba<br />
Newfield Ba2 Stable Ba Ba Ba Ba<br />
Petrobras Energia 5 (Ba2)* Stable Baa Baa Baa Baa<br />
Plains E&P Ba2 Stable Ba Ba Ba Ba<br />
Pogo Ba2 Stable Ba Ba Ba Ba<br />
Southwestern Ba2 Stable B B Ba Ba<br />
Vintage Ba2 RUR Up Ba Ba Ba Ba<br />
Cimarex Ba3 Stable Ba Ba Ba Ba<br />
Denbury Ba3 Stable Caa Ba Ba B<br />
Encore Acquisition Ba3 Positive B Ba Ba B<br />
Forest Ba3 Negative Ba Ba Ba B<br />
Houston Exploration Ba3 Stable B B Ba B<br />
Kerr-McGee Ba3 Stable Baa Baa Baa Ba<br />
Swift Ba3 Stable B B Ba B<br />
Whiting Ba3 Stable B Ba Ba Ba<br />
Baytex B1 Stable B B B B<br />
Compton B1 Stable Caa B B B<br />
Comstock B1 Stable Caa B Ba B<br />
EXCO Resources B1 Developing Caa Ba Ba B<br />
PT Medco Energi B1 Stable Ba Ba Ba Caa<br />
Range B1 Positive B Ba Ba B<br />
Stone B1 Negative B Ba Ba B<br />
Clayton Williams B2 Stable Caa B B B<br />
Energy Partners B2 Negative Caa B B B<br />
HET B2 RUR Down B B B B<br />
KCS Energy B2 Stable Caa B B B<br />
Delta B3 Stable Caa Caa B Caa<br />
El Paso Production B3 Stable Ba Ba Ba Caa<br />
Paramount B3 Negative Caa B Caa Caa<br />
Belden & Blake Caa1 Developing Caa B B Caa<br />
Petrohawk Caa1 Stable Caa B B B<br />
PetroQuest Energy Caa1 Stable Caa Caa Caa Caa<br />
* Reflects <strong>Moody's</strong> Methodology for Government Related Issuers<br />
Positive Outlier<br />
Negative Outlier<br />
Reserves<br />
Diversification<br />
• lxxviii •
Observations<br />
Positive outliers in this rating factor typically include larger companies whose ratings are often restrained by re-investment<br />
risk and high leverage. Devon has A characteristics for this rating factor, but is rated in the Baa category reflecting<br />
weakness in 3-year drill bit F&D and to a lesser extent leverage. Amerada Hess, Chesapeake and Kerr-McGee,<br />
which despite Baa characteristics for this rating factor are rated in the Ba category. Both Amerada Hess and Kerr-<br />
McGee are “fallen angels,” – i.e. companies that had investment grade ratings but have since been downgraded to noninvestment<br />
grade because of poor operating performance and high leverage. Chesapeake is growing rapidly by acquisitions<br />
using leverage, which also introduces event risk and financial risk.<br />
Negative outliers include some larger companies such as CNOOC and Apache, which have Baa characteristics for<br />
this rating factor despite actual ratings in the A category. Apache has A characteristics while CNOOC has Aa characteristics<br />
in each of the other rating factors, which support their ratings. Within non-investment grade companies,<br />
some of the Ba rated companies, such as Southwestern and Swift, have B characteristics for this factor. This is a result<br />
of these companies being smaller yet strong in the areas of re-investment risk, and operating and capital efficiency.<br />
FACTOR 2: RE-INVESTMENT RISK<br />
Why it Matters<br />
Reserves replacement is the most fundamental challenge an E&P company faces. Because E&P companies produce<br />
their assets to generate cash flow, they are in effect slowly liquidating over time. For example, a company with an eight<br />
year reserve life index produces 1% of its reserves each month on average.<br />
To sustain the company and service debt in future years, oil and gas that is produced must be replaced with newly<br />
discovered or purchased reserves. We often describe E&P as a portfolio management business and we evaluate companies’<br />
oil and gas assets to assess portfolio durability. The key issue is whether a company has constructed a portfolio<br />
of assets that it can replicate consistently year after year.<br />
Reserves replacement is a significant challenge for all E&P companies but as companies move higher in the rating<br />
scale, particularly into the investment grade ratings, the bar of consistent reserves replacement is set increasingly<br />
higher. We note that effective portfolio management involves a certain degree of pruning by selling smaller interests<br />
or areas that are no longer core as well.<br />
The Re-investment Risk rating factor addresses portfolio durability and sustainability by focusing attention on the<br />
consistency and repeatability of a company’s reserves replacement as well as on whether a company replaces its production<br />
economically. An E&P company that consistently replaces the oil and gas it produces with fresh reserves – and<br />
that does so at economic rates of return – will be more likely to survive economic, industry and commodity cycles and<br />
be able to service its debt over long periods of time.<br />
Note that we evaluate reserves replacement as part of our analysis, but we do not map it as a separate metric for<br />
reasons that are discussed in more detail below. However, a company’s reserves replacement performance is reflected<br />
in its finding and development costs, which are mapped as part of this rating factor.<br />
Positive Rating Indicators<br />
• Consistent reserves replacement in excess of 100% each year<br />
• Successful execution of the company’s stated reserves replacement strategy<br />
• Lower all-sources F&D costs and lower organic F&D costs<br />
• For acquisitions, paying a price per boe that is less than historical F&D costs<br />
Measurement Criteria<br />
• Three-year all-sources F&D costs ($/boe)<br />
• Three-year drill bit F&D costs, including revisions ($/boe)<br />
• lxxix •
Notes on Measurement Criteria<br />
Overview of Finding and Development Costs: Our analysis includes a review of all-sources reserves replacement.<br />
This includes extensions and discoveries (E&D), acquisitions and revisions. We subsequently deconstruct the allsources<br />
into its components of organic replacement (which includes E&D and revisions), and acquisitions. We also<br />
evaluate the individual components to better understand the sources of the reserves changes, particularly the reserves<br />
revisions. 7 We measure reserves replacement as the ratio of reserves added in the numerator divided by annual production<br />
in the denominator and express the result as the percentage of production replaced.<br />
Both organic reserves replacement and acquisitions include particular risks, but our mapping incorporates a slight<br />
bias in favor of organic replacement. Companies developing their own properties are often perceived as being better<br />
able to “control their destiny” as opposed to depending on the acquisitions market at any given time. Acquisitions also<br />
introduce a level of event risk, which is reflected in the price paid for reserves, the company’s cost structure and returns<br />
on investment, as well as how the company finances the acquisition (including the proportion of debt vs. equity). Ultimately,<br />
whatever reserves replacement strategy a company follows, the most important issue is how consistently the<br />
company executes its strategy to create a durable oil and gas portfolio.<br />
Reserves Replacement Issues: We assess a company’s reserves replacement in terms of how well new reserves fit<br />
geographically and geologically with the rest of its portfolio, the proportion of developed and undeveloped reserves,<br />
and the value of the new reserves.<br />
• Geographic Fit: Some companies hold large legacy land or field positions in a particular basin that provides<br />
economies of scale and greater technical knowledge. Adding reserves in the same area plays to these advantages,<br />
whereas adding reserves in an entirely new area increases operating, technical and competitive risks.<br />
• Proportion of Developed Reserves: Because developed reserves have more value to debt holders than undeveloped<br />
reserves, replacing production with PUD reserves, as with a large offshore discovery that will not<br />
come on production for several years, is not viewed as favorably as replacing reserves while maintaining or<br />
increasing the overall proportion of PD reserves.<br />
• Reserves Value: Fields have different values, determined by factors such as reserve life, realized prices and<br />
operating costs. For example, replacing light sweet oil production with heavier or more sour oil reserves is<br />
less valuable than finding reserves of a similar or higher quality.<br />
Three-Year F&D Costs: Our analysis focuses on how economically a company accomplishes its reserves<br />
replacement strategy through its F&D costs. F&D costs are a measure of efficiency as well as representative of the<br />
company’s investment in its reserves. We measure F&D costs by dividing the capital spent to replace reserves in the<br />
numerator by the reserves added in the denominator and expressing the result in terms of dollars per boe.<br />
We focus our measurement on three-year reserves replacement and F&D costs, which recognizes that the reserves<br />
replacement process typically spans multiple years from the time capital is spent for the initial work until reserves are<br />
proved, as well as follow-up exploitation and development. A three-year time frame averages out some of the lumpiness<br />
of larger projects yielding proved reserves. We also consider one-year values of both all-sources and organic<br />
F&D costs to get a sense of a company’s more recent performance. This ensures that performance two or three years<br />
ago does not unduly benefit or impair the company’s metrics.<br />
The issues discussed for reserves replacement performance find parallels in the review of F&D costs. Again, we start with<br />
all-sources F&D costs. This incorporates all capital spent in replacing production and is the most comprehensive measure. We<br />
also break down all-sources F&D costs into its organic and acquisition components. This provides a comparison of the capital<br />
spent for organic and acquisition activities compared to the results, namely reserves added, of this capital spending.<br />
For all-sources F&D costs, the numerator includes all capital spent from the cost incurred disclosure plus goodwill<br />
recorded as a result of corporate E&P acquisitions. The denominator includes reserves added through E&D, plus<br />
reserves purchased, plus or minus revisions. For drill bit F&D costs, the numerator includes exploration and development<br />
capital, while the denominator includes reserves added through E&D plus or minus revisions.<br />
Finally, because our ratings are meant to be forward looking we make pro forma adjustments to historical values to<br />
reflect activity since the latest year end, including significant acquisitions or divestitures, or updated information that<br />
better reflects the company’s expected future performance.<br />
Annual Disclosure: As discussed, companies only issue a FAS 69 disclosure once a year. In addition, the costs<br />
incurred are only disclosed annually. Therefore, the best estimate of reserves replacement and F&D costs is immediately<br />
after a company files its annual report. As the year goes on, this data becomes more stale particularly as companies<br />
complete acquisitions and divestitures, as well as normal drilling and development activity.<br />
7. Revisions can be performance related if the reservoir produces better or worse than expected, price related if changes in commodity prices result in a different economic<br />
limit, or the result of remedial operations performed by the company. Because revisions can be both positive and negative, it is important to understand the<br />
constituent parts rather than just the composite total.<br />
• lxxx •
Comment on Reserves Replacement: We evaluate reserves replacement as part of our analysis, but we<br />
do not map it explicitly in this methodology for several reasons. While reserves replacement is vitally<br />
important for E&P companies, as discussed earlier, it is essentially a binary metric as E&P companies<br />
must replace at least 100% of their production.<br />
Replacing 200% or 300% is not necessarily two or three times better than replacing 100% as there<br />
are potentially diminishing returns. Conversely, replacing only 50% is not half as good as 100%; it is<br />
actually much worse. Acquisitions have the potential to skew this metric in that companies, particularly<br />
smaller ones, can acquire reserves relatively easily. They would therefore look better on a<br />
reserves replacement metric, but may not be adding value with the acquisition.<br />
Larger companies could be penalized by a simple reserves replacement percentage metric as they are<br />
challenged to replace even 100% of their production. For example, the average Baa1 E&P company<br />
produces on the order of 150 million boe annually. Replacing this much production is equivalent to<br />
creating a typical Ba3 E&P company. Stated another way, a Baa1 company replacing 100% of its<br />
production is roughly the same as a Ba3 company doubling in size in a year.<br />
Reserves replacement performance is impounded in F&D costs already in that if a company is not<br />
successful finding oil and gas, its F&D costs will be higher because the denominator will be smaller<br />
for a given amount of capital spent.<br />
Finally, reserves replacement and F&D costs only consider reserves additions. It is possible for a<br />
company to add more reserves than it produces, thus having greater than 100% reserves replacement.<br />
However, if the company also sells reserves during the year, its total reserves year over year<br />
could be lower. Therefore, it is important to link trends in total reserves and production, as discussed<br />
in the first rating factor, with re-investment performance from the second rating factor to get a more<br />
complete picture of a company’s oil and gas portfolio durability.<br />
Factor Mapping: Re-investment Risk<br />
Aaa Aa A Baa Ba B Caa<br />
3-year all-sources F&D ($/boe) < $5 $5 - $6 $6 - $8 $8 - $10 $10 - $12 $12 - $15 > $15<br />
3-year drillbit F&D costs including revisions ($/boe) < $4 $4 - $5 $5 - $7 $7 - $9 $9 - $11 $11 - $14 > $14<br />
• lxxxi •
Company Mapping: Re-investment Risk<br />
Senior Unsecured or<br />
Corporate Family<br />
Rating Outlook 3-year All-Sources F&D<br />
3-year Drillbit F&D<br />
Costs Including<br />
Revisions<br />
Company<br />
BG Energy A2 Stable Aaa Aa<br />
CNOOC 3 (A2)* Stable Aa A<br />
PTT Exploration & Production 4 (A2)* Stable Aaa Aa<br />
Apache A3 Stable A A<br />
Burlington A3 Stable A Baa<br />
Occidental A3 Stable Aa A<br />
Anadarko Baa1 Stable A Baa<br />
Canadian Natural Baa1 Stable Baa Baa<br />
EOG Baa1 Stable A Baa<br />
Murphy Baa1 Negative Ba Ba<br />
Talisman Baa1 Stable Baa Ba<br />
Woodside Baa1 Stable A Aa<br />
Devon Baa2 Stable Baa Ba<br />
EnCana Baa2 Stable Baa Ba<br />
Husky Baa2 Stable B B<br />
Nexen Baa2 Negative Ba Ba<br />
Noble Baa2 Negative Baa Baa<br />
PetroCanada Baa2 Stable Ba Caa<br />
Pioneer Baa3 RUR Down Baa Ba<br />
XTO Energy Baa3 Stable A Aa<br />
Amerada Hess Ba1 Stable B B<br />
Chesapeake Ba2 Stable Ba Baa<br />
Newfield Ba2 Stable B B<br />
Petrobras Energia 5 (Ba2)* Stable Ba B<br />
Plains E&P Ba2 Stable Baa Baa<br />
Pogo Ba2 Stable B B<br />
Southwestern Ba2 Stable A Baa<br />
Vintage Ba2 RUR Up B Caa<br />
Cimarex Ba3 Stable Caa Caa<br />
Denbury Ba3 Stable A Baa<br />
Encore Acquisition Ba3 Positive Baa Ba<br />
Forest Ba3 Negative B B<br />
Houston Exploration Ba3 Stable B B<br />
Kerr-McGee Ba3 Stable B B<br />
Swift Ba3 Stable Baa Ba<br />
Whiting Ba3 Stable Baa Ba<br />
Baytex B1 Stable Caa Caa<br />
Compton B1 Stable B B<br />
Comstock B1 Stable Ba Caa<br />
EXCO Resources B1 Developing A Baa<br />
PT Medco Energi B1 Stable Aaa Aaa<br />
Range B1 Positive A Baa<br />
Stone B1 Negative Caa Caa<br />
Clayton Williams B2 Stable Ba B<br />
Energy Partners B2 Negative B B<br />
HET B2 RUR Down Ba Ba<br />
KCS Energy B2 Stable Baa Baa<br />
Delta B3 Stable Ba B<br />
El Paso Production B3 Stable B B<br />
Paramount B3 Negative Caa Caa<br />
Belden & Blake Caa1 Developing Caa Caa<br />
Petrohawk Caa1 Stable B Baa<br />
PetroQuest Energy Caa1 Stable Caa Caa<br />
* Reflects <strong>Moody's</strong> Methodology for Government Related Issuers<br />
Positive Outlier<br />
Negative Outlier<br />
• lxxxii •
Observations<br />
Positive outliers in the Re-investment Risk rating factor include several larger companies such as BG Energy and<br />
XTO, which have A or Aa characteristics for this rating factor, putting them one or two rating letters higher than their<br />
actual ratings. Non-investment grade positive outliers include Chesapeake, Denbury, Plains and Range. Each of these<br />
companies has been quite successful replacing its reserves at competitive costs, both organically and all-sources. Their<br />
ratings are restrained, however, by other factors, principally scale (reserves and production) and leverage or because of<br />
event risk associated with acquisitions.<br />
Negative outliers include larger companies whose model outcome is dragged down by poor performance that has<br />
persisted across the three-year average F&D costs assessments; and companies that have invested capital in large<br />
projects but which have not booked reserves. The latter include Murphy in deepwater Malaysia. Several companies’<br />
year-end 2004 reserves were negatively affected by anomalously high heavy oil differentials.<br />
Some companies, such as Forest, Kerr-McGee, Newfield and Pogo, are in the midst of a multi-year portfolio<br />
restructuring, the results of which are either uncertain or have not shown up in their costs and reserves additions.<br />
Companies such as Devon, Petro-Canada and Whiting were negative outliers only for drill bit F&D costs, not allsources.<br />
This reflects acquisitions that lowered overall F&D costs and mitigated weaker organic F&D costs.<br />
There were more outliers, both positive and negative, for this rating factor than for any of the other three. In part,<br />
this reflects the three-year nature of these metrics in that good or poor performance tends to persist. It is difficult for<br />
a company to materially change its three-year F&D costs in any single year. This also reflects the dynamic industry<br />
environment as higher commodity prices have led to increased capital costs. F&D costs rose substantially in 2004 over<br />
2003, driven primarily by higher acquisition costs but also by greater oilfield services costs. As a result, companies with<br />
less durable portfolios of oil and gas assets either acquired other companies or assets in a high price environment or<br />
were simply unable to keep up with the rising costs. The net effect is that positive outlier companies’ ratings were<br />
pulled down by other factors or negative outlier companies’ ratings were mitigated by strength in other areas.<br />
FACTOR 3: OPERATING AND CAPITAL EFFICIENCY<br />
Why it Matters<br />
As noted, E&P companies are in a commodity business wherein no single company controls the price of the product it<br />
sells. To achieve competitive margins, companies must control their cash operating costs, in addition to the capital<br />
costs discussed in the previous rating factor. Furthermore, E&P companies are highly capital intensive, constantly<br />
reinvesting capital and raising external debt and equity capital. Companies must show sufficient returns on investment<br />
to capital providers relative to the risk they are asking investors to take.<br />
The Operating and Capital Efficiency rating factor measures an E&P company’s cost structure through the fullcycle<br />
costs metric. Full-cycle costs include cash operating and financing costs on a per boe produced basis plus threeyear<br />
all-sources F&D costs discussed previously.<br />
The combination of cash and replacement costs approximates a company’s breakeven cost. Full-cycle costs capture<br />
a company’s operating efficiency, as reflected in its lease operating expenses (LOE) and general and administrative<br />
(G&A) burden, which represents a different skill set from its ability to find and develop oil and gas reserves. For the<br />
marginal boe of production, full-cycle costs represent the average cash cost to produce that boe plus the amount of<br />
capital that the company will need to spend to replace that boe, assuming that historical F&D costs are a good predictor<br />
of future F&D costs.<br />
This rating factor also provides a proxy for return on invested capital using the leveraged full-cycle ratio, which is a measure<br />
of cash on cash return. The leveraged full-cycle ratio reflects the productivity of reinvested capital on a boe basis, comparing<br />
the cash generated by a boe of production relative to the capital required, in terms of F&D costs, to replace that boe.<br />
Accordingly, this is an important measure that indicates whether a company is competitive relative to its peers.<br />
The leveraged full-cycle ratio is an important comprehensive metric that combines oil and gas portfolio construction<br />
decisions, as reflected in the company’s realized price, its cash cost structure efficiency, and its re-investment risk<br />
as shown by its finding and development costs.<br />
Positive Rating Indicators<br />
• Full-cycle costs that are lower than $20 per boe, in the current price environment<br />
• Leveraged full-cycle ratios greater than 2x, and even higher in a robust commodity price environment<br />
Measurement Criteria<br />
• Full-cycle costs per boe<br />
• Leveraged full-cycle ratio, using three-year all-sources F&D costs<br />
• lxxxiii •
Notes on Measurement Criteria<br />
Full-Cycle Costs: Full-cycle costs include cash costs plus three-year all-sources F&D costs. Cash costs include<br />
lease operating expense, transportation expense, G&A expense and interest expense. For G&A and interest expense,<br />
we add back capitalized amounts to the cash portion of these expenses, while taking out the capitalized amounts from<br />
the calculation of F&D costs. For companies with hybrid securities, including preferred stock, that are allocated<br />
between debt and equity, the interest component associated with the “debt” portion is added to interest expense per<br />
Moody’s standard adjustments for hybrid securities. 8 Each of these expenses is divided by production in that period to<br />
arrive a cost per boe produced.<br />
Some E&P companies have significant other businesses such as refining and marketing, midstream natural gas,<br />
chemicals or natural gas distribution. In these cases we allocate a portion of the expenses to the non-E&P businesses<br />
as appropriate.<br />
Leveraged Full-Cycle Ratio: The leveraged full-cycle ratio is the cash margin generated per boe of production<br />
divided by three-year all-sources F&D costs (see sidebar for a more detailed description). Cash margin per boe is the<br />
realized price per boe minus cash costs per boe described earlier. For realized prices, we strip out non-E&P revenue<br />
but include hedging gains or losses. Realized prices also reflect the quality of the commodity produced and transportation<br />
or basis differentials. The leveraged full-cycle ratio calculation is shown in greater detail in the following box.<br />
Calculating The Leveraged Full-cycle Ratio<br />
Realized price per boe production (reflects basis differentials, transportation and hedging)<br />
• Minus:Operating costs per boe production<br />
• Minus:Total G&A expense per boe production (including capitalized portion)<br />
• Minus:Total interest expense per boe production (including capitalized portion)<br />
Equals: Pre-capex cash margin per boe production<br />
• Divided by:Three-year average all-sources F&D costs<br />
Equals: Leveraged full-cycle ratio<br />
As noted, because our ratings are intended to be forward looking we adjust a company’s cash operating costs or<br />
G&A if its historical costs are not representative. In addition, if a company has made a significant acquisition or materially<br />
changed its capital structure – particularly if it has taken on additional debt – we make appropriate pro forma<br />
adjustments.<br />
Factor Mapping: Operating & Capital Efficiency<br />
Aaa Aa A Baa Ba B Caa<br />
Full-cycle cost ($/boe) < $10 $10 - $12 $12 - $16 $16 - $20 $20 - $25 $25 - $30 > $30<br />
Leveraged full-cycle ratio > 6x 4x - 6x 3x - 4x 2x - 3x 1.5x - 2.5x 1x - 2x < 1x<br />
8. Please refer to <strong>Moody's</strong> Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations – Part I (July 2005).<br />
• lxxxiv •
Company Mapping: Operating & Capital Efficiency<br />
Senior Unsecured or<br />
Corporate Family<br />
Rating Outlook Full-Cycle Cost<br />
Leveraged Full-<br />
Cycle Ratio<br />
Company<br />
BG Energy A2 Stable A A<br />
CNOOC 3 (A2)* Stable Aa A<br />
PTT Exploration & Production 4 (A2)* Stable Aaa Aa<br />
Apache A3 Stable A A<br />
Burlington A3 Stable Baa A<br />
Occidental A3 Stable Baa Aa<br />
Anadarko Baa1 Stable Baa Baa<br />
Canadian Natural Baa1 Stable Baa Baa<br />
EOG Baa1 Stable A Baa<br />
Murphy Baa1 Negative Ba Baa<br />
Talisman Baa1 Stable Ba Ba<br />
Woodside Baa1 Stable Aa Aa<br />
Devon Baa2 Stable Baa Baa<br />
EnCana Baa2 Stable Baa Baa<br />
Husky Baa2 Stable Ba Ba<br />
Nexen Baa2 Negative Ba Baa<br />
Noble Baa2 Negative Baa Baa<br />
PetroCanada Baa2 Stable Baa Baa<br />
Pioneer Baa3 RUR Down Ba Baa<br />
XTO Energy Baa3 Stable Baa Baa<br />
Amerada Hess Ba1 Stable B B<br />
Chesapeake Ba2 Stable Ba Baa<br />
Newfield Ba2 Stable Ba Baa<br />
Petrobras Energia 5 (Ba2)* Stable Ba Caa<br />
Plains E&P Ba2 Stable Baa Ba<br />
Pogo Ba2 Stable Ba Ba<br />
Southwestern Ba2 Stable A Aa<br />
Vintage Ba2 RUR Up Ba Caa<br />
Cimarex Ba3 Stable B B<br />
Denbury Ba3 Stable Caa A<br />
Encore Acquisition Ba3 Positive Ba Ba<br />
Forest Ba3 Negative B B<br />
Houston Exploration Ba3 Stable Ba B<br />
Kerr-McGee Ba3 Stable Ba B<br />
Swift Ba3 Stable Ba Baa<br />
Whiting Ba3 Stable B Baa<br />
Baytex B1 Stable Caa Caa<br />
Compton B1 Stable B B<br />
Comstock B1 Stable Ba Baa<br />
EXCO Resources B1 Developing B Baa<br />
PT Medco Energi B1 Stable A Baa<br />
Range B1 Positive Ba Ba<br />
Stone B1 Negative Caa Ba<br />
Clayton Williams B2 Stable B Ba<br />
Energy Partners B2 Negative B Ba<br />
HET B2 RUR Down Ba Ba<br />
KCS Energy B2 Stable Baa Baa<br />
Delta B3 Stable B B<br />
El Paso Production B3 Stable B B<br />
Paramount B3 Negative Caa Ba<br />
Belden & Blake Caa1 Developing Caa Caa<br />
Petrohawk Caa1 Stable Caa B<br />
PetroQuest Energy Caa1 Stable Ba Ba<br />
* Reflects <strong>Moody's</strong> Methodology for Government Related Issuers<br />
Positive Outlier<br />
Negative Outlier<br />
• lxxxv •
Observations<br />
Companies that were positive outliers in the Operating and Capital Efficiency rating factor (both the full-cycle cost<br />
and leveraged full-cycle ratio metrics) were also, with just a few exceptions, positive outliers in the three-year F&D<br />
costs metric. This is logical because three-year all-sources F&D costs is the denominator in the leveraged full-cycle<br />
ratio. The reverse was not necessarily true, in that a number of companies that had superior F&D costs did not have<br />
better full-cycle costs or leveraged full-cycle ratios, as these two metrics provide additional information.<br />
Specifically, full-cycle costs include cash operating costs. The leveraged full-cycle ratio adds information about a<br />
company’s commodity mix, differentials, hedging and cash cost structure that are reflected in its cash margin in the<br />
numerator of this metric.<br />
Similarly, companies that were negative outliers for this rating factor were almost universally negative outliers for<br />
three-year F&D costs for the same reasons as those cited above.<br />
FACTOR 4: LEVERAGE AND CASH FLOW COVERAGE<br />
Why it Matters<br />
The first three rating factors cover various aspects of business risk, including asset value and durability, cost structure<br />
and margins, and returns on investment. Financial risk, or how a company is capitalized, is also important, particularly<br />
in light of the fact that the industry is cyclical and subject to the vagaries of commodity prices.<br />
The Leverage and Cash Flow Coverage rating factor measures financial risk by comparing a company’s debt to the<br />
assets that support its debt and by analyzing post-capex cash flow in relation to its debt.<br />
Positive Rating Indicators<br />
• Debt to PD reserves lower than $5 per boe, in the current price environment<br />
• Debt plus future capital to total proved reserves of no more than about $1 per boe higher than the company’s<br />
debt to PD reserves<br />
• Lower F&D costs will result in lower sustaining capex and thus improve this metric<br />
Measurement Criteria<br />
• Debt to proved developed reserves<br />
• Debt plus future development capital and abandonment costs divided by total proved reserves<br />
• Retained cash flow less sustaining capex divided by debt<br />
Notes on Measurement Criteria<br />
Debt to Reserves Measures: As discussed, oil and gas reserves are a store of value for an E&P company. Our analysis<br />
focuses on proved developed reserves as these are the company’s cash-generating assets. Debt to proved developed<br />
reserves is therefore an intuitive measure in units of dollars per boe that can be compared to oil and gas prices and to a<br />
company’s full-cycle costs. Both debt and PD reserves are point-in-time measures, as opposed to debt to cash flow<br />
measures that compare a balance sheet value to a flow measurement.<br />
We do not use a debt to total proved reserves metric. We believe this approach distorts leverage as it does not<br />
account for the capital that is required to bring PUD reserves on production and generating cash flow. We do recognize<br />
the value of PUD reserves, but look at debt plus the future development capital, including final abandonment<br />
costs, divided by total proved reserves. Companies with a larger percentage of PUD reserves or with reserves that<br />
require significant future capex (such as in deepwater offshore), will have potentially higher leverage with this metric<br />
than they would using the debt to PD measure.<br />
The conceptual basis for comparing debt to reserves is similar to a “loan to value” measure. This is also analogous<br />
to the process banks use when calculating a borrowing base, which is typically done for smaller, non-investment grade<br />
companies. Through the borrowing base process, banks calculate the debt capacity that a given quantity of reserves<br />
will support. As E&P companies grow, they move from borrowing base credit facilities to corporate facilities, but the<br />
general principle remains that an E&P company’s leverage or debt capacity should be related to its underlying cashgenerating<br />
assets.<br />
• lxxxvi •
Cash Flow Coverage: In addition to<br />
comparing debt to asset value, we also compare<br />
debt to the cash flow supporting the<br />
debt. Cash flow as a percentage of debt is a<br />
common metric that Moody’s has used for<br />
many years. Because E&P requires capital<br />
spending to maintain production, we use<br />
retained cash flow less sustaining capex,<br />
divided by debt. Sustaining capex, or maintenance<br />
capex, is the amount of capital a company<br />
would need to spend to replace 100% of<br />
its current production. Most E&P companies,<br />
particularly smaller ones, spend much<br />
more than sustaining capex to grow; however,<br />
this metric compares cash flow after what is<br />
essentially maintenance capex to the company’s<br />
debt.<br />
Retained cash flow is funds from operations,<br />
or cash flow from operations before<br />
changes in working capital, less dividends.<br />
Again, sustaining capex is the capital required<br />
to replace 100% of production and is the<br />
product of production volume times threeyear<br />
all-sources F&D costs. The relevant<br />
production volume is generally the last twelve<br />
months production, but if this is not indicative<br />
because of acquisitions, divestitures or other activities we will often annualize the most recent quarter’s production.<br />
Debt Adjustments: Each of these three metrics uses the company’s total debt. For E&P companies with other<br />
substantial businesses such as refining and marketing, midstream natural gas, chemicals or natural gas distribution, we<br />
allocate a portion of the debt to these other businesses and then calculate the standalone E&P leverage.<br />
Moody’s adjusts balance sheet debt for off-balance sheet items such as operating leases and unfunded pension liabilities,<br />
and the debt component of hybrid securities, including preferred stock, in accordance with Moody’s standard<br />
adjustments. For E&P companies, we adjust for transactions that represent foregone capital spending. For example,<br />
leasing of an offshore spar or capacity payments that support pipeline construction would be capitalized, particularly<br />
where the infrastructure is financed and repayment relies on these capacity payments.<br />
We normally do not include obligations that are akin to operating costs (such as drilling rig commitments). As<br />
noted, for companies with non-E&P businesses, we allocate a portion of the debt to these other businesses to determine<br />
the debt supported by the E&P business. Future development costs are shown in the company’s FAS 69 disclosure<br />
in the Standardized Measure of Discounted Future Net Cash Flows calculation. For non-U.S. companies, future<br />
development costs are based on the company’s reserve development plans.<br />
Some Limitations: Leverage metrics such as debt to PD reserves or debt to total reserves have some limitations<br />
in that all “boe’s” are not created equal in terms of value. Ideally this would be captured in the leverage metrics.<br />
Among the differences to consider is reserve life as, all other things being equal, a longer reserve life is better for debt<br />
holders than a shorter one. In terms of leverage, an eight-year reserve life better approximates most companies’ average<br />
debt maturity than a four-year reserve life. Another consideration is cash margin generated per boe. Higher margins<br />
are clearly better. As part of our leverage analysis and ratings process, we look past the mechanical calculation of<br />
debt to reserves to understand the value of the reserves as well.<br />
Factor Mapping: Leverage & Cash Flow Coverage<br />
Why Traditional Measures Don’t Apply<br />
Traditional measures of leverage and debt service in credit analysis (debt to<br />
total capitalization, debt to cash flow or EBITDA, and interest coverage) are<br />
not highly predictive for E&P companies for a number of reasons. An E&P<br />
company’s capitalization reflects the capital that has been spent to acquire<br />
and develop oil and gas reserves, but the balance sheet does not reflect the<br />
fair value of these reserves. Different accounting methods, such as the<br />
successful efforts method (which expenses exploration costs) and the fullcost<br />
method (which capitalizes these costs), result in different balance<br />
sheet presentations for what is economically the same asset. In addition,<br />
some acquisitive companies have large goodwill balances that skew<br />
traditional metrics. Debt to capitalization measures respond too slowly to<br />
changes in commodity prices and operating performance to be useful in<br />
this industry.<br />
EBITDA is a pre-capex measure of cash flow that does not reflect the<br />
capital intensive nature of E&P and the reinvestment necessary to sustain<br />
the company. EBITDA is strongly influenced by commodity prices so shortterm<br />
cyclical changes have a disproportionate effect on these metrics<br />
when a company’s fundamental credit profile has not changed. EBITDA<br />
also is skewed by an E&P company’s choice of full-cost or successful<br />
efforts accounting. The fundamental assumption in using debt to EBITDA is<br />
that it is expected to represent durable cash flow. Because the depleting<br />
nature of E&P assets requires constant reinvestment, using EBITDA at a<br />
point in time is not an appropriate assumption for durable cash flow.<br />
Aaa Aa A Baa Ba B Caa<br />
Debt / PD boe reserves < $1.0 $1 - $2 $2 - $3 $3 - $5 $5 - $6 $6 - $8 > $8<br />
(Debt + Future Development Capex) / Total Reserves < $1.0 $1 - $2.50 $2.50 - $4 $4 - $6 $6 - $8 $8 - $10 > $10<br />
(Retained Cash Flow - Sustaining Capex) / Debt >100% 80 - 100% 50 - 80% 30 - 50% 10 - 30% 0 - 10% < 0%<br />
• lxxxvii •
Company Mapping: Leverage & Cash Flow Coverage<br />
(Debt + Future<br />
Development<br />
Capex) / Total<br />
Reserves<br />
(Retained Cash Flow -<br />
Sustaining Capex) /<br />
Debt<br />
Company<br />
Senior Unsecured or<br />
Corporate Family Rating Outlook<br />
Debt / PD<br />
Reserves<br />
BG Energy A2 Stable Baa Baa Ba<br />
CNOOC 3 (A2)* Stable Aa Baa Baa<br />
PTT Exploration & Production 4 (A2)* Stable Aa A Baa<br />
Apache A3 Stable A A A<br />
Burlington A3 Stable A A Baa<br />
Occidental A3 Stable A A A<br />
Anadarko Baa1 Stable A A Baa<br />
Canadian Natural Baa1 Stable A Baa Baa<br />
EOG Baa1 Stable Aa A A<br />
Murphy Baa1 Negative A Baa A<br />
Talisman Baa1 Stable A Baa Baa<br />
Woodside Baa1 Stable Baa Baa Ba<br />
Devon Baa2 Stable Baa Baa Baa<br />
EnCana Baa2 Stable Ba Ba Baa<br />
Husky Baa2 Stable A A Ba<br />
Nexen Baa2 Negative Ba Ba Ba<br />
Noble Baa2 Negative Baa A Baa<br />
PetroCanada Baa2 Stable A A Baa<br />
Pioneer Baa3 RUR Down Ba Ba Ba<br />
XTO Energy Baa3 Stable Baa Baa Baa<br />
Amerada Hess Ba1 Stable B Ba Caa<br />
Chesapeake Ba2 Stable B B Ba<br />
Newfield Ba2 Stable Baa Ba Baa<br />
Petrobras Energia 5 (Ba2)* Stable Baa Baa Caa<br />
Plains E&P Ba2 Stable Baa Baa Ba<br />
Pogo Ba2 Stable Ba Ba Ba<br />
Southwestern Ba2 Stable Baa A B<br />
Vintage Ba2 RUR Up A A Caa<br />
Cimarex Ba3 Stable A Baa A<br />
Denbury Ba3 Stable Baa Baa A<br />
Encore Acquisition Ba3 Positive Baa Baa Ba<br />
Forest Ba3 Negative Ba Ba B<br />
Houston Exploration Ba3 Stable Baa Ba A<br />
Kerr-McGee Ba3 Stable Ba Ba Ba<br />
Swift Ba3 Stable Baa Ba Ba<br />
Whiting Ba3 Stable Ba Ba Ba<br />
Baytex B1 Stable Ba Ba Caa<br />
Compton B1 Stable Ba Baa Ba<br />
Comstock B1 Stable Ba Ba Ba<br />
EXCO Resources B1 Developing B B Ba<br />
PT Medco Energi B1 Stable B Caa B<br />
Range B1 Positive Baa Ba Ba<br />
Stone B1 Negative Baa Ba Ba<br />
Clayton Williams B2 Stable Baa Ba Baa<br />
Energy Partners B2 Negative Baa B Ba<br />
HET B2 RUR Down Ba Baa Caa<br />
KCS Energy B2 Stable B Ba Baa<br />
Delta B3 Stable Caa Ba B<br />
El Paso Production B3 Stable B B B<br />
Paramount B3 Negative Caa Caa Ba<br />
Belden & Blake Caa1 Developing B B Caa<br />
Petrohawk Caa1 Stable Caa B B<br />
PetroQuest Energy Caa1 Stable Baa Ba Caa<br />
* Reflects <strong>Moody's</strong> Methodology for Government Related Issuers<br />
Positive Outlier<br />
Negative Outlier<br />
• lxxxviii •
Observations<br />
Positive outliers in the Leverage and Cash Flow Coverage rating factor generally reflected conservatively capitalized<br />
companies across the rating spectrum. Many of the Baa1 rated companies had debt to PD reserves and debt plus<br />
future capital to total proved reserves metrics in the A category, signaling low leverage on reserves. Similarly, the<br />
stronger Ba and B rated companies tended to have reserves leverage metrics more consistent with one or two rating<br />
levels higher. These were offset principally by smaller scale (reserves and production) or weaker re-investment risk.<br />
There were few reserves leverage negative outliers in this area, reflecting the generally conservative capital structures<br />
of this group of companies. Two notable exceptions are EnCana and Nexen, rated Baa2 but with model outcomes<br />
in the Ba range. In both cases, the low model outcome reflects leveraged acquisitions and both companies are<br />
expected to reduce leverage to levels consistent with their ratings through asset sales and operating cash flow. There<br />
were more negative outliers using the cash flow coverage metric (retained cash flow less sustaining capex, divided by<br />
debt). In almost all cases wherein a company was a negative outlier on cash flow coverage, it was also a negative outlier<br />
on F&D costs. This is expected because the formula uses sustaining capex, which incorporates three-year all-sources<br />
F&D costs.<br />
Other Considerations<br />
Non-E&P Businesses<br />
As noted earlier, a number of E&P companies have significant other businesses such as refining and marketing, midstream<br />
natural gas, chemicals and natural gas distribution. We generally view these other businesses as supporting the<br />
credit quality and, by extension, the rating of the standalone E&P business. These other businesses are typically complementary<br />
natural extensions of E&P and provide a degree of business risk and cash flow diversification. We account<br />
for the value of these other operations through the diversification metric and through attributing some portion of the<br />
company’s debt, interest expense and G&A expense to these businesses. The leverage metrics are recalculated using<br />
the remaining debt to determine E&P-only leverage. Full-cycle costs are reduced and the cash margin used in the<br />
leveraged full-cycle ratio is increased by the amount of costs allocated to the non-E&P business.<br />
In addition to the benefits, we also evaluate the liabilities associated with these businesses, especially environmental<br />
liabilities from refineries and chemical plants.<br />
Liquidity<br />
E&P companies are typically paid once per month for the oil and natural gas they sell but expenses occur throughout<br />
the month. Companies also make lumpy payments during the year such as semi-annual interest expense. Many E&P<br />
companies hedge their commodity price exposure, which potentially creates the need to post collateral or letters of<br />
credit. For these and other reasons, we analyze a company’s sources of liquidity, including cash on its balance sheet,<br />
short-term liquid investments, and committed bank credit facilities, to ensure it will be able to meet its obligations.<br />
Political Risk<br />
As the industry has matured, particularly in North America and Europe, companies have increased their operations in<br />
regions with greater political risk, including the Middle East, North Africa (including the recent reopening of Libya),<br />
West Africa, Latin America and Russia. As part of our analysis, we evaluate the locations of existing operations, as well<br />
as new areas under consideration and review companies’ plans for mitigating the political risk associated with them.<br />
Other aspects of political risk include drilling in environmentally sensitive areas and liquefied natural gas (LNG)<br />
development projects.<br />
Business Risk & Quality of Earnings<br />
Certain rated companies’ cash flow is supported by long-term take-or-pay contracts. Examples include Woodside and<br />
PTTEP in Asia, which have substantial gas reserves dedicated to domestic or international (through LNG) users. The<br />
price of the underlying product in these examples exhibits a relatively lower degree of volatility. This is because it is<br />
only partly linked to oil prices (domestic gas) or it incorporates caps/floors (e.g., LNG) to limit downside risk while<br />
providing upside earnings potential. These companies have lower business risk profiles than typical E&Ps (other<br />
things being equal).<br />
• lxxxix •
OTHER CONSIDERATIONS SPECIFIC TO SPECULATIVE-GRADE COMPANIES<br />
Sequential Quarterly Performance<br />
With a few exceptions, there is very little seasonality in E&P. When evaluating a particular quarter of a year, companies<br />
typically provide a comparison with the same quarter in the prior year. A more relevant measure, however, is the<br />
immediately preceding quarter.<br />
We look at sequential quarterly production for all E&P companies but this is more important for non-investment<br />
grade companies. These companies are generally much smaller and, if they also have a shorter reserve life, can deteriorate<br />
more quickly. In addition, investment grade companies, because of their size, often develop larger projects such<br />
as offshore fields. These can lead to lumpy production additions that may skew sequential quarterly comparisons.<br />
Conversely, when a large field undergoes a maintenance turnaround (such as in the North Sea), production during the<br />
quarter may decline, although the fundamental credit quality does not change.<br />
Company Growth Targets, Acquisitions and Event Risk<br />
Non-investment grade companies are smaller and younger, and tend to be growing more quickly, particularly through<br />
acquisitions. All acquisitions entail a degree of event risk that includes integration of the assets, changes in the company’s<br />
cost structure and financing of the transaction. Non-investment grade companies generally don’t have the scale<br />
to absorb a bad acquisition or a lengthy integration process, which also adds to the risk.<br />
Some high yield companies have a stated growth or acquisition strategy that is rewarded by the equity market as<br />
long as the company executes its strategy successfully. However, from a fixed income perspective, aggressive growth<br />
targets, particularly involving serial acquisitions, introduce an additional level of volatility and uncertainty that is often<br />
incorporated into a company’s rating.<br />
Access to Equity Markets<br />
High yield companies often spend more on capex than their operating cash flow, with the deficit funded by the capital<br />
markets. On the other hand, investment grade companies generally keep capital spending within cash flow and rarely<br />
access the equity markets. A corollary to growth and acquisitions as discussed above is the need to access the equity<br />
capital markets to fund this growth. As a result, access to the equity markets is critically important to many noninvestment<br />
grade companies’ growth strategies. Our evaluation of E&P companies – particularly high yield companies<br />
– includes consideration of their ability and willingness to access the equity markets.<br />
Management/CEO<br />
Most E&P companies were founded by entrepreneurs who have grown the company and are often still employed by it.<br />
While there are some investment grade E&P companies run by members of a founding family, this is more typical of<br />
high yield companies. In addition, the force of the CEO’s personality is felt more strongly in a smaller company.<br />
While management is important in all companies, the CEO’s and senior management’s strategy, vision and risk tolerance<br />
is a consideration in our ratings process, especially for high yield companies.<br />
Final Considerations<br />
The table in the Appendix summarizes the 11 mapped metrics among the four key rating factors for each of the E&P<br />
companies we rate. The table highlights indicated ratings that are at least one letter rating category higher or lower<br />
than the company’s actual senior unsecured or corporate family rating.<br />
As noted in the discussion of the individual rating factors, there is a natural interrelationship, both direct and indirect,<br />
among a number of the metrics. Larger companies often have legacy asset positions in larger fields wherein they<br />
benefit from economies of scale and may maintain greater buying power with drilling contractors or oilfield services<br />
companies. This provides an advantage in cost structure, in both capital and cash operating costs. Larger companies<br />
also typically generate free cash flow (cash flow from operations less capex and dividends), which enables them to build<br />
up their equity and reduce their leverage.<br />
As noted, there is a direct linkage between three-year all-sources F&D costs and several other metrics. F&D costs<br />
are a component of full-cycle costs and the denominator in the leveraged full-cycle ratio. F&D costs also affect cash<br />
flow coverage through the calculation of sustaining capex.<br />
• xc •
The table in the Appendix shows the indicated composite rating using the weightings shown below. The weighting<br />
factors are designed to ascribe more weight to those metrics that tend to play a more meaningful role in the rating<br />
process, including scale and diversification, and leverage, which combine for about two-thirds of the total weight.<br />
Key Rating Factor<br />
Weighting<br />
Reserves and Production Characteristics 36%<br />
Re-investment Risk 16%<br />
Operating and Capital Efficiency 18%<br />
Leverage and Cash Flow Coverage 30%<br />
Total 100%<br />
Overall, the key rating factors predict a rating that is within two notches of the actual rating for roughly 80% of<br />
the E&P companies, a level we believe provides a reasonable degree of accuracy and transparency.<br />
A review of the table in the Appendix underscores an important point: a company’s final rating is a composite of a<br />
number of variables. While this is obvious, the significance of this point is that companies will have individual metrics<br />
that are higher or lower than its actual rating, especially based on historical values. This reflects the reality of credit<br />
analysis where some factors provide positive support for the rating while other factors tend to add negative pressure on<br />
the rating.<br />
The ultimate decision of a rating committee is not a mechanistic weighting of the factors but a thoughtful analysis<br />
of what the various metrics are telling us about a company’s expected future performance. In addition to the quantitative<br />
measurements described here, we also consider a company’s stated strategy and its execution of that strategy, the<br />
quality of its management, risk tolerance, and financial flexibility and liquidity.<br />
Finally, we emphasize that Moody’s ratings are forward looking. Although we evaluate historical performance, our<br />
ratings are meant to provide a view regarding risk, probability of default and loss given default in the future. As such,<br />
we start with historical data, but then make pro forma adjustments to reflect significant changes such as acquisitions,<br />
divestitures and capital structure differences to bring the historical numbers up to date. We then forecast a company’s<br />
expected near-term performance to arrive at metrics that dynamically reflects where we expect the company is headed.<br />
For example, an E&P rating committee in the fall of 2005 would be concerned with how the company would be<br />
expected to look at year-end 2005 and into <strong>2006</strong>. The use of historical values such as three-year average F&D costs<br />
from 2002 to 2004 could potentially understate, possibly to a great extent, the company’s current and expected F&D<br />
costs, which are more relevant for ratings purposes.<br />
• xci •
• xcii •<br />
Exploration & Production - Outlier Outcome Summary<br />
Senior<br />
Unsecured<br />
or Corporate<br />
Family Rating<br />
Reserves & Production Characteristics<br />
Proved<br />
Developed<br />
Reserves<br />
Total<br />
Proved<br />
Reserves<br />
Re-investment Risk<br />
3-year All-<br />
Sources<br />
F&D<br />
3-year Drillbit<br />
F&D Costs<br />
Including<br />
Revisions<br />
Operating & Capital<br />
Efficiency<br />
Leveraged<br />
Full-Cycle<br />
Ratio<br />
Leverage & Cash Flow Coverage<br />
(Debt + Future<br />
Development<br />
Capex) / Total<br />
Reserves<br />
(Retained<br />
Cash Flow -<br />
Sustaining<br />
Capex) / Debt<br />
Annual Production<br />
Full-Cycle<br />
Debt / PD<br />
Company<br />
Outlook<br />
Diversification<br />
Cost<br />
Reserves<br />
BG Energy A2 Stable Baa Baa A A Aaa Aa A A Baa Baa Ba A<br />
CNOOC 3 (A2)* Stable Baa Baa A B Aa A Aa A Aa Baa Baa A<br />
PTT E&P 4 (A2)* Stable Ba Baa Baa B Aaa Aa Aaa Aa Aa A Baa A<br />
Apache A3 Stable Baa Baa Baa A A A A A A A A A<br />
Burlington A3 Stable Baa Baa A A A Baa Baa A A A Baa A<br />
Occidental A3 Stable A A A A Aa A Baa Aa A A A A<br />
Anadarko Baa1 Stable Baa Baa A Baa A Baa Baa Baa A A Baa Baa<br />
Canadian Natural Baa1 Stable Baa Baa Baa Baa Baa Baa Baa Baa A Baa Baa Baa<br />
EOG Baa1 Stable Baa Baa Baa Baa A Baa A Baa Aa A A A<br />
Murphy Baa1 Negative Baa Baa Baa Ba Ba Ba Ba Baa A Baa A Baa<br />
Talisman Baa1 Stable Baa Baa Baa A Baa Ba Ba Ba A Baa Baa Baa<br />
Woodside Baa1 Stable Baa Ba Baa B A Aa Aa Aa Baa Baa Ba Baa<br />
Devon Baa2 Stable A A A A Baa Ba Baa Baa Baa Baa Baa Baa<br />
EnCana Baa2 Stable A Baa Baa A Baa Ba Baa Baa Ba Ba Baa Baa<br />
Husky Baa2 Stable Baa Baa Baa Ba B B Ba Ba A A Ba Baa<br />
Nexen Baa2 Negative Baa Baa Baa Ba Ba Ba Ba Baa Ba Ba Ba Ba<br />
Noble Baa2 Negative Baa Baa Baa Baa Baa Baa Baa Baa Baa A Baa Baa<br />
PetroCanada Baa2 Stable Baa Baa Baa Baa Ba Caa Baa Baa A A Baa Baa<br />
Pioneer Baa3 RUR Down Baa Baa Baa Ba Baa Ba Ba Baa Ba Ba Ba Ba<br />
XTO Energy Baa3 Stable Baa Baa Baa Ba A Aa Baa Baa Baa Baa Baa Baa<br />
Amerada Hess Ba1 Stable Baa Baa Baa Baa B B B B B Ba Caa Ba<br />
Chesapeake Ba2 Stable Baa Baa Baa Ba Ba Baa Ba Baa B B Ba Ba<br />
Newfield Ba2 Stable Ba Ba Ba Ba B B Ba Baa Baa Ba Baa Ba<br />
Petrobras Energia 5 (Ba2)* Stable Baa Baa Baa Baa Ba B Ba Caa Baa Baa Caa Ba<br />
Plains E&P Ba2 Stable Ba Ba Ba Ba Baa Baa Baa Ba Baa Baa Ba Ba<br />
Pogo Ba2 Stable Ba Ba Ba Ba B B Ba Ba Ba Ba Ba Ba<br />
Southwestern Ba2 Stable B B Ba Ba A Baa A Aa Baa A B Baa<br />
Vintage Ba2 Negative Ba Ba Ba Ba B Caa Ba Caa A A Caa Ba<br />
Cimarex Ba3 Stable Ba Ba Ba Ba Caa Caa B B A Baa A Ba<br />
Denbury Ba3 Stable Caa Ba Ba B A Baa Caa A Baa Baa A Ba<br />
Encore Acq. Ba3 Positive B Ba Ba B Baa Ba Ba Ba Baa Baa Ba Ba<br />
Forest Ba3 Negative Ba Ba Ba B B B B B Ba Ba B B<br />
Houston Exp. Ba3 Stable B B Ba B B B Ba B Baa Ba A Ba<br />
Kerr-McGee Ba3 Stable Baa Baa Baa Ba B B Ba B Ba Ba Ba Ba<br />
Swift Ba3 Stable B B Ba B Baa Ba Ba Baa Baa Ba Ba Ba<br />
Whiting Ba3 Stable B Ba Ba Ba Baa Ba B Baa Ba Ba Ba Ba<br />
* Numerical rating reflects baseline credit assessment per <strong>Moody's</strong> Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating or Foreign Currency rating in cases where<br />
there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related<br />
Issuers” (April 2005).<br />
Positive Outlier<br />
Indicated<br />
Rating<br />
Negative Outlier
• xciii •<br />
Exploration & Production - Outlier Outcome Summary<br />
Senior<br />
Unsecured<br />
or Corporate<br />
Family Rating<br />
Reserves & Production Characteristics<br />
Proved<br />
Developed<br />
Reserves<br />
Total<br />
Proved<br />
Reserves<br />
Re-investment Risk<br />
3-year All-<br />
Sources<br />
F&D<br />
3-year Drillbit<br />
F&D Costs<br />
Including<br />
Revisions<br />
Operating & Capital<br />
Efficiency<br />
Leveraged<br />
Full-Cycle<br />
Ratio<br />
Leverage & Cash Flow Coverage<br />
(Debt + Future<br />
Development<br />
Capex) / Total<br />
Reserves<br />
(Retained<br />
Cash Flow -<br />
Sustaining<br />
Capex) / Debt<br />
Annual Production<br />
Full-Cycle<br />
Debt / PD<br />
Company<br />
Outlook<br />
Diversification<br />
Cost<br />
Reserves<br />
Baytex B1 Stable B B B B Caa Caa Caa Caa Ba Ba Caa B<br />
Compton B1 Stable Caa B B B B B B B Ba Baa Ba B<br />
Comstock B1 Stable Caa B Ba B Ba Caa Ba Baa Ba Ba Ba Ba<br />
EXCO Resources B1 Developing Caa Ba Ba B A Baa B Baa B B Ba Ba<br />
PT Medco Energi B1 Stable Ba Ba Ba Caa Aaa Aaa A Baa B Caa B Ba<br />
Range B1 Positive B Ba Ba B A Baa Ba Ba Baa Ba Ba Ba<br />
Stone B1 Negative B Ba Ba B Caa Caa Caa Ba Baa Ba Ba B<br />
Clayton Williams B2 Stable Caa B B B Ba B B Ba Baa Ba Baa Ba<br />
Energy Partners B2 Negative Caa B B B B B B Ba Baa B Ba B<br />
HET B2 RUR Down B B B B Ba Ba Ba Ba Ba Baa Caa Ba<br />
KCS Energy B2 Stable Caa B B B Baa Baa Baa Baa B Ba Baa Ba<br />
Delta B3 Stable Caa Caa B Caa Ba B B B Caa Ba B B<br />
El Paso Prod. B3 Stable Ba Ba Ba Caba B B B B B B B B<br />
Paramount B3 Negative Caa B Caa Caa Caa Caa Caa Ba Caa Caa Ba Caa<br />
Belden & Blake Caa1 Developing Caa B B Caa Caa Caa Caa Caa B B Caa Caa<br />
Petrohawk Caa1 Stable Caa B B B B Baa Caa B Caa B B B<br />
PetroQuest Energy Caa1 Stable Caa Caa Caa Caa Caa Caa Ba Ba Baa Ba Caa B<br />
* Numerical rating reflects baseline credit assessment per <strong>Moody's</strong> Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating or Foreign Currency rating in cases where<br />
there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related<br />
Issuers” (April 2005).<br />
Positive Outlier<br />
Negative Outlier<br />
Indicated<br />
Rating
Related Research<br />
Rating Methodologies:<br />
Global Integrated Oil & Gas Industry, October 2005 (94696)<br />
Global Refining and Marketing Industry, October 2005 (94695)<br />
<strong>Moody's</strong> Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial<br />
Corporations - Part I, July 2005 (93570)<br />
Industry Outlooks:<br />
Outlook for the Investment Grade North American Exploration and Production Industry, September 2005 (94356)<br />
Asia's Oil & Gas Sector: Stable-to-Positive Rating Outlook as Solid Credit Fundamentals Continue,<br />
August 2005 (93919)<br />
Financial Reporting Assessment:<br />
Oil & Gas Exploration and Production Industry, September 2004 (89040)<br />
• xciv •
May 2005<br />
Contact<br />
Phone<br />
Canada<br />
Allan McLean 1.416.214.1635<br />
Andrew Kriegler<br />
Indu Sambandam<br />
New York<br />
Daniel Gates 1.212.553.1653<br />
Moody’s Comments on the Government of Canada’s<br />
Proposed New Airport Rent Policy<br />
Moody’s Investors Service believes that the proposed new airport rent policy announced by the Government of Canada<br />
is directionally positive and supportive of the credit ratings of the airport authorities rated by Moody’s. When<br />
implemented, the new policy will apply to the not-for-profit authorities which operate the airports that comprise Canada’s<br />
National Airports System (NAS). The government’s review of the existing rent policy, a process initiated in June<br />
2001, concluded with the announcement of the new airport rent policy on May 9, 2005.<br />
The new airport rent structure seeks to harmonize the rent determination process across eligible airports, addressing<br />
the inequities that currently exist in this process. The proposed structure is markedly different from the existing<br />
patch-work of rent formulae in that it applies a simple, transparent and consistent formula to the NAS airports. Following<br />
a four year transition period, rent for 2010 and each year of the remaining term of the ground leases will be<br />
determined by applying a progressive scale of percentage rent to the airport’s actual gross revenue stream. The maximum<br />
rate of 12% will apply to any airport revenue in excess of $250 million.<br />
Under the new policy, airports currently paying rent will transition to the new formula over a four year period<br />
which is scheduled to commence on January 1, <strong>2006</strong>. Those airports not currently paying rent will commence paying<br />
rent on the date specified under the existing rent regime, but the amount of rent payable will be determined by<br />
the new formula. The airports that are currently paying rent will pay a declining series of fixed dollar amounts in<br />
each of <strong>2006</strong>, 2007, 2008 and 2009. The fixed dollar amounts will be determined with reference to the actual rent<br />
paid by the airport in 2005 and Transport Canada’s going-in estimate of the 2010 rent payable by the airport under<br />
the new formula. Commencing in 2010, rent will be payable in accordance with the new formula based on actual<br />
2010 airport revenues.<br />
Transport Canada estimates that the new formula will reduce the net present value of airport rent to be paid over<br />
the remaining term of the leases from approximately $13 billion to $5 billion. The benefits of the new rent policy will<br />
chiefly be seen over the long run, and will substantially reduce airport expenses on average. However, Moody’s notes<br />
that the impact of the new policy will be more significant for some airports than it will be for others. For example,<br />
Ottawa Macdonald-Cartier International Airport Authority’s rent is expected to decline to a fraction of its 2005 level<br />
over the transition period under the new formula. Edmonton Regional Airports Authority (ERAA) is expected to<br />
experience a modest rent increase in <strong>2006</strong> relative to its forecast 2005 rent. This is substantially less than the <strong>2006</strong> rent<br />
increase of several hundred percentage points that ERAA forecasts would have occurred under the existing rent<br />
arrangement. The rent payable by Greater Toronto Airports Authority (GTAA) under the new policy is not expected<br />
to be significantly different than that payable under the existing regime in the near-term. However, GTAA is expected<br />
to realize very significant reductions in rent payable in the medium and long-terms under the new policy.<br />
• xcv •
While Moody’s views the announcement of the new rent policy as directionally positive and supportive of the<br />
existing ratings in the sector, Moody’s does not anticipate that the announcement will result in significant rating revisions.<br />
The implementation of the new policy is contingent upon Treasury Board approval of the wording of the new<br />
rent calculation and upon the amendment of each individual lease agreement. While Moody’s regards it as unlikely<br />
that any of the airport authorities would refuse to amend their rent clauses, there are uncertainties about the longevity<br />
of the current minority government and whether the new airport rent policy would continue to be a priority for any<br />
potential new government. Most importantly, Moody’s existing ratings for the airport sector already incorporate the<br />
assumption of some form of rental accommodation, which the proposed new policy would effectively fulfill. In addition,<br />
Moody’s notes that the Government of Canada indicated in its announcement of the new airport rent policy that<br />
new legislation impacting the governance of the airport authorities will be forthcoming. The stated intent of that legislation<br />
is to increase transparency and accountability for the airport authorities which Moody’s understands might<br />
resemble NAV CANADA’s governance structure. While Moody’s believes that a NAV CANADA-like governance<br />
structure would likely be credit neutral for the airport authorities, we view the unfettered rate-setting autonomy of the<br />
airport authorities as being one of the most important supportive underpinnings of the current ratings. Should the<br />
forthcoming legislation either limit the ability or – by changing the governance structure – the willingness of airport<br />
authorities to set rates and charges as necessary, the credit quality of the sector could be affected.<br />
Related Research<br />
Credit Opinions:<br />
Aeroports de Montreal, April 2004<br />
Edmonton Regional Airports Authority, April 2004<br />
Greater Toronto Airports Authority, April 2004<br />
Ottawa Macdonald-Cartier International Airport Authority, April 2004<br />
Press Release:<br />
Winnipeg Airports Authority<br />
Special Comments:<br />
Canadian Non-Share Capital Corporations - In <strong>Infrastructure</strong> <strong>Finance</strong>: High Credit Quality Despite The Lack Of<br />
Equity, March 2003 (77665)<br />
The Incorporation of Joint-Default Analysis into <strong>Moody's</strong> Corporate, Financial and Government Rating<br />
Methodologies, February 2005 (91617)<br />
Rating Methodology:<br />
The Application of Joint Default Analysis to Government Related Issuers, April 2005 (92432)<br />
• xcvi •
January 2005<br />
Contact<br />
Phone<br />
GENERAL 61.2.9270.8100<br />
Sydney<br />
Clement Chong 61.2.9270.8108<br />
Brian Cahill 61.2.9270.8105<br />
Australian <strong>Infrastructure</strong> Companies Remain<br />
Appropriately Rated at Investment Grade Despite<br />
High Debt Levels<br />
Summary Opinion<br />
Moody’s believes that the high debt loads – and resultant low financial metrics – of Australian infrastructure companies<br />
are sustainable within their investment-grade ratings because of their predominantly low business risk, steady operating<br />
profiles as well as stable, predictable and recurring cash flows.<br />
Business risk is low because of each company’s dominant market position or the lack of meaningful competition.<br />
Furthermore, it is difficult for competitors to establish alternative assets in view of the large initial capital investments<br />
required, regulatory restrictions and the uncertain nature of returns. In other words, the barriers to entry are very<br />
high.<br />
The companies covered in this special comment are regulated energy transmission and distribution (T&D) businesses,<br />
toll roads, airports, and broadcast transmission assets. Their ratings are listed in Appendix 1.<br />
Their infrastructure assets provide essential services which have an established track record of demand and are<br />
predominantly low risk. In addition, they are not subject to high degrees of technology or operating risk.<br />
Because of the low business risk and stable operating profile, the companies enjoy relatively high and stable operating<br />
margins, ensuring in turn relatively robust, predictable and recurring cash flows. In the case of energy T&D<br />
assets, cash flow certainty is further enhanced by regulatory regimes which prescribe revenue or tariff calculations.<br />
Airports and toll roads are – to a large extent – not subject to regulatory arrangements which support revenue<br />
determinations. However, the historical experiences of these assets suggest highly steady throughput growth as well as<br />
resilience of throughput to downside scenarios.<br />
At the same time, rated companies operating in these sectors have very high debt loads. Moody’s nevertheless<br />
believes – for the reasons outlined above – that these companies can sustain higher debt loads while still maintain<br />
investment-grade ratings. Moody’s notes that – over the past three years – the average Debt/EBITDA ratio for A- and<br />
Baa-rated infrastructure companies is 7.8 times. Included in this average are Debt/EBITDA ratios of 7.1 times for<br />
energy T&D companies, and 8.8 times for airports. In addition, the EBITDA/Interest ratios for these three classes of<br />
companies are 2.2 times, 2.5 times and 1.7 times, respectively.<br />
In contrast, most Australian industrial companies – for example in the retail, building materials, telecommunications<br />
or airlines sectors – are less capable of supporting high debt loads due to the greater degree of competitive pressures<br />
apparent in their market structures and the lack of contractual or regulatory support. Such companies must<br />
demonstrate a reasonable amount of financial flexibility – indicated by lower debt and stronger financial metrics – to<br />
achieve investment-grade ratings. The average financial metrics for these companies has been Debt/EBITDA of 2.8<br />
times and EBITDA/Interest of 7.9 times over the last three years.<br />
Moody’s ratings in this sector therefore balance the very low business risk with the, typically, high financial risk. In<br />
other words, the presence of a relatively high degree of financial risk caps the investment-grade ratings of these companies.<br />
• xcvii •
If their operating risk were to change – so that revenues or margins came under negative pressure – ratings could<br />
be severely impacted. Moody’s does not foresee such an event in any rated infrastructure sector at present. At the same<br />
time, infrastructure assets that establish longer track record of stable operating profiles and cash flows through business<br />
and economic cycles could – in the absence of a material change in capital structures – merit rating upgrades notwithstanding<br />
their high financial risk.<br />
Moody’s also places significant emphasis on refinancing risk and liquidity profiles of rated infrastructure companies.<br />
They typically have low levels of retained cash flow and rely on bank liquidity facilities to support some operational<br />
cash requirements. This means that the risk of unforeseen events interrupting cash flows for an extended period<br />
of time must be very low. Similarly, it is important that these companies maintain long debt maturity profiles to minimise<br />
refinancing risk since their ability to retire debt is minimal.<br />
Fundamental Characteristics of Australian <strong>Infrastructure</strong> Companies<br />
Market Position/Threat of<br />
Competition<br />
Regulatory/ Legislative<br />
Support<br />
Operating/ Technology<br />
Risk Profile<br />
Throughput/ Revenue<br />
Profile<br />
Key Rating Considerations<br />
T&D Networks Airports Toll Roads Broadcast Transmission<br />
Near-monopoly asset,<br />
little by-pass risk<br />
Well-established<br />
regulatory framework for<br />
revenue calculations<br />
Low operating risk and<br />
limited exposure to<br />
technology risk<br />
• Revenue exposed to electricity<br />
or gas volumes<br />
• Solid history of volume<br />
growth<br />
• No direct exposure to<br />
fluctuations in electricity<br />
or gas prices<br />
Near-monopoly asset,<br />
little by-pass risk<br />
Airport charges not<br />
regulated<br />
Low operating risk and<br />
limited exposure to<br />
technology risk<br />
• Revenue impacted by<br />
passenger numbers<br />
• Solid history of passenger<br />
growth notwithstanding<br />
short term impact of oneoff<br />
events<br />
DOMINANT MARKET POSITIONS AND BARRIERS TO ENTRY MEAN LOW BUSINESS RISK<br />
Rated Australian infrastructure companies exhibit relatively strong market positions which are protected by high barriers<br />
to entry. In contrast, most industrial companies – such as retailers, airlines, building materials manufacturers, or<br />
telecommunications – face a higher degree of competitive risk due to lower barriers to entry.<br />
Energy T&D Companies<br />
Regulated T&D companies rated by Moody’s face little risk of bypass. These companies typically have state-wide coverage<br />
and enjoy dominant positions in their respective states. While their monopoly-like positions are not protected<br />
by law, the risk of competing networks being built is low, given the high costs involved and the uncertainty of returns.<br />
At the same time, their monopoly positions mean the revenues and returns they are allowed to generate are subject to<br />
regulatory determinations.<br />
Current regulatory regimes are relatively well set-out and are unlikely to negatively change over the next reset<br />
period. The companies’ strong competitive positions, coupled with regulatory certainty, result in relatively stable and<br />
predictable cash flows, which support, in turn, their investment-grade ratings.<br />
Moody’s does not presently rate any companies that own unregulated T&D assets. Such assets, because of their<br />
unregulated nature, face a higher risk of cash flow variability. Some are exposed to competitive pressures from other<br />
network assets, heightening by-pass risk – this is often the reason for not regulating such network assets. In some cases,<br />
long-term transportation agreements – for example, between an off-taker of gas and a pipeline owner – may underpin<br />
cash flow stability and mitigate the risk of by-pass. At the same time, the pipeline owner is exposed to the credit<br />
strengths of its counterparty.<br />
Consequently, Moody’s believes that companies which own unregulated T&D assets must demonstrate higher<br />
levels of financial flexibility to achieve the same ratings as their regulated counterparts.<br />
• xcviii •<br />
Strong position:<br />
congestions on, and the<br />
lack of ability to expand,<br />
competing roads<br />
enhance their<br />
competitiveness<br />
Concession Deeds<br />
govern tolling<br />
arrangements, including<br />
certainty of toll increases<br />
Low operating risk.<br />
Manageable exposure to<br />
technology: risk of failure<br />
of electronic tolling<br />
equipment<br />
• Revenues impacted by<br />
car flows<br />
• Solid history of traffic<br />
growth<br />
Near-monopoly asset, little<br />
by-pass risk<br />
No regulatory or legislative<br />
support. Long-term<br />
contracts with very<br />
creditworthy counterparties<br />
Low operating risk and<br />
manageable exposure to<br />
technology: installation of<br />
digital transmission<br />
predominantly low risk in<br />
nature<br />
• Availability charges for providing<br />
transmission facilities<br />
• Revenue not dependent on<br />
actual coverage or actual<br />
viewer numbers
Airports<br />
Rated airports have strong market dominance because of the lack of competing facilities within their respective states.<br />
In all cases, other airports within their states are small, farther from large cities, and lack the capacity to handle larger<br />
aircrafts or a large numbers of passengers. To expand these to a viable size would require substantial capital expenditure<br />
and government approval.<br />
Domestic Passengers<br />
International Passengers<br />
18000000<br />
16000000<br />
14000000<br />
12000000<br />
10000000<br />
8000000<br />
6000000<br />
4000000<br />
2000000<br />
1999 2000 2001 2002 2003 2004<br />
10000000<br />
9000000<br />
8000000<br />
7000000<br />
6000000<br />
5000000<br />
4000000<br />
3000000<br />
2000000<br />
1000000<br />
0<br />
1999 2000 2001 2002 2003 2004<br />
Sydney Melbourne Adelaide Brisbane Perth<br />
Sydney Melbourne Adelaide Brisbane Perth<br />
Because of the entrenched positions of rated airports, they also handle the vast majority of passengers travelling<br />
interstate or abroad. They are well-placed to take advantage of passenger growth. Airport charges are no longer regulated<br />
and are negotiated directly with airlines for a set number of years.<br />
Airports face exposure to shock events – such as the September 11 terrorist attacks and SARS – which could materially<br />
affect passenger travel. However, Moody’s believes such events tend to affect passenger numbers for only a short<br />
time of a few months. Rated airports have shown remarkable recoveries after such events, for example, with strong passenger<br />
growth. The charts above show actual international and domestic passenger numbers – in the past six years – in<br />
all five rated-airports.<br />
Toll Roads<br />
Moody’s rated toll roads serve areas which have clear traffic demand profiles and where competing roads face capacity<br />
constraints. Apart from Lane Cove Tunnel which is under construction, rated toll roads have a solid track record of<br />
traffic growth. Examples of this are the strong traffic profiles of Transurban’s Melbourne Citylink and the Airport<br />
Motorway.<br />
Toll increases are largely prescribed within the toll road operators’ concession deeds with the relevant state governments.<br />
In this regard, the certainty of toll rises and steady traffic growth mean that toll revenue will increase<br />
steadily over time.<br />
Broadcast Transmission<br />
Moody’s only rated broadcast transmission company in Australia is Broadcast Australia. The company enjoys relatively<br />
low business risk, given it has long-term contracts with key broadcasters, two of which are government-owned TV stations,<br />
ABC and SBS. Broadcast Australia’s transmission towers already cover 99% of the nation’s population. The risk<br />
of bypass is low because of the high costs needed to replicate the company’s towers and the uncertainty of returns<br />
because of the need to establish contractual relations with key broadcasters.<br />
LOW OPERATING RISK<br />
Rated infrastructure companies face low operating risk. Their primary businesses entail the provision of access to users<br />
for commodity throughput. Revenue is generated either by charging [1] for available capacity (capacity charge), [2] for<br />
volume through their assets (volume base charge), or [3] a combination of both.<br />
Given this business profile, infrastructure assets do not have direct exposure to short-term commodity risks – such<br />
as input or selling price risk. For example, electricity transmission or distribution companies are not affected by shortterm<br />
spikes in electricity prices. Similarly, Broadcast Australia’s revenue is not dependent on actual coverage or the<br />
actual number of viewers.<br />
• xcix •
In addition, such operations are relatively simple, and are – in most material aspects – not subject to technology<br />
risk or the obsolescence of products they transport. In this regard, operating costs and capital expenditures are relatively<br />
stable and predictable. Margins earned by such companies tend to be relatively high and stable year on year.<br />
For instance, the EBITDA margins earned by Australian infrastructure companies typically fall in the 60-70%<br />
range. This strong margin is only matched by that evident in the listed property trust sector and compares favourably<br />
against the 20-30% margin seen for most industrial companies. The higher operating margins of infrastructure companies<br />
therefore provide some cushion against negative events, such as tariff cuts or operating cost increases.<br />
Rated infrastructure companies face a small degree of single-asset risk because they predominantly rely on a single<br />
income-generating asset. This risk has the potential to result in a major liquidity problem in the event of a failure in a<br />
part of their assets. However, in Moody’s opinion, single-asset risk is manageable within the credit profiles of rated<br />
infrastructure companies due to their histories of solid asset performance, sound asset conditions, the presence of adequate<br />
liquidity to deal with short-term negative events, and insurance regimes which facilitate revenue recovery.<br />
STABLE, PREDICTABLE AND RECURRING CASH FLOW<br />
Because of their low business and operating risk profiles, the cash flows generated by infrastructure companies are relatively<br />
stable and not subject to material cash flow variability on a year-on-year basis.<br />
Their cash flows generally rise in line with the level of economic activities. At the same time, such flows are highly<br />
resilient to economic downturns or external shocks. In other words, there is a track record of recurring and robust cash<br />
flows. For instance, the rated Australian airports have weathered recent shocks, such as the September 11 terrorist<br />
attacks, the Iraq War and SARS. Passenger numbers have shown remarkable recoveries.<br />
In contrast, the supply and demand dynamics of the markets – for instance, competitors’ actions, new technology<br />
exacerbating the end of a product life cycle, or market-driven drops in commodity prices – which most industrial companies<br />
serve could have a more pronounced impact on their cash flows. The variability in cash flows year-on-year is<br />
more apparent, and future cash flows may be less predictable relative to their infrastructure peers.<br />
In this regard, industrial companies must exhibit a greater degree of financial flexibility – which means less debt in<br />
their capital structures and higher levels of liquidity – to deal with the greater risk of cash flow variability. That is,<br />
industrial companies would typically exhibit higher financial flexibility than infrastructure companies at the same rating<br />
level.<br />
BUT HIGH DEBT LEVELS AND FINANCIAL METRICS CAP RATINGS<br />
Moody’s believes that, notwithstanding the natural credit strengths enjoyed by infrastructure companies, their appetite<br />
for highly-leveraged structures – typically for reasons of tax efficiency and lowering funding costs – heighten financial<br />
risks which constrain their ratings. Most have adopted capital structures – incorporating the appropriate mix of debt<br />
and equity and financial policies – which produce the optimal ratings that facilitate access to the capital market. The<br />
fundamental ratings of Australian infrastructure companies tend to converge around the single A or Baa rating range.<br />
If the operating risk of these companies were to change – so that revenues or margins came under downward pressure<br />
– ratings could be severely impacted. However, Moody’s does not foresee such an event in any rated infrastructure<br />
sector. At the same time, infrastructure companies that establish longer track record of stable operating profiles and<br />
cash flows through business and economic cycles could – in the absence of a material change in capital structure –<br />
merit rating upgrades notwithstanding their high financial risk.<br />
Rated infrastructure companies typically have low levels of liquidity. Excess cash flows from operations are paid<br />
out to shareholders, leaving little in the way of contingencies for unforeseen expenses. As a consequence, there is a reliance<br />
on bank liquidity facilities which sometimes contains conditionality to drawdown, such as a material adverse<br />
effect clause.<br />
In addition, Moody’s places significant emphasis on the refinancing risk of these companies. It is important that<br />
they maintain long debt maturity profiles to minimise refinancing risk since their ability to repay debt is minimal.<br />
The following charts show a cross-industry comparison of the average financial metrics for A- and Baa-rated Australian<br />
companies over the last three years.<br />
• c •
Debt/ EBITDA<br />
EBITDA/ Interest Expense<br />
Times<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
INDUSTRIALS<br />
AIRPORTS<br />
LPT's<br />
UTILITIES<br />
INFRASTRUCTURE<br />
Times<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
INDUSTRIALS<br />
AIRPORTS<br />
LPT's<br />
UTILITIES<br />
INFRASTRUCTURE<br />
Baa Rated Companies<br />
A- and Baa-rated Companies<br />
Baa Rated Companies<br />
A- and Baa-rated Companies<br />
* Moody’s rated listed property trusts have A ratings<br />
As shown above, industrial companies have the strongest financial metrics, necessary given their higher business<br />
risk profiles. Whilst infrastructure companies have lower financial flexibility, their low business risk, stable operating<br />
profiles and predictable cash flows justify their investment-grade ratings.<br />
In addition, the capital structures of infrastructure companies are often more complex and aggressive when compared<br />
to industrial companies. For example, most T&D companies and, to a lesser extent, airports use equity-like subordinated<br />
debt or shareholder loans invested by private shareholders. These instruments are treated as debt for tax<br />
purposes and therefore interest paid on these instruments is tax deductible. However, in many cases, Moody’s has – for<br />
rating purposes – treated these instruments as having financial flexibility that is similar to equity because of their position<br />
in security structures, distribution restrictions on these instruments, and their loss absorption ability at liquidation.<br />
• ci •
Appendix 1: Credit Ratings of Australian <strong>Infrastructure</strong> Companies<br />
Ratings<br />
Outlook<br />
Electricity & Gas Transmission and Distribution<br />
CitiPower I Pty. Ltd. Aaa Stable<br />
ElectraNet Pty. Ltd. Aaa/Baa1 Stable/Stable<br />
Envestra Victoria Pty. Ltd Aaa Stable<br />
ETSA Utilities <strong>Finance</strong> Pty. Ltd. Aaa/A3 Stable/Stable<br />
GasNet Australia (Operations) Pty. Ltd. Aaa/Baa1 Stable/Negative<br />
Energy Partnership (Gas) Pty. Ltd. Aaa/Baa2 Stable/Stable<br />
Powercor Australia LLC Aaa/A3 Stable/Positive<br />
SPI Australia <strong>Finance</strong> Pty. Ltd. Aaa Stable<br />
United Energy Distributions Pty. Ltd. Aaa/Baa1 Stable/Stable<br />
Airports<br />
Australia Pacific Airports (Melbourne) Pty. Ltd. Aaa/A3 Stable/Stable<br />
Brisbane Airport Corporation Ltd. Aaa/Baa1 Stable/Negative<br />
New Terminal Financing Company Pty. Ltd. Aaa/Baa3 Stable/Negative<br />
Southern Cross Airports Corporation Pty. Ltd. Aaa/Baa2 Stable/Stable<br />
Southern Cross FLIERS Trust Aaa/Baa3 Stable/Stable<br />
Westralia Airports Corporation Pty. Ltd. Aaa/Baa3 Stable/Stable<br />
Toll Roads<br />
Airport Motorway Trust A3 Stable<br />
Lane Cove Tunnel <strong>Finance</strong> Company Aaa/Baa3 Stable/Stable<br />
Transurban <strong>Finance</strong> Company Pty. Ltd. Aaa/A3 Stable/Stable<br />
Broadcasting<br />
Broadcast Australia <strong>Finance</strong> Pty. Ltd. Aaa/Baa2 Stable/Stable<br />
Related Research<br />
Special Comments:<br />
Australian/NZ Electricity and Gas Industry 2004-2005 Outlook, June 2004 (87181)<br />
Australia/New Zealand Airport Outlook: Stable, But Over-Geared, February 2004 (81362)<br />
Rating Methodology:<br />
Australia and New Zealand Utilities, February 2001 (63890)<br />
Analyses:<br />
Transurban <strong>Finance</strong> Company Pty Limited, August 2004 (88396)<br />
Airport Motorway Trust, November 2004 (89405)<br />
Lane Cove Tunnel <strong>Finance</strong> Company, November 2003 (79996)<br />
Broadcast Australia <strong>Finance</strong> Pty Limited, February 2004 (81189)<br />
• cii •
January 2005<br />
Contact<br />
Phone<br />
New York<br />
Maria Matesanz 1.212.553.1653<br />
Edward Roche<br />
Aaron Freedman<br />
Kevin Carney<br />
Omar Ouzidane<br />
Bart Oosterveld<br />
John Nelson<br />
U.S. Toll Road Sector Outlook Stays Stable for 2005<br />
Executive Summary<br />
Moody’s outlook for the U.S. toll road sector as a whole remains stable for 2005, reflecting the relatively large portfolio<br />
of mature multi-asset facilities. In 2004 Moody’s downgraded three toll road ratings, including two start-up<br />
projects, upgraded three facilities, including one start-up and placed one rating on Watchlist for possible downgrade.<br />
The stable outlook for U.S. toll facilities is based on <strong>Moody's</strong> expectation that despite some recent rating changes,<br />
traffic growth will continue to drive steady revenue increases, particularly for mature facilities. We expect that the<br />
on-going recovery of the national economy also will continue to spur traffic and revenue growth in the toll road sector,<br />
notwithstanding rising fuel costs and uneven economic recovery across different regions of the country. Uneven<br />
economic growth may have more of a credit impact on single asset facilities due to economic concentration and lack of<br />
revenue diversity. Strong traffic growth, in turn, may pressure operators to issue additional debt to finance growing<br />
capital expenditures, thus increasing leverage, lessening liquidity and potentially having a negative impact on credit<br />
quality if not properly managed.<br />
Moody’s expects that toll roads will continue to make large capital investments to expand and upgrade facilities as<br />
well as implement new toll collection and traffic management technologies. Total unmet needs for national highways<br />
could exceed $100 billion from 2005 to 2020 and governmental funding sources are becoming increasingly scarce. If<br />
not addressed, these growing capital needs could present additional operating and financial risks for toll facilities, particularly<br />
related to impaired service delivery, reduced safety and increased traffic congestion.<br />
In the U.S., Moody’s rates approximately $44 billion in toll road debt, $35 billion of which was issued to finance<br />
projects for established facilities and $9 billion for start-ups. The median rating for established multi-asset facilities is<br />
A1, A3 for single-asset facilities and for start-ups Baa3.<br />
Ratings Distribution<br />
% Rated<br />
Established Toll Facilities[1]<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Ca<br />
[1] Toll Facilities can have more than one rating reflected.<br />
% Rated<br />
50%<br />
45%<br />
40%<br />
35%<br />
30%<br />
25%<br />
20%<br />
15%<br />
10%<br />
5%<br />
0%<br />
Start-up Toll Facilities[1]<br />
Baa3 Baa1 Ba2 B1<br />
Our rating approach for toll facilities focuses on credit fundamentals that directly affect the generation of cash<br />
flows necessary to both operate the facility and service its debt obligations. Our ratings also incorporate key ratios<br />
that are calculated based on financial and operating information for each toll road and compiled as medians (see<br />
Appendix I).<br />
• ciii •
Sector Outlook Stable With Same Number of Upgrades as Downgrades in 2004<br />
Moody’s rating outlook for the sector remains stable. In 2004 we upgraded three ratings, downgraded three ratings<br />
and placed one rating on Watchlist for possible downgrade. Of the $44 billion in debt rated by Moody’s 90% has a stable<br />
outlook. Our ratings range from Aa2 (New York State Bridge Authority and Florida’s Turnpike) to Ca (Venice<br />
McKinley Bridge), with the rating level usually closely correlated with stage of development/lifecycle and asset type.<br />
RATING REVISIONS IN 2004:<br />
Upgrades:<br />
Harris County Toll Road Authority, Texas<br />
In April 2004 <strong>Moody's</strong> upgraded to A1 from A2 the rating on $666 million outstanding toll road revenue bonds. The<br />
rating upgrade reflected the historically strong debt service coverage of both senior and subordinate debt that has generated<br />
large cash balances and the expectation that a recent toll increase - the first in the road's history - will perpetuate<br />
these trends. Importantly, the toll increase had only a minor impact on traffic, which has now returned to pre-toll<br />
increase levels. This indicates a relatively high inelasticity of demand and acceptance of tolls by Houston area commuters.<br />
The strength and diversity of the regional economy reflected in Harris County's rating of Aa1 by <strong>Moody's</strong> are also<br />
important credit considerations. <strong>Moody's</strong> rating also incorporates the significant amount of debt - both revenue and<br />
general obligation bonds - supported by toll revenues and the additional capital projects that the Authority could<br />
potentially undertake if approved by the County Commissioners Court, as well as the open indenture which allows for<br />
the transfer out of surplus revenue. <strong>Moody's</strong> notes that while the list of projects totals several billion dollars, not all<br />
capital projects will necessarily be implemented. Capital costs would likely be off-set by state and other contributions,<br />
and those undertaken are expected to be done on an as-needed and self-supporting basis. Finally, the rating incorporates<br />
the historically strong management that has successfully operated and developed a self-supporting toll road system<br />
in a fast-growing metropolitan area.<br />
Florida Turnpike<br />
In November we upgraded the rating on $2.1 billion of Turnpike revenue bonds to Aa2 from Aa3. The upgrade<br />
reflects the continued strong growth in the Turnpike's traffic and revenues despite the recent economic slowdown. A<br />
recently implemented toll increase appears to have had minimal impact on traffic while significantly boosting revenues.<br />
This traffic growth and relative inelasticity of demand reflect the strategically vital role the Turnpike plays in<br />
Florida's service-oriented economy. The Turnpike serves the most populous and economically important employment<br />
centers in the state, and it continues to expand into areas undergoing rapid population growth. <strong>Moody's</strong> believes that<br />
the geographic and economic diversity of the Turnpike's service area will continue to shield its traffic and revenues<br />
during possible future economic slowdowns. Moreover, we expect the prudent fiscal policies and rational capital planning<br />
practices demonstrated by management will continue to sustain the Turnpike's long track record of healthy financial<br />
operations, despite a sizeable planned increase in debt to fund its ambitious capital program.<br />
Chesapeake Expressway, Virginia<br />
In December we upgraded to Baa1 from Baa2 the rating on $21.63 million City of Chesapeake, Virginia, Expressway<br />
Toll Road Revenue Bonds. The upgrade reflects the successful ramp-up of this start-up toll road, which has posted significantly<br />
higher-than-expected toll revenues consistently for its first three years of operations. <strong>Moody's</strong> rating also<br />
incorporates the very modest amount of revenue bond debt relative to the size of the initial financing and the slow payout.<br />
Debt service is interest-only until FY 2007. The Baa1 rating carries a stable outlook.<br />
The Chesapeake Expressway opened in May, 2001, ahead of schedule and within budget. The City used the early<br />
completion to introduce the road on a toll free basis. Since its opening, the road has consistently exceeded toll transaction<br />
and revenue forecasts: Over the past three fiscal years, toll revenues have averaged 150% of forecast revenues.<br />
Debt service coverage on a GAAP basis was 4.46x and 3.83x in fiscal years 2003 and 2004, respectively. Senior debt service<br />
will rise to approximately $1.6 million in FY 2007 and remain roughly level thereafter. FY 2004 net revenues<br />
cover peak debt service by 2.9x.<br />
The favorable performance of the Expressway since its start-up has generated a healthy cash flow supporting the<br />
repayment of the senior debt. In addition to a cash-funded debt service reserve, bondholder security is enhanced by<br />
Expressway net working capital of almost $3.3 million, twice the amount of peak debt service on the bonds and 150%<br />
of FY 2004 expenditures.<br />
• civ •
Downgrades:<br />
Pocahontas Parkway Association, Virginia<br />
Our downgrade of the Pocahontas Parkway Association, Route 895 Connector, Senior Toll Road Revenue bond rating<br />
to Ba2 from Baa3, and the First Tier Subordinate bond rating to B1 from Ba1 is rooted in the much slower than forecasted<br />
traffic and revenue ramp-up for the toll road in the first year-and-a-half of operation and <strong>Moody's</strong> expectation<br />
that growth will continue at a slower pace than necessary to match steadily growing annual debt service requirements.<br />
The widening of the rating spread between the senior and subordinate bonds from one to two notches reflects the<br />
lower standing in the flow of funds and the significantly greater amount of senior debt. The bonds are solely secured<br />
by a gross revenue pledge of operating revenues of the Parkway and certain funds in the Trust Estate. In early February<br />
2004 the Association notified the Trustee that it does not expect to meet the 1.25x rate covenant for FY 2005 as<br />
required in the Trust Indenture, and has begun the process of engaging an independent traffic consultant to evaluate<br />
project operations and potential toll rate adjustments. The Association has autonomous rate-setting authority. The<br />
rating outlook for both ratings remains negative.<br />
San Joaquin Hills Transportation Corridor Agency, California<br />
In May <strong>Moody's</strong> downgraded the rating to Ba2 from Baa3 for $1.9 billion San Joaquin Hills Transportation Corridor<br />
Agency (SJHTCA) toll revenue bonds. The rating has been recently confirmed following a Watchlist for possible<br />
downgrade but the rating outlook is negative. The Watchlist review of the Agency was initiated in February 2004 due<br />
to the failure of a planned consolidation with the Foothills/Eastern Transportation Corridor Agency (F/ETCA) and<br />
the lack of board consensus on mitigation alternatives to avert a potential cash default. The rating and outlook are<br />
based on weak traffic and revenue performance and the possibility of a cash default as early as 2014 absent dramatic<br />
growth in traffic and revenues or external financial support. The availability of some accumulated reserves and external<br />
liquidity in the form of a Federal line of credit (FLOC), as well as the economic strength of the service, somewhat mitigate<br />
credit risks in the near term.<br />
Toll revenues for FY 2004 and FY 2003 were 78% and 79% of forecast, respectively. While year-to-date FY 2005<br />
traffic growth appears to be accelerating, notwithstanding the impact of a recent toll rate increase, <strong>Moody's</strong> believes, it<br />
unlikely that revenue will grow fast enough to match a steep increase in debt service requirements in FY <strong>2006</strong>, and certainly<br />
not after the FLOC expiration in 2007. The SJH pledged revenue has only met the 1.3x rate covenant over the<br />
last several years by virtue of the use of one-time, non-toll revenues to defease some bonds. Based on the current pace<br />
of traffic and revenue growth, <strong>Moody's</strong> expects that the bonds will fail to meet the rate covenant by FY <strong>2006</strong> or 2007.<br />
A cash default could occur by FY 2014 or 2015, after the Agency exhausts all available reserves.<br />
As of October, 2004, the agency held $4.2 million in unrestricted cash reserves and nearly $182 million in funds<br />
restricted under the bond indenture, including a debt service reserve fund balance of approximately $96 million and a<br />
capitalized interest account balance of $19 million.<br />
Miami-Dade Expressway Authority, Florida<br />
In June 2004 <strong>Moody's</strong> downgraded Miami-Dade County Expressway revenue bond rating to A3 from A2 and assigned<br />
a stable outlook. The downgrade reflects the credit pressures presented by the significant increase in debt the Authority<br />
expects to issue to fund its new 5-year capital improvement program (CIP). In order to afford greatly increased<br />
annual debt service costs, the Authority will rely heavily on revenue from planned new toll plazas on segments of the<br />
system that are not currently tolled. The A3 rating further reflects the established nature of the toll facilities operated<br />
by the Authority and the vital links they provide to state and national highways in South Florida, demonstrated by<br />
their high level of utilization. Traffic growth is expected to resume following some fall-off in recent years due to a<br />
series of toll increases. These increases have demonstrated the willingness of the Authority to exercise its rate-setting<br />
autonomy and raise tolls when necessary. This has allowed the Authority to achieve stable financial results marked by<br />
sound debt service coverage levels, though coverage is expected to tighten going forward. <strong>Moody's</strong> views as a credit<br />
vulnerability the bonds' liberal legal covenants, particularly in light of the large CIP.<br />
Watchlist:<br />
Tampa-Hillsborough Expressway Authority, Florida<br />
On November 17, 2004 <strong>Moody's</strong> placed on Watchlist for possible downgrade the A3 rating on $194.9 million of revenue<br />
bonds of the Authority. This action reflects the uncertainty surrounding the final resolution and financial impact<br />
of significant delays in the Authority's 'reversible lanes' construction project. The delays are directly related to two pier<br />
subsidence incidents in April of this year that revealed design flaws in the structure.<br />
• cv •
Authority officials are working closely with the Florida Department of State Transportation and Division of Bond<br />
<strong>Finance</strong>, as well as with financial and engineering consultants to assess the cost of the remediation and possible financing<br />
strategies. Officials currently estimate a maximum additional project cost of up to $80 million, a significant sum<br />
when compared to the balance sheet, debt profile, and overall finances of the Authority.<br />
Moody’s notes that the cash flows supporting the A3 rating are unaffected and that the construction delays have<br />
not as yet impacted traffic. The Expressway is a 14-mile, four-lane, limited access toll road that serves a predominantly<br />
commuter customer base. The Authority continues to boast steady long-term growth in its traffic and in FY 2004 grew<br />
its toll revenues by 7% over FY 2003. The Authority currently has approximately $21.2 million in reserves, consisting<br />
of internally generated cash, investment earnings and unused bond proceeds.<br />
Related Research<br />
Special Comment:<br />
Construction Risk: Mitigation Strategies for U.S. Public <strong>Finance</strong>, December 2004 (89406)<br />
Rating Methodology:<br />
Start-up Toll Roads, February 2000 (53305)<br />
High Profile New Issues:<br />
Miami-Dade County Expressway Authority, FL, July 2004 (87950)<br />
Harris County Toll Road, April, 2004 (81849)<br />
Florida Department of Transportation-Florida (State of) Turnpike System, November 2004 (89754)<br />
Rating Updates:<br />
San Joaquin Hills Trans. Corridor Agency, CA, January 2005<br />
Pocahontas Parkway Association, VA, February 2004<br />
Chesapeake (City of) VA Toll Facility, December 2004<br />
• cvi •
Appendix I: <strong>Moody's</strong> Toll Road Sector Medians<br />
<strong>Moody's</strong> Public <strong>Finance</strong> Group began producing its Toll Road Sector National Medians in 2004. The ratios are based<br />
on key statistical information on <strong>Moody's</strong> rated toll facilities derived from the data included in the Municipal Financial<br />
Ratios Analysis (MFRA) product available to clients on our web site, www.moodys.com/mfra. MFRA provides three<br />
years of detailed financial and operational information on 38 rated toll facilities. The indicators shown utilize the most<br />
recent available data from MFRA for each of the issuers included in the sample set, which may span different fiscal<br />
years from 2002 to 2004 for different issuers, and provide key ratios used in our ratings. The selected indicators should<br />
be considered as broad guidelines only. Performance relative to the guidelines is not an absolute indicator of credit<br />
quality, and bond ratings cannot be inferred solely within this narrow context.<br />
Selected Moody’s Toll Facilities Financial Ratios:<br />
Start-up<br />
Medians<br />
Established<br />
Operating Ratio (%) 37.1 52.4<br />
Net Takedown (%) 73.4 53.7<br />
Senior Lien Debt Service Coverage (x) 1.4 2.0<br />
Aggregate DebtService Coverage (x) 1.4 1.9<br />
O&M Expense per Roadway Mile ($) 455 571<br />
Debt per Roadway Mile ($) 39,410 3,237<br />
Glossary of Selected Moody’s Toll Facilities Financial Ratio Definitions<br />
Median<br />
The median represents the middle value in an ordered sequence of<br />
data, such that 50% of the observations are below the median and<br />
50% are above the median. Unlike the mean, the median is affected<br />
only by the number of observations in a data set and not by the<br />
magnitude of the extremes.<br />
Senior lien debt service coverage (x)<br />
Net revenues (calculated on a GAAP basis) divided by principal and<br />
interest requirements for an entity’s senior lien debt for the fiscal year.<br />
Aggregate debt service coverage (x)<br />
Net revenues (calculated on a modified GAAP basis) divided by<br />
principal and interest requirements for an entity’s senior and<br />
subordinate debt for the fiscal year.<br />
Debt per roadway mile ($)<br />
Net funded debt divided by the aggregate length of the entity’s roads.<br />
Operating ratio (%)<br />
Operating and maintenance expenses divided by total operating<br />
revenues. This ratio measures the proportion of system revenues used<br />
to support operating expenses.<br />
Net take down (%)<br />
Net revenues divided by gross revenue and income. The amount of<br />
revenue remaining from all sources after meeting operating costs.<br />
O&M expense per roadway mile ($)<br />
Total expenses for operations, maintenance, and administration<br />
divided by the aggregate length of the entity’s roads.<br />
• cvii •
Appendix II: Moody’s Rated U.S Toll Facilities<br />
<strong>Moody's</strong> Organization Name<br />
Stage of<br />
Development<br />
Asset Mix<br />
Senior Lien<br />
Revenue Rating<br />
Outlook<br />
Bay Area Toll Authority, CA Established Multi-asset Aa3 Negative<br />
Pocahontas Parkway Association, VA Start-up Single Asset Ba2 Negative<br />
San Joaquin Hills Transportation Corridor Agency, CA Start-up Single-asset Ba2 Negative<br />
Santa Rosa Bay Bridge Authority, FL Start-up Single-asset B1 Negative<br />
(Venice (City of) IL, Toll Facility Established Single-asset Ca Negative<br />
Cameron (County of) ,TX Established Multi-asset A3 [1]<br />
Del Rio (City of), TX Established Single-asset Baa2 [1]<br />
Laredo (City of), TX Established Multi-Asset A3 [1]<br />
McAllen (City of), TX Established Multi-asset A2 [1]<br />
Thousand Islands Bridge Authority, NY Established Single-asset A3 [1]<br />
Tampa-Hillsborough County Expressway Authority, FL Established Single-asset A3 [2]<br />
Central Texas Turnpike System, TX Start-up Multi-Asset Baa1 Stable<br />
Chesapeake (City of) VA Toll Facility Start-up Single-asset Baa1 Stable<br />
Delaware River and Bay Authority, DE Established Single-asset A1 Stable<br />
Delaware River Joint Toll Bridge Commission, PA Established Single-asset A2 Stable<br />
Delaware River Port Authority, PA Established Multi-asset A3 Stable<br />
E-470 Public Highway Authority, CO Start-up Single-asset Baa3 Stable<br />
Eagle (City of), TX Established Multi-asset Baa1 Stable<br />
Florida (State of) Turnpike System Established Multi-asset Aa2 Stable<br />
Foothill/Eastern Transportation Corridor Agency, CA Start-up Multi-asset Baa3 Stable<br />
Greater New Orleans Expressway Commission, LA Established Single Asset A2 Stable<br />
Harris (County of) Toll Facility, TX Established Multi-asset A1 Stable<br />
Illinois State Toll Highway Authority Established Multi-asset A1 Stable<br />
Kansas Turnpike Authority, KS Established Multi-asset A1 Stable<br />
Maine Turnpike Authority, ME Established Single-asset Aa3 Stable<br />
Maryland Transportation Authority Established Multi-asset Aa3 Stable<br />
Massachusetts Turnpike Authority - Metropolitan Highway System Established Multi-asset A3 Stable<br />
Massachusetts Turnpike Authority - Western Turnpike Established Single-Asset Aa3 Stable<br />
Miami-Dade County Expressway Authority, FL Established Multi-asset A3 Stable<br />
New Hampshire (State of) Turnpike Enterprise Established Multi-asset A1 Stable<br />
New Jersey Turnpike Authority Established Multi-asset A3 Stable<br />
New York State Bridge Authority Established Multi-asset Aa2 Stable<br />
New York State Thruway Authority Established Multi-asset Aa3 Stable<br />
North Texas Tollway Authority, TX Established Multi-asset A1 Stable<br />
Northwest Parkway Public Highway Authority, CO Start-up Single-asset Baa3 Stable<br />
Ohio Turnpike Commission Established Multi-asset Aa3 Stable<br />
Oklahoma Transportation Authority Established Multi-asset Aa3 Stable<br />
Orlando-Orange County Expressway Authority, FL Established Multi-asset A2 Stable<br />
Pennsylvania Turnpike Commission Established Multi-asset Aa3 Stable<br />
South Jersey Transportation Authority, NJ Established Single-asset A3 Stable<br />
Toll Road Investors, L.P., VA Start-up Single-asset Baa3 Stable<br />
Triborough Bridge & Tunnel Authority, NY Established Multi-asset Aa3 Stable<br />
West Virginia Parkways, Economic Development and Tourism<br />
Authority<br />
Established Single-asset Aa3 Stable<br />
[1] No rating outlook.<br />
[2] Rating under watchlist review for possible downgrade<br />
• cviii •
December 2004<br />
Contact<br />
Phone<br />
New York<br />
Chee Mee Hu 1.212.553.1653<br />
Daniel Gates<br />
Latin American Power Industry Update<br />
This Special Comment is based on a teleconference held for investors on October 18, 2004.<br />
Summary<br />
The rating profile for the Latin American power market has demonstrated general stabilization since 2002, when the<br />
regional sector experienced a peak period of credit deterioration and rating downgrades. In Chile, economic and political<br />
stability and sustainable growth should support regulatory stability, as will the new 2004 Ley Corta ("Short Law")<br />
which amends the Chilean Electricity Law of 1982 that established the foundation for the nation's regulatory model .<br />
Argentina's rationing of natural gas this year created hurdles, but not insurmountable ones.<br />
In Brazil, the country's dependence on hydro power has led to under-investment in new generation at a time when<br />
electricity consumption has increased at double the rate of the GDP. In response, Brazil is introducing a new general<br />
regulatory framework designed to promote new generation. This model does introduce some uncertainty because it<br />
includes untested guarantees, introduces some tax issues, and, based on decree rather than legislation, can be altered<br />
relatively easily. Overall, we see the new model as being a potential positive for the hydro-generators, neutral-to-positive<br />
for the distributors, and a negative for private generators that have large, unamortized, intangible assets.<br />
Overview of <strong>Moody's</strong> Ratings in the Latin American Power Industry<br />
VOLUME DOMINATED BY CHILE; LAST TWO YEARS MARKED BY RATING STABILITY<br />
<strong>Moody's</strong> currently rates 27 electric utilities and power projects, representing significant components of the electric<br />
business in Latin America. These issuers collectively aggregate to over US$13 billion in debt. The ratings are distributed<br />
primarily among five countries: Mexico, El Salvador, Chile, Guatemala and Brazil, with additional assets held by<br />
regional parent companies in Columbia, Peru, and Argentina.<br />
The volume of ratings and <strong>Moody's</strong> rated debt in the Latin American power market is dominated by Chile which<br />
has approximately US$9.4 billion of power sector rated debt, or 70% of the regional total. The most active Chilean<br />
issuers are Enersis and Endesa,Chile. Both are rated Ba2 and have been placed under review for possible upgrade.<br />
In addition, <strong>Moody's</strong> currently rates nine individual power project financings located in Mexico, Chile, Columbia<br />
and Brazil. The largest power project financing in the market last year was the Mexican hydroelectric generation<br />
project "El Cajon", a US$687 million transaction. It was assigned a Baa3 rating with a stable outlook. Excluding El<br />
Cajon, the average power project transaction was approximately US$150 million.<br />
The rating profile for the Latin American power market has mostly stabilized since 2002, when Corporate<br />
<strong>Finance</strong> downgrades peaked and outpaced upgrades 27 to 4. In 2003, <strong>Moody's</strong> assigned 13 downgrades and two<br />
upgrades; this year to date, <strong>Moody's</strong> has assigned one downgrade and no upgrades. Further underscoring the improvement<br />
in the credit environment, two issuers are currently under review for possible upgrade.<br />
• cix •
LATIN AMERICAN POWER MARKET SEES MODERATE IMPROVEMENT IN 2004<br />
In general, the power sector in 2004 experienced moderate improvement in financial performance and an overall stabilization<br />
in credit profile thanks to general regional economic growth, growing demand, and advances in the regulatory<br />
environment. <strong>Moody's</strong> electric power ratings in Brazil experienced the most rating activity this year with one new rating,<br />
an upgrade in the national scale rating, and a global local currency downgrade. Across the sector in Latin America,<br />
the global local currency rating dispersion runs from Baa1 to Ca with the average rating at Ba3. Currently, 20 Latin<br />
American power issuers rated by <strong>Moody's</strong> carry a stable outlook. One issuer in Brazil, AES Tiete (Tiete Certificates<br />
Grantor Trust) carries a positive outlook and, two issuers also in Brazil, Companhia Paranaense de Energia (COPEL)<br />
and Espirito Santo Centrais Electricas (ESCELSA) carry a negative rating outlook. In Chile two issuers - Enersis and<br />
Endesa Chile - are under review for possible upgrade.<br />
Comparing the Chilean and Brazilian Electricity Markets<br />
It is interesting to compare one of the oldest regulatory models in Latin America to one that's undergoing considerable<br />
change; furthermore, Chile is a country of about 15 million people, whereas Brazil has a population of about 175<br />
million. Chile and Brazil are a study in contrasts.<br />
The Chilean Electricity Market<br />
A STABLE REGULATORY MODEL<br />
In general, the Chilean regulatory model has fostered a separation of generation, transmission, and distribution in<br />
order to promote competition and efficiency. Transmission and distribution are natural monopolies although there are<br />
no regulatory impediments to new entrants. Pricing for distribution and transmission services is regulated based on<br />
operating costs plus an allowable rate of return on assets. The generation sector is competitive and plants are dispatched<br />
based on the least expensive production mix necessary to satisfy demand at any given point in time.<br />
The Chilean regulatory model and electricity market is one of the earliest to be developed and one of the most<br />
stable in Latin America. In fact, in many countries in Latin America, the Chilean model has come to be viewed as a<br />
prototype. Since 1982, the Chilean electric market has operated in accordance with the Electricity Law as amended.<br />
Each amendment has been designed to further the stated goals of simplicity, transparency, and objectivity.<br />
THREE AMENDMENTS SINCE1982; NEW 2004 "SHORT LAW" STRENGTHENS REGULATORY MODEL<br />
There have been three major amendments to Chile's Electricity Law since 1982. In 2000, following the hard lessons<br />
learned from the back-to-back droughts of 1998 and 1999, the Chilean congress amended the law to place severe penalties<br />
on deficient generators in the event of prolonged periods of adverse hydrology by including fines of up to about<br />
US$5 million for failure to deliver as required.<br />
In 2001, Resolution 525 established a list of ancillary services subject to regulation, including, for example, the leasing<br />
of meters. In 2002, the Chilean regulators announced that the electricity framework would be further amended in two<br />
steps. The first step deals with those matters that are more urgent, as embodied in the Short Law that was passed this year,<br />
with additional future amendments to be included in a longer law, which is currently under discussion. It is worth noting<br />
that it took several years for the Short Law to be vetted and passed through Congress. The law was first introduced in<br />
2002 and was not put in effect until 2004. Despite the different views surrounding the Short Law prior to its enactment,<br />
the general consensus now is that it is a step towards even greater clarity and a strengthening of the regulatory model.<br />
The following are some of the modifications imposed by the Short Law.<br />
• The definition of a deregulated or large customer has been modified to allow for a lower usage threshold to qualify<br />
for negotiated power contracts. Regulated customers are subject to power costs calculated at the node price set<br />
by the regulators.<br />
• There is now a requirement of 12 months advance notice when deregulated customers switch suppliers or switch<br />
from classification as a deregulated customer to classification as a regulated customer, and vice versa.<br />
• There are limitations on how many times the customer can opt to switch from being regulated to deregulated:<br />
customers can only switch once every four years. This is designed to ensure some level of stability by preventing<br />
end-users from flipping back and forth frequently and without advanced notice.<br />
• The Short Law also includes regulation of ancillary services, including the fees that would be charged for them.<br />
• Node price adjustments are limited to a 5 % band above or below the unregulated prices which are negotiated.<br />
Node prices determine the cost of power for regulated customers. This should help tighten the variances between<br />
regulated and unregulated markets a little better.<br />
• cx •
• On the transmission side, it provides for an inventory of all of the assets within Chile's transmission system, which,<br />
going forward, will be classified into three categories: trunk assets, which are the high voltage lines, sub- transmission<br />
assets, and additional transmission. Each of these categories will be assigned a value integral to the calculation<br />
of tariffs and the inventory will be used for future strategic planning and investments. More importantly, going<br />
forward, transmission charges will be shared between generators and end-users rather than paid 100-percent by<br />
the generators, as it is currently structured.<br />
To strengthen the regulatory framework, the Short Law established a permanent, seven-member expertise commission<br />
that is charged with resolving disputes between the various parties in the industry. These are just some of the<br />
major changes embodied in the Short Law, which is now undergoing a two-year period of implementation. These<br />
modifications to the Electricity Law are all designed to help stabilize the market, narrow pricing, mitigate volatility,<br />
and promote consistency and clarity. These are attributes intended to help attract long-term investments into Chile's<br />
electric power system.<br />
<strong>Moody's</strong> view is that there are not likely to be additional significant amendments to the Electricity Law in the near<br />
future, and there will not be any major changes of direction or policy. It is encouraging that the process by which the<br />
Short Law was put into place took a reasonable amount of time, involved full vetting of the views of various market<br />
constituents, and that all of the industry participants that we've spoken to since it was put in place generally feel that it<br />
is helpful to generation, transmission, and distribution.<br />
INDEPENDENT SYSTEM OPERATORS ARE KEY TO EFFICIENCY AND TRANSPARENCY<br />
The various Centro de Despacho Economico de Carga ("CDEC") are important elements of the Chilean model and<br />
are key to system efficiency and transparency. Each interconnected system or grid is coordinated by its own CDEC,<br />
which is a semi-private agency whose board of directors is composed of representatives of the participating generation<br />
and transmission companies operating within that grid.<br />
Each CDEC coordinates dispatch into the grid and calculates and clears spot market transactions for its members.<br />
In each grid system, the CDEC makes hourly determinations of which generating units are needed to meet demand<br />
based on the concept of lowest marginal cost. Through the CDECs, each power grid in Chile is able to continuously<br />
track supply and demand, marginal costs, spot market prices, and spot market transactions among the various generation<br />
companies. Through integration and mapping of the entire generation and transmission system within one physical<br />
location, each CDEC, or system operator, is able to locate system bottlenecks and failures expeditiously.<br />
UNIQUE GEOGRAPHY GIVES RISE TO TWO MAIN INDEPENDENT GRIDS<br />
The Chilean electricity market has some interesting features. To a large extent, Chile's unique geography has heavily<br />
impacted development of the country's electricity sector. Chile is an exceptionally long and narrow country, confined,<br />
for the most part, by the Andes Mountains to the east and north and the Pacific Ocean to the west. The lion's share of<br />
Chile's population is concentrated in the greater Santiago metropolitan area. In the 2002 census, the population of<br />
Santiago's metropolitan area comprised over 40% of the entire country's population of about 15 million. Not surprisingly,<br />
the Santiago metropolitan area contributes some 44% of the national GDP and has the highest GDP per capita<br />
in the country. It is the site of the federal government and the center of business, banking, and industry. It is not surprising,<br />
then, that the highest concentration of electric power demand growth resides in this area.<br />
Geography has affected the development of the country's electricity grids. Chile is divided into four separate grids<br />
but two dominate the market. The Sistema Interconectado Central, or "SIC", serves the greater metropolitan area of<br />
Santiago, and as such, encompasses most of the land, population, and power consumption in the country. Over 70% of<br />
the country's installed capacity is located in the SIC. In extreme northern Chile, a separate transmission system,<br />
Sistema Interconectada Norte Grande ("SING"), serves the arid desert region, which includes most of the country's<br />
important mining operations and limited population which is fairly spread apart. Because of the unique geography and<br />
the potential costs of connecting these two systems, the two largest grids in Chile remain unconnected and are likely to<br />
remain so for the long term.<br />
The following are some of the distinguishing characteristics of Chile's power market. Again, geography has<br />
heavily influenced the development of Chile's power industry. Because of the abundance of rivers and mountains in<br />
Chile, the great majority, about 78%, of the SIC's installed capacity is hydro based. Hydro generation is the lowest<br />
cost and most environmentally beneficial. The commencement of operations at Endesa's 570 MW Ralco project this<br />
summer added further to the dominance of hydro generation in the SIC, increasing total installed capacity by over 8%.<br />
The droughts of 1998 and 1999 focused Chile on the need to diversify generation in order to counterbalance periods<br />
of poor hydrology. While AES Gener, (Ba3, stable outlook) is the second-largest generation company in the SIC, it is<br />
primarily dependent on coal, oil, and natural gas generation, helping to diversify the overall generation portfolio.<br />
• cxi •
The largest grid in terms of land mass is the SING, in the north of Chile, but it is less than half the size of the SIC<br />
in terms of installed capacity. The SIC's installed capacity is over 7,000 MW, whereas the SING's is about 3,600 MW.<br />
Since the SING is located in the arid desert regions to the north of the SIC, it relies on coal and natural gas generation.<br />
Currently, installed capacity in the SING is over two-and-a-half times greater than the actual demand. This distinct<br />
overbuild in the SING is very different from the supply-demand situation in the SIC.<br />
CHILEAN ECONOMY SUPPORTS STABILITY IN THE ELECTRICITY MARKET<br />
Demand growth has long been steady reflecting the reliable growth of GDP in Chile. Since 1977, GDP has been<br />
growing steadily with the exception of minor declines in 1983 and 1999. Since 1998, GDP growth has averaged about<br />
2.5% per year. During the first quarter of this year, GDP grew at an average annual rate of 4.8%, which is in line with<br />
general revised projections of 5% growth. Population growth in Chile has also dependably advanced at just under 2%<br />
annually, with the highest levels of population growth in the greater Santiago area.<br />
While moderate economic growth of 4% to 5% for 2004 and beyond represents a down-shifting from the golden<br />
years of more robust growth, it can be viewed as a positive credit factor for the Chilean electricity market, as sustainable<br />
moderate growth reduces the probability of damaging system shocks. Sustainable growth of electricity demand<br />
will support the continued evolution of the stable regulatory model.<br />
Chile enjoys many macroeconomic and political factors that help support stability in the power sector, such as low<br />
inflation and a stable currency. Inflation has been in the low single-digits, thanks to the country's sound fiscal and<br />
monetary policies. Since 1999, inflation has averaged about 2.5%. Foreign currency exchange risk has also not been an<br />
overriding problem in Chile. While there have been fluctuations in exchange rates, periodic movements up or down<br />
have not been widely volatile. Between 1999 and October 1, 2004, the Chilean peso to US dollar exchange rate has<br />
varied from an average low of 508 Chilean pesos to the US dollar to a high of 691, with spreads between the highs and<br />
the lows within any given year averaging only about a hundred pesos. These manageable levels of inflation and currency<br />
fluctuations are important to the long term stability of the electricity model since they are important inputs to<br />
periodic node the price reset mechanism which determine the cost of power to regulated customers and provides fertile<br />
ground for private investments.<br />
Chile's political and institutional framework has similarly remained solid and stable. Chile's foreign currency rating<br />
has been Baa1 since 1995 and currently has a stable outlook that reflects the presence of a strong institutional<br />
framework and a broad-based consensus on key political directives.<br />
Centralization of the regulatory agenda is another key credit plus. The locus of electricity regulation in the federal<br />
regulatory agencies, the Superintendencia de Electricidad y Combustibles ("SEF"), and the Ministry of Economy acting<br />
through the Comision Nacional de Electricidad ("NEC") have helped to advance the regulatory agenda in a coordinated<br />
and consistent manner since the passage of the Electricity Law in 1982. This is unlike the United States, where<br />
the regulatory agenda is played out in a relatively inefficient and patchwork fashion at the various state and federal levels.<br />
Chile's approach has been centralized from the beginning.<br />
Yet another important element of the Chilean model is the manageable number of participants in the electricity<br />
industry. Transmission is dominated by (HQI Transelec) (Baa1, stable outlook), while generation is dominated by<br />
Endesa Chile. AES Gener is the second largest generation company although it is significantly smaller than Endesa.<br />
While there are no regulatory impediments to new entrants, the macroeconomics of the industry are sufficiently<br />
served by the current participants to make it uneconomic at the current time for many new entrants.<br />
ARGENTINA'S NATURAL GAS RATIONING A CHALLENGE, BUT NOT AN INSURMOUNTABLE ONE<br />
In Chile, the impact of Argentina's natural gas rationing this year has proven to be disruptive but not insurmountable.<br />
Rationing began on March 29th, when Disposition 27 rolled natural gas exports to Chile back to 2003 levels. Relief<br />
was provided in April, when Bolivia and Argentina signed agreements to export gas from Bolivia to Argentina to help<br />
meet local demand. In June, Resolution 659 was passed, basically cutting the cuts by 50% and limiting export restrictions<br />
only to levels necessary to meet domestic demand in Argentina<br />
The contract supply reductions were deepest in May, when supplies were reduced about 38% to 40% pro rata, but<br />
the restrictions essentially took place over a three-month period and have gradually come back to manageable levels.<br />
AES Gener was the hardest hit of the generation companies because of its generation portfolio. The company is suing<br />
the gas producers for damages related to restrictions on the volume of gas sales. Endesa is arguably a winner in the natural<br />
gas crisis, given the dominance of hydro in the company's generation mix.<br />
• cxii •
HIGH COPPER PRICES, GROWTH IN DEMAND, HELP TO BOLSTER STABLE OUTLOOK<br />
The Chilean economy continues to register strong growth reflecting favorable external conditions, particularly high<br />
copper prices, which have increased central government revenues this year. 2003 saw a 14% increase in average copper<br />
prices. In the first week of October, 2004, copper prices reached $141, which is the highest level since 1995. This<br />
healthy surge in copper demand is driven largely by increased demand from Asia, particularly from China, which was<br />
responsible for about 20% of Codelco's sales of refined copper in 2003. Given the continued growth potential in<br />
China, it's likely that the strong demand for copper will continue over the near-to-medium term, which will be beneficial<br />
to the growth of GDP in Chile.<br />
GROWTH IN ELECTRICITY DEMAND SHOULD CONTINUE AT A STEADY RATE<br />
Growth in electricity demand in the SIC averaged about 6% per year from 1997 to 2003 while GDP grew at an average<br />
annual rate of about 3% during the same period. In 2003, the regulatory body, the CNE, projected growth in electricity<br />
demand at about 8% per year for the next 10 years. This is more or less consistent with GDP growth<br />
projections of between 4% and 5% for the next several years given the historic ratio of electricity demand growth at<br />
about 150% to 200% of GDP growth. Continued growth in demand is also supported by the fact that although per<br />
capita consumption of electric power in Chile is among the highest in Latin America, it is still significantly below that<br />
of more developed countries, such as Canada and the U.S. Chilean per capita consumption is currently about 14% of<br />
Canadian consumption.<br />
Node price stability will also support positive growth trends. Node prices have gradually moved from $42 per<br />
megawatt hour in 1997 to a low of $28 in 1999 and are now back to $42 in the last regulatory reset in April of this year.<br />
The general consensus among market participants in Chile is that node prices will remain flat at about $41 to $42 at<br />
the next reset in November, 2004, which will be in place for six months until the next scheduled adjustment. This<br />
should help stabilize overall financial performance for the generators and the market in general.<br />
The Brazilian Power Market<br />
HYDRO DEPENDENCY LEADS TO UNDER-INVESTMENT, RATIONING IN 2001 AND 2002<br />
More than 80% of Brazil's total generation capacity is hydroelectric. This is an important feature of the Brazilian<br />
power market because most new marginal energy is more expensive than existing energy. This is because new plants<br />
are either thermoelectric with substantial fuel costs, or are new hydro facilities that are farther away from consumption<br />
centers and thus have a higher transmission cost. Meanwhile, electricity consumption in Brazil has historically grown<br />
at approximately 150% of GDP growth. During the 1990s, generation capacity grew at an average of 2.9% per year<br />
while consumption grew at 4.2% per year. This under-investment in generation reflects the risks of thermoelectric<br />
generation in a market dominated by hydroelectric generation, instability in the regulatory framework, and overall<br />
volatile macroeconomic conditions.<br />
The under-investment in generation capacity caused generators to use up excess reservoir reserves in the hydroelectric<br />
facilities. After several years of lower-than-average rainfall in all regions of Brazil except for the south, this ultimately<br />
led to the electricity rationing crises in 2001 and 2002. Rationing resulted in an overall drop in demand<br />
reflecting permanently changed consumer habits. There is a 10% surplus of generation capacity in Brazil. This is due<br />
to the persistence of lower consumption habits developed during the droughts of 2001 and 2002 and due to improved<br />
rainfall since 2002. In recent years the regulators have focused on increasing thermoelectric and alternative generation<br />
capacity in response to lessons learned during the electricity-rationing period.<br />
INVESTMENT IN GENERATION IS A GOAL OF THE NEW REGULATORY MODEL<br />
The general framework for the new regulatory model in Brazil was established by laws 10762, 10847, and 10848, all<br />
passed within the last year. The most important operational details of the new model were provided by a series of ministerial<br />
decrees that were announced from March through August of this year. The principal objective of the new regulatory<br />
model is to attract investment in generation that will allow the installed plant generating base to grow at a level<br />
that is more in line with potential economic growth in the future.<br />
• cxiii •
There are two principal differences between the new regulatory model and the previous model.<br />
• Distributors must now contract 100% of their projected market consumption in long-term contracts. Distributors<br />
were previously allowed to contract for 95% of their projected market. The new model allows for up to a 3%<br />
overestimation of the projected market. Companies underestimating their tariffs will have to buy energy in the<br />
wholesale market or through future adjustment auctions.<br />
• Most electricity will be sold to a pool of consumers through an auction process in which generators will offer the<br />
lowest tariff for consumers. Previously, bilateral contracts were negotiated directly between distributors and generators.<br />
Bilateral contracts in negotiation between large industrial consumers and generators will still be allowed<br />
as part of the new model, but the new model also distinguishes between existing and new generation capacity. Auctions<br />
under the new model are buyers' auctions whereby generators offering the lowest prices win. The first test of<br />
the new model occured on December 7 which involved bidders of "existing" capacity (power plants that commenced<br />
operations before 2000) offering eight-year contracts starting in 2005, <strong>2006</strong> and 2007. While limited in<br />
scope, this initial test was important to assess auction mechanisms and effectiveness of the new model. The next<br />
two auctions planned for the first half of 2005 will more likely set the tone for the power market in Brazil. One<br />
auction in the first quarter of 2005 involves bidders of "existing" energy for 2008 and 2009 deliveries. Following<br />
that is an auction scheduled in April for "new" energy (plants started up after 2000). Prices will likely be higher for<br />
future auctions which include old as well as new generation. Pricing levels achieved in the future may or may not<br />
stimulate investments in new capacity.<br />
Several new institutions were created for the new regulatory model, including the Empresa de Pesquisa Energetica<br />
("EPE"), an important component of the new model responsible for overall energy policy planning, the Camara de<br />
Comercializacao de Energia Eletrica ("CCEE") or Energy Trading Board responsible for administering the execution<br />
of take-or-pay contracts, and the Comite de Monitoramento de Setor Eletrico ("CMSE") or Committee for Monitoring<br />
the Electricity Sector, which will be continuously monitoring supply capacity. There is more monitoring and planning<br />
built into the new framework than was present in the old framework, which may help reduce the probability of<br />
electricity rationing in the future.<br />
NEW MODEL PRESENTS SOME UNCERTAINTIES<br />
In <strong>Moody's</strong> view, there are several areas which could be points of contention or sources of uncertainty in the new<br />
model. First, a large part of the new rules have been established by government decrees instead of through legislation<br />
such as those decrees on the percentage of projected market that distributors must contract, the operational rules of<br />
the new wholesale market, and the scope of the regulators' responsibilities. These items could be altered by a future<br />
government without legislative approval.<br />
Another point of uncertainty arises from the fact that the contract guarantees provided by distribution companies<br />
to generators through the pool model have not been tested in court. This creates uncertainties as to the real value of<br />
this collateral to generators and their exposure to the risk of distribution company payment delinquency.<br />
Recently the government determined that the IPCA (a CPI index) will be used in the calculation of annual tariff<br />
adjustments rather than the existing IGP-M (PPI index). This may generate criticism from private sector generation<br />
investors given the IPCA's lower correlation with currency devaluation than the IGP-M index. This may result in<br />
lower levels of investment or higher levels of required risk mitigation.<br />
IMPACT ON CREDIT QUALITY UNCLEAR AT THE PRESENT TIME<br />
Ultimately the impact may vary from positive for hydro generators, neutral-to-positive for distributors, to negative for<br />
some private generators. One of the principal strengths of the new regulatory model is its higher level of predictability<br />
created by the institutionalization of long-term planning of required generation capacity and adequate levels of<br />
reserves. Another positive aspect is the standardization of long-term take-or-pay contracts which reduces the risk that<br />
these contracts can be challenged in court.<br />
The new model is mostly positive for hydroelectric generators with highly depreciated asset bases and no goodwill<br />
on their balance sheet, as these generators will be able to compete at an advantage in the new auction process in which<br />
the generator offering the lowest tariff will win the contracts first. We think the model is also positive for investors in<br />
new-generation capacity due to the long-term nature of the contracts in the new capacity auctions and reduced risks<br />
that these contracts can be questioned in court.<br />
The model's impact on distribution companies is neutral to slightly positive. While the companies have less flexibility<br />
in contracting their market, they will have to be more accurate in projecting their electricity needs within the<br />
new guidelines, although that is balanced by less risk of electricity rationing going forward.<br />
The new model is potentially negative for investors in privatized generation capacity with large, unamortized,<br />
intangible assets, since these facilities are unlikely to be able to compete effectively in the lowest-tariff-wins auction<br />
format. This may lead to asset write-downs at those types of generators.<br />
• cxiv •
ECONOMIC GROWTH IN BRAZIL IS DRIVING CONSUMPTION<br />
Finally, recent strong economic growth in Brazil is driving a recovery in electricity consumption. Electricity consumption<br />
hit a new monthly record in September 2004, reaching 7.85% above the same month in 2003. Year-on-year growth has<br />
accelerated every month this year. This is positive in terms of improving industry balance sheets. Total debt to EBITDA<br />
for the industry was 5.1 times at the end of 2002 and 3.3 times at the end of 2003, and it has continued to drop in 2004.<br />
However, continued strong macroeconomic performance with growth reaching 3% to 4% a year, will create more urgency<br />
in terms of the need to secure private investments in new marginal generation capacity. Another electricity rationing period<br />
is possible as early as 2008 if the new model is unable to attract sufficient private investment in generation capacity.<br />
The following are some of the questions that were posed by participants in the investor<br />
teleconference<br />
Question: What is the outlook on Enersis and Endesa-Chile?<br />
Answer: Recently <strong>Moody's</strong> placed the Ba2 senior unsecured ratings of Enersis and Endesa-Chile under review for possible<br />
upgrade. The rating action recognizes improvements in the financial performance of both companies in 2004<br />
and the benefits of debt reduction and restructuring which help mitigate concerns about liquidity and debt service<br />
profile over the next few years. Fundamentally, the companies are well positioned, given their size and the service<br />
area in which they operate in Chile, mainly the SIC, and the quality of their assets.<br />
The weaker-than-expected contributions from their international investments over the past few years have been<br />
credit concerns. With a population of 15 million and a steady-state but ultimately limited growth in demand,<br />
Chile would not be able to provide the levels of strong growth that the companies were looking for, so starting in<br />
1992 Enersis and Endesa looked outside of Chile for future growth potential - to Brazil, Columbia, Peru, and<br />
Argentina. However, soon after Enersis and Endesa undertook their international investments, the regions suffered<br />
various economic and industry crises which negatively impacted the companies' strategic plans. In 2004, the<br />
international economies in which both companies operate have begun to stabilize and electricity demand has<br />
grown an average of 5% in Brazil, Columbia, Peru and Argentina.<br />
Question: Do the Argentine gas export restrictions still affect the Chilean power industry and, if so, how?<br />
Answer: The most dramatic impact of the natural gas rationing from Argentina occurred over a three-month period<br />
from April to June of this year. The current regulation requires rationing only to the extent that domestic Argentine<br />
demand is covered first, which has been helped to some extent, as we mentioned earlier, by exports of natural<br />
gas to Argentina from Bolivia.<br />
By late August, 2004 gas delivery reductions were less than 10% of normal contracted amounts. Furthermore<br />
there are two key points of systemic resilience that help to mitigate the negative impact of gas rationing. One is the<br />
dominance of hydro generation in Chile and the second is the ability to reset node price tariffs every six months.<br />
Node prices include the marginal cost of generation as one factor in a very complicated tariff formula which is<br />
recalculated every six months. Hence adjustments in the cost of natural gas fuel would theoretically be passed<br />
through to the end-user in the following six month tariff reset.<br />
Bottom line, the dislocations caused by the gas restrictions from Argentina was pretty much resolved within a<br />
three-month period. Now that the industry has experienced the disruptions caused by gas rationing, the industry<br />
is more prepared should this sort of restriction scenario happen again in the future.<br />
Question: In reference to the upcoming pool auctions in Brazil, would you expand on what type of guarantees the distributors<br />
are expected to provide? Also, how likely is it that they will be able to provide such guarantees, given the<br />
poor financial health of the industry?<br />
Answer: The guarantees under the new pool auction model are the same guarantees that were provided in the past<br />
through lender standards for bilateral contracts that were directly negotiated between generations and distributors.<br />
In theory, if there is a default on the take-or-pay contract, the generator would be able to directly access the<br />
bank account of the distribution company and to access their client receivables. However, to date we have not seen<br />
any precedents for that type of action in an actual debt-restructuring scenario where a generator was able to successfully<br />
pursue these guarantees.<br />
In terms of the financial strength of the distribution companies providing the guarantees, they are improving over<br />
time with overall economic growth but there are still some distribution companies that are in precarious financial<br />
position. Under the new model, generators will basically have to sell to any and all distribution companies. They<br />
won't be able to pick and choose between strong and weak distribution companies, so the guarantees become even<br />
more important credit features. This is one of the weak features in the new model.<br />
• cxv •
Appendix<br />
MOODY’S RATINGS IN THE ELECTRIC SECTOR IN LATIN AMERICA<br />
<strong>Moody's</strong> Latin America Power Ratings<br />
Issuer Country Rating Debt Outlook $ Volume<br />
AES Gener S.A. Chile Ba3 Sr. Unsecured Stable 3,800.0<br />
AES Sul Distribuidora Gaucha De Energia S.A. Brazil Ca Sr. Secured Stable 87.8<br />
Bandeirante Energia S.A. Brazil Ba3 Issuer Rating Stable 40.0<br />
Chilquinta Energia <strong>Finance</strong> Corp. Chile Aaa insured Sr. Secured NA 320.0<br />
Chivor S.A. ESP Columbia B1 Sr. Secured Stable 150.0<br />
Companhia Energetica de Brasilia (CEB) Brazil Ba3 Sr. Unsecured Stable 45.6<br />
Companhia Energetica de Minas Gerais (CEMIG) Brazil B1 Sr. Unsecured Stable 359.8<br />
Companhia Energetica do Ceara (COELCE) Brazil Ba3 Sr. Unsecured Stable 31.1<br />
Companhia Paranaense de Energia (COPEL) Brazil Ba3 Sr. Unsecured Negative 175.5<br />
Compania de Alumbrado Electrico de San Salvador, S.A. de C.V. (CAESS) El Salvador Baa3 Sr. Secured Stable 120.0<br />
Constructora Internacional De Infraestructora, S.A. (El Cajon) Mexico Baa3 Sr. Secured Stable 687.0<br />
El Habal Funding Mexico Baa2 Sr. Secured Stable 60.0<br />
Empresa Electrica de Guatemala S.A. Guatemala Ba2 Trust Certificates Stable 100.0<br />
Empresa Electrica de Oriente, S.A. de C.V. (EEO) El Salvador Baa3 Sr. Secured Stable 120.0<br />
Empresa Electrica Del Norte Grande S.A. (EDELNOR) Chile B3 Issuer Rating Stable —<br />
Empresa Electrica Guacolda S.A. Chile Baa3 Sr. Secured Stable 150.0<br />
Empresa Nacional De Electricidad, S.A. (Chile) (ENDESA) Chile Ba2 Sr. Unseured. RUR 3,537.0<br />
Enersis S.A. Chile Ba2 Sr. Unsecured RUR 1,100.0<br />
Espirito Santo Centrais Eletricas S.A. (ESCELSA) Brazil B2 Sr. Unsecured Negative 500.0<br />
Fideicomiso Petacalco Mexico Baa2 Sr. Secured Stable 308.9<br />
Furnas 1 FIDC Brazil Ba2 Securitization NA 118.5<br />
HQI Transelec Chile S.A. Chile Baa1 Sr. Unsecured Stable 465.0<br />
Investco S.A. Brazil Ba1 Guaranteed Sub. Stable 88.6<br />
Machadinho Energetica S.A.(MAESA) Brazil Ba2 Guaranteed Sub. Stable 113.5<br />
Monterrey Power, S.A. de C.V. Mexico Baa2 Sr. Secured Stable 235.5<br />
Proyectos de Energia S.A. de C.V. Mexico Baa2 Sr. Secured Stable 100.0<br />
Tiete Certificates Grantor Trust Brazil Caa2 Sr. Secured Positive 300.0<br />
Related Research<br />
Special Comments:<br />
Enersis S.A., December 2003 (80271)<br />
Measuring the Quality and Consistency of Corporate Ratings across Regions, November 2004 (89168)<br />
Special Report:<br />
<strong>Moody's</strong> Credit Trends - Emerging Market's Commentary, December 2004 (90160)<br />
• cxvi •
Credit Opinions<br />
<strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong><br />
• 1 •
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Aeroporti di Roma S.p.A.<br />
Fiumicino, Italy<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
Baa3<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
Aeroporti di Roma S.p.A.<br />
2004 2003 2002<br />
EBIT Margin (before G'will Amort'n)[1] 22.9% 21.5% 22.2%<br />
Adj RCF/ Net Adj Debt[2] 6.6% 1.7% 6.0%<br />
Adj FFO Interest Coverage[3] 2.0 1.6 2.1<br />
Adj RCF/Capex + Investments (net of disposals)[4] 2.2 0.5 3.3<br />
Adjusted Debt / Enplaned Passenger (in currency amount)[5] EUR 118.8 EUR 130.0 EUR 134.3<br />
Total Airport Revenues / Enplaned Passenger (in currency amount) EUR 36.3 EUR 36.9 EUR 38.8<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest<br />
Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Total Debt+ 8*OpLease Expense+Off-balance sheet debt+Pension<br />
liabilities)/(Total passengers*0.5)<br />
Opinion<br />
Credit Strengths<br />
• Monopoly provider of the Rome airport system<br />
• Relatively modest capital expenditure required over the<br />
medium term<br />
• Financial structural enhancements and debt profile mitigate<br />
debt leverage<br />
Credit Challenges<br />
• Relatively high debt leverage<br />
• Economic regulatory framework yet to bed down<br />
• Question mark over Alitalia's longer term prospects<br />
Rating Rationale<br />
The Baa3 rating reflects (1) ADR’s long term concession for<br />
the Rome airport system, (2) its high debt leverage and high<br />
dividend payout policy mitigated somewhat by the structural<br />
protections in its financial documentation, (3) management’s<br />
focus on its core business, (4) its modest capital expenditure<br />
programme and lack of significant operational restrictions,<br />
and (5) its new regulatory charging system which is yet to bed<br />
down.<br />
ADR’s concession should enable it to exploit the prospects<br />
of a major European city which is expected to see material<br />
growth in air traffic over the coming years, albeit that there is<br />
a question mark over the longer term competitive position of<br />
Alitalia and its route network. Nevertheless, the expected<br />
recapitalisation and implementation of a new business plan<br />
should stabilise Alitalia in the near term.<br />
ADR has a relatively high debt burden, a legacy of the<br />
acquisition debt taken on to finance the purchase of the Rome<br />
Airport System from the Italian Government in 2000. ADR’s<br />
financial strategy is to maximise shareholder cash returns via a<br />
high dividend payout policy. However, these factors are somewhat<br />
mitigated by the contractual terms of ADR’s debt which<br />
reduce event risk, provide liquidity support, and provide some<br />
protection in downside cash flow scenarios.<br />
Management is focused on developing the Rome airport<br />
system and is not expected to make any acquisitions or investments<br />
in facilities not pertaining to this business. Given the<br />
expected traffic growth at the airport system and the revenue<br />
maximising opportunities this is an appropriate policy.<br />
The Rome Airport system is well placed to expand with relatively<br />
few operational constraints compared to European<br />
peers, and ADR has a moderate capital expenditure programme<br />
aimed at accommodating expected growth.<br />
The long delayed new regulatory charging framework is<br />
likely to be implemented in Autumn 2005 and proposals for<br />
an increase in aviation charges have now been proposed by<br />
the regulatory body ENAC and are with the Italian Government<br />
for approval. This is a new framework which will take<br />
time to bed down, and its performance overtime remains to<br />
be tested.<br />
Rating Outlook<br />
The positive outlook reflects the balance of probability that<br />
ADR will see good revenue and cash flow growth into the<br />
medium term which would position its key financial metrics<br />
within the range deemed appropriate for a Baa2 rating. Such a<br />
financial profile would probably incorporate an increase in<br />
airport charges in accordance with the new regulatory framework<br />
and reasonable year on year traffic growth.<br />
What Could Change the Rating - UP<br />
An improvement in debt metrics such that ADR had evidenced<br />
and was likely to maintain FFO interest Cover consistently<br />
of over 2.5 times and Adj RCF/ Net Adjusted debt<br />
consistently in the higher single digit % range could warrant<br />
a ratings upgrade.<br />
What Could Change the Rating - DOWN<br />
The rating could be downgraded if ADR’s debt metrics<br />
decline to a level consistently below Adj RCF/ Net Adjusted<br />
debt of 5% and Adj FFO interest cover of less than 2 times.<br />
This could result from a material downturn in traffic at the<br />
Rome Airport System or a significantly more aggressive<br />
financial policy such as a return of capital to shareholders.<br />
• 3 •
AES Corporation, (The)<br />
Arlington, Virginia, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Bkd Sr Sec Bank Credit Facility<br />
Senior Secured<br />
Senior Unsecured<br />
Senior Subordinate<br />
IPALCO Enterprises, Inc.<br />
Outlook<br />
Senior Secured<br />
Indianapolis Power & Light Company<br />
Outlook<br />
Issuer Rating<br />
First Mortgage Bonds<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Ba2<br />
Ba3<br />
B1<br />
B2<br />
Stable<br />
Ba1<br />
Stable<br />
Baa3<br />
Baa2<br />
Senior Secured Shelf<br />
(P)Baa2<br />
Preferred Stock<br />
Ba2<br />
AES China Generating Co. Ltd.<br />
Outlook<br />
Stable<br />
Senior Unsecured<br />
B1<br />
AES Sul Distribuidora Gaucha de Energia S.A.<br />
Outlook<br />
Stable<br />
Senior Secured -Dom Curr<br />
Ca<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
AES Corporation, (The)<br />
2004 2003 2002<br />
Funds from Operations / Adjusted Debt[1] 9.1% 5.6% 5.5%<br />
Retained Cash Flow / Adjusted Debt[1] 9.1% 5.6% 5.5%<br />
Common Dividends / Net Income Available for Common 0% 0% 0%<br />
Adjusted Funds from Operations + Adjusted Interest / Adjusted Interest[2] 1.91 1.57 1.65<br />
Adjusted Debt / Adjusted Capitalization[1][3] 85.5% 92.8% 98.5%<br />
Net Income Available for Common / Common Equity 23.5% n/m n/m<br />
[1] Debt is adjusted to reflect operating leases and mandatorily redeemable convertible preferred securities of subsidiary trusts. [2] Adjusted Interest reflects operating lease adjustments and<br />
distribution on mandatorily redeemable convertible pref. sec. of sub. trusts. [3] Adjusted Capitalization reflects the adjusted debt and the exclusion of deferred taxes.<br />
Opinion<br />
Credit Strengths<br />
AES's credit strengths include:<br />
Improved financial condition due to debt reduction and a<br />
good liquidity profile;<br />
Diversification benefit from asset ownership in diversified<br />
geographic locations;<br />
Core U.S. utility and contracted or hedged assets lend stability<br />
to overall cash flow, resulting in consistent levels of cash<br />
flow generation at the parent level.<br />
Credit Challenges<br />
AES's credit challenges include:<br />
Significant indebtedness including double leverage in<br />
AES's capital structure;<br />
With significant investments in non-investment grade<br />
countries, AES will continue to be exposed to sovereign, economic,<br />
regulatory and foreign exchange risks;<br />
Corporate level debt is structurally subordinated to project<br />
debt.<br />
Rating Rationale<br />
AES's ratings reflect the company’s improved financial<br />
matrix, successful debt reduction and relative stability and<br />
predictability of cash flow generation. Furthermore, the ratings<br />
reflect an expectation for additional near-term debt<br />
reduction, the company’s ability to generate strong cash flow<br />
on a sustainable basis and its good liquidity profile.<br />
The rating level however is constrained by the company's<br />
levered capital structure and the uncertainties and challenges<br />
associated with operating in non-investment grade economies.<br />
Although AES continues to focus on reducing debt, it is<br />
showing increased interest in new investment opportunities.<br />
<strong>Moody's</strong> expects that AES will fund any large new investments<br />
in a way that allows it to continue to improve its credit<br />
profile.<br />
In 2004, AES’s parent level debt was reduced by $800 million<br />
to approximately $5.1 billion, a reduction of $2 billion<br />
from $7.1 billion at December 31, 2002. Parent level cash<br />
flow distribution from its subsidiaries less corporate overhead<br />
and interest expense (parent level cash flow) covered year-end<br />
parent company debt approximately 7.3%, an improvement<br />
from 2003’s 5.8%. Parent level interest coverage also<br />
improved to approximately 1.8 times in 2004 compared to 1.6<br />
times in 2003. AES plans to reduce debt by an additional $600<br />
million in late 2005/early <strong>2006</strong>.<br />
Prospectively, parent level cash flow is expected to improve<br />
to approximately 9% of year-end projected parent company<br />
debt, and is expected to cover interest expense approximately<br />
2 times.<br />
AES's consolidated funds flow from operating activities for<br />
the twelve months ended December 31, 2004 improved considerably<br />
to $1.69 billion, from approximately $1.1 billion the<br />
prior comparable period. However, after adjusting for working<br />
capital changes, consolidated operating cash flow is comparable<br />
to last year’s level.<br />
AES has a good liquidity profile, which is supported by<br />
minimal near-term scheduled principal repayments and<br />
expected positive free cash flow. Parent liquidity, including<br />
availability under its multi-year revolving credit facility,<br />
totaled $643 million at December 31, 2004. <strong>Moody's</strong> expects<br />
AES to maintain $400-$600 million of reliable liquidity<br />
sources going forward.<br />
Rating Outlook<br />
The stable outlook considers the fairly stable and predictable<br />
nature of cash distributions from AES's large utilities and<br />
contracted or hedged generation subsidiaries.<br />
What Could Change the Rating - UP<br />
Ratings upgrade could result if AES produces consolidated<br />
funds from operations to debt and parent level cash flow to<br />
parent company debt of approximately 15% on a sustainable<br />
basis.<br />
What Could Change the Rating - DOWN<br />
Ratings could be downgraded if financial metrics weaken considerable<br />
from anticipated levels . Financing future investment<br />
activities with significant leverage and reduction in<br />
parent level cash flow could also result in a ratings downgrade.<br />
• 4 •
AES Eastern Energy, L.P.<br />
New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Ba1<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
AES Eastern Energy, L.P.<br />
2004 2003 2002 2001<br />
CFO + Interest Expense - CapEx 134,924 181,492 132,052 143,704<br />
Interest Expense + Principal Repayment 68,634 60,119 63,918 60,247<br />
Debt Service Coverage Ratio 1.97x 3.02x 2.07x 2.39x<br />
Debt/Capitalization 74% 65% 63% 60%<br />
Funds from Operations/Debt 15% 20% 14% 17%<br />
(CFO + Interest Expense - CapEx)/Debt 21% 28% 22% 25%<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for AES Eastern Energy include<br />
- AESEE’s low cost, base-loaded coal plants are competitive<br />
against natural-gas plants in NY Power Pool<br />
- AES Corp. is an experienced operator of coal-fired plants,<br />
with a track record of high availability and efficiency<br />
- Short-term hedging strategy has been effective in cushioning<br />
the impact of spark-spread compression<br />
Credit Challenges<br />
Credit challenges for AES Eastern Energy include:<br />
- Exposure to the spot market pricing volatility of the New<br />
York Power Pool<br />
- Ongoing environmental compliance expenditures associated<br />
with operating coal-fired plants<br />
- Leverage at the assets<br />
Rating Rationale<br />
AES Eastern Energy’s (AESEE) Ba1 senior secured rating<br />
reflects the low cost nature of the assets, effective short-term<br />
hedging strategy, the project's solid long-term competitive<br />
position within the region and AES Corp.'s history of being<br />
an experienced coal-fired plant operator. The rating, however,<br />
also reflects the merchant risk being undertaken, the<br />
leverage on the assets and ongoing environmental compliance<br />
expenditures.<br />
AESEE consists of four coal-fired generating plants representing<br />
1,268 MW of capacity in Western New York supplying<br />
power to Eastern New York through the New York Power<br />
Pool. New York Power Pool consists approximately 40% natural-gas<br />
fired generating resources and natural gas is on the<br />
margin for approximately 75% of the time. With its regionally<br />
sourced low cost coal, the AESEE plants are competitive<br />
in comparison to the older, less efficient natural gas plants.<br />
AESEE’s coal purchase agreement expired on 12/31/03.<br />
AESEE coal hedging strategy is to enter into short or<br />
medium-term contracts for approximately 75% of near-term<br />
fuel requirement. The balance of the projected requirement is<br />
monitored and hedged on an ongoing basis balancing coal<br />
pricing, energy hedges in place, and other operational considerations.<br />
Moody’s believes that AESEE will be able to source<br />
coal competitively locally.<br />
AESEE is exposed to the merchant price risk. The assets<br />
sell power to the New York Power Pool, which exposes them<br />
to the price volatility of the merchant market. AESEE’s strategy<br />
has been to enter into short-term hedges for both its<br />
energy and capacity. It is the company’s strategy to continue<br />
its hedging program. Because the company is only partially<br />
hedged, it is not fully protected from spot market price fluctuations.<br />
In addition, when prevailing market prices are low, it is<br />
difficult to enter into hedging arrangements.<br />
AESEE has entered into a settlement agreement with the<br />
New York State Department of Environmental Conservation<br />
regarding alleged environmental violations. As part of the settlement<br />
AESEE has agreed to either shutdown or install new<br />
pollution controls at specific power plants and, with partial<br />
funding from the Department of Energy, install clean coal<br />
technology at another plant that will be used as a demonstration<br />
project.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Long-term hedging arrangements with credit-worthy counterparties<br />
covering higher proportion of capacity and energy<br />
output will help stabilize AESEE’s revenues and cash flow.<br />
What Could Change the Rating - DOWN<br />
Weak operating performance, unexpected environmental<br />
expenditures, large exposure to the merchant market risk and<br />
significant increases in fuel expense.<br />
• 5 •
AES Ironwood, L.L.C.<br />
United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B2<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
AES Ironwood, L.L.C.<br />
2004 2003 [1]2002<br />
CFO + Interest Expense - CapEx 40,038 28,949 32,792<br />
Interest Expense + Principal Repayment 32,826 33,744 29,220<br />
Debt Service Coverage Ratio 1.22x 0.86x 1.12x<br />
Debt/Capitalization 92.9% 93.1% 90.9%<br />
Funds from Operations/Debt 3.9% 1.1% 2.8%<br />
(CFO + Interest Expense - CapEx)/Debt 14.1% 10.5% 10.7%<br />
[1] The <strong>Project</strong> was declared commercially available in December 2001<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of AES Ironwood are:<br />
- Bondholders benefit from a six-month debt service<br />
reserve as well as additional credit support that was provided<br />
by The Williams Companies (Williams: sr. unsec. B1, stable<br />
outlook) pursuant to provisions in the tolling agreement.<br />
- Williams has provided a corporate guarantee covering<br />
125% of outstanding bonds.<br />
Credit Challenges<br />
Credit weaknesses of AES Ironwood are:<br />
- Sole dependence on cash flow derived from Williams for<br />
repayment.<br />
- Prevailing higher natural gas prices and lower than<br />
expected power prices have resulted in substantial lower dispatch<br />
of the plant, pressuring debt service coverage ratio.<br />
- Repayment for approximately 30% of principal will be<br />
dependent upon merchant power sales into the PJM market<br />
pool.<br />
Rating Rationale<br />
AES Ironwood (Ironwood: B2 senior secured) was formed to<br />
develop, own and operate a 705 MW combined cycle gas turbine<br />
generating plant (the <strong>Project</strong>) located in South Lebanon,<br />
Pennsylvania. Ironwood’s rating relies on the credit quality of<br />
The Williams Companies, Inc. (Williams: B1 senior unsecured)<br />
and its willingness and ability to perform under a 20-<br />
year tolling agreement, which is not cross-defaulted to its<br />
general corporation obligations.<br />
In the absence of the tolling agreement, Ironwood could<br />
sell to the merchant market or seek a new tolling agreement<br />
with another party. However, cash flow from either of these<br />
options would likely be insufficient to repay Ironwood's debt<br />
on a timely basis given the current wholesale market conditions.<br />
As required under the tolling agreement, Williams<br />
agreed to provide a $35 million letter of credit, which equals<br />
approximately one year's debt service. In addition, the project<br />
has a six month debt service reserve letter of credit. Although<br />
the added liquidity does not substantially alter the fundamental<br />
long-term credit quality of the project, it provides more<br />
time in which the power market could potentially improve<br />
from current levels.<br />
Financial performance weakened in the TTM Sept 2005<br />
relative to FYE 2004 resulting in a debt service coverage ratio<br />
of approximately 1 times. This deterioration was driven by an<br />
approximate one month outage during the summer 2005<br />
resulting in lower revenue and increased operating costs.<br />
The current one notch rating differential between William’s<br />
unsecured rating and Ironwood’s secured rating reflects<br />
the project’s low debt service coverage ratio and its exposure<br />
to merchant power prices for repayment.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Pricing improvement for gas-fired generation within the PJM<br />
power market or improved financial and operating performance.<br />
What Could Change the Rating - DOWN<br />
AES Red Oak’s rating could be negatively impacted by a<br />
downgrade of William’s ratings or further deterioration in<br />
financial performance.<br />
• 6 •
AES Puerto Rico, L.P.<br />
Delaware, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
Credit Strengths<br />
AES Puerto Rico’s credit strengths include:<br />
• Long-term power purchase agreement with the Puerto<br />
Rico Electric Power Authority;<br />
• Competitive and low cost nature of the <strong>Project</strong>;<br />
• Strong contractual linkages.<br />
Credit Challenges<br />
AES Puerto Rico’s credit challenges include:<br />
• Performance shortfalls;<br />
• Potential technical challenges and environmental<br />
requirements of running a coal-fired plant;<br />
• Lower inflation expectations and an expected run-off of<br />
the project’s existing income tax exemption may negatively<br />
impact future results.<br />
Rating Rationale<br />
AES Puerto Rico, L.P.’s (AESPR) Baa3 senior secured rating<br />
reflects the strength of a long-term power purchase agreement<br />
with the Puerto Rico Electric Power Authority<br />
(PREPA: Power Revenue Bonds rated A3), competitive and<br />
low cost nature of the <strong>Project</strong>, strong contractual linkages,<br />
relatively strong cash flow and debt service coverage ratios,<br />
and the fuel diversity that the <strong>Project</strong> brings to the island of<br />
Puerto Rico.<br />
The rating also reflects performance shortfalls and ongoing<br />
operating issues that have resulted in reoccurring forced outages<br />
and lower than expected projected cash flows and debt<br />
service coverage ratios. The project experienced a five month<br />
delay in reaching commercial operation, and forced outages<br />
in 2003 and 2005 that negatively impacted its equivalent<br />
availability factor. Future results may be lower than the original<br />
projections due to lower inflation expectations (which<br />
affect contract charges) and an expected run-off of the<br />
project’s existing income tax exemption.<br />
The rating also considers the challenges and environmental<br />
requirements associated with running a coal-fired plant. This<br />
risk is somewhat mitigated by AES’ track record and experience<br />
at running coal-fired power plants.<br />
Rating Outlook<br />
The stable outlook reflects Moody’s expectation that the<br />
project will operate at or above required levels and that cash<br />
flows and debt service coverages will remain at levels that are<br />
consistent with an investment grade rating for a coal-fired<br />
power plant.<br />
What Could Change the Rating - UP<br />
Better than projected financial results.<br />
What Could Change the Rating - DOWN<br />
A proliferation of newer, more efficient coal-fired plants on<br />
the island of Puerto Rico which may render AESPR uncompetitive.<br />
We view this scenario as unlikely.<br />
• 7 •
AES Red Oak, L.L.C.<br />
Arlington, Virginia, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B2<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
AES Red Oak, L.L.C.<br />
2004 2003 [1]2002<br />
CFO + Interest Expense - CapEx 40,342 44,577 8,484<br />
Interest Expense + Principal Repayment 39,028 41,463 15,962<br />
Debt Service Coverage Ratio 1.03x 1.08x 0.53x<br />
Debt/Capitalization 88.4% 88.8% 88.7%<br />
Funds from Operations/Debt 3.6% 3.2% 0.6%<br />
(CFO + Interest Expense - CapEx)/Debt 10.9% 11.9% 2.2%<br />
[1] The <strong>Project</strong> achieved commercial operation in September 2002<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of AES Red Oak are:<br />
• Bondholders benefit from a six-month debt service<br />
reserve as well as additional credit support that has been provided<br />
by The Williams Companies (Williams: sr. unsec. B1)<br />
pursuant to provisions in the tolling agreement.<br />
• Williams has provided a corporate guarantee covering<br />
125% of outstanding bonds.<br />
Credit Challenges<br />
Credit challenges of AES Red Oak are:<br />
• Sole dependence on cash flow derived from Williams for<br />
repayment.<br />
• Prevailing higher natural gas prices and lower than<br />
expected power prices have resulted in substantial lower dispatch<br />
of the plant, pressuring debt service coverage ratios.<br />
• The final 7 year tail of the transaction, representing<br />
approximately 22% of the principal repayment, is exposed to<br />
the market price of electricity.<br />
• Litigation with EPC contractor<br />
Rating Rationale<br />
AES Red Oak L.L.C.'s (Red Oak) B2 senior secured rating<br />
reflects the credit quality of Williams and its willingness and<br />
ability to perform under the PPA with the 832 MW combined<br />
cycle gas turbine plant (the <strong>Project</strong>) located in Sayreville,<br />
New Jersey. The PPA is not cross-defaulted to Williams general<br />
corporation obligations. In the absence of the PPA, Red<br />
Oak could sell the power to the merchant market or seek a<br />
new PPA with another party. Given current market prices and<br />
capacity conditions within the PJM power pool, cash flow<br />
from either of these options would likely be insufficient to<br />
repay Red Oak's debt on a timely basis.<br />
Williams has not dispatched the project to a significant<br />
degree due to prevailing high natural gas prices and the minimal<br />
dispatch has negatively impacted the project’s financial<br />
performance. Debt service coverage ratio for the TTM Sept<br />
2005 improved compared to FYE 2004 with a DSCR of<br />
approximately 1.14 times due to lower operating costs.<br />
In addition to the six month debt service reserve, the<br />
project benefits from a $35 million letter of credit provided by<br />
Williams to support payments under the PPA. The project<br />
also has approximately $45 million in restricted cash as of<br />
November 2005; however, the restricted cash includes the<br />
draw down of a $30.3 million letter of credit posted by the<br />
EPC contractor reflecting Red Oak's belief that the contractor<br />
substantially breached the EPC agreement. The EPC<br />
contractor has filed suit and placed a construction lien for<br />
approximately $30.3 million.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Pricing improvement for gas-fired generation within the PJM<br />
power market.<br />
What Could Change the Rating - DOWN<br />
AES Red Oak’s rating could be negatively impacted by a<br />
downgrade of Williams ratings or a negative outcome relating<br />
to the litigation with the EPC contractor.<br />
• 8 •
Allegheny Energy Supply Company, LLC<br />
Greensburg, Pennsylvania, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility<br />
Senior Unsecured<br />
Commercial Paper<br />
Parent: Allegheny Energy, Inc.<br />
Outlook<br />
Corporate Family Rating<br />
Sr Unsec Bank Credit Facility<br />
Senior Unsecured Shelf<br />
Subordinate Shelf<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Ba3<br />
NP<br />
Stable<br />
Ba1<br />
Ba2<br />
(P)Ba2<br />
(P)Ba3<br />
Commercial Paper<br />
NP<br />
Speculative Grade Liquidity<br />
SGL-2<br />
Allegheny Generating Company<br />
Outlook<br />
Stable<br />
Senior Unsecured<br />
Ba3<br />
Bkd Commercial Paper<br />
NP<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
Allegheny Energy Supply Company, LLC<br />
LTM 1Q2005 2004 2003 2002 2001<br />
FFO % Adj. TD[1][2] 7.7% 7.0% 1.0% -2.8% -0.1%<br />
RCF % Adj. TD[2] 2.7% -4.3% 0.9% -6.3% -0.1%<br />
Div / NI (P/O) -37.1% -85.7% -0.6% -17.3% 0.0%<br />
FFO Coverage[1][3] 1.99 1.86 1.07 0.33 0.90<br />
Adj. Total Debt % Total Cap.[2][4] 81.1% 82.9% 80.0% 72.8% 58.0%<br />
NI / Equity (ROE) -63.2% -69.4% -63.8% -55.7% 13.4%<br />
[1] Adjusted FFO deducts all annual payments for preferred securities and excludes the effects of securitization. [2] Adjusted debt includes trust preferred securities, 8x next year's operating<br />
lease expenses (excluding railcar leases), and synthetic leases and excludes the effects of securitization. [3] Adjusted interest includes all payments for preferred securities and synthetic lease<br />
payments and excludes the effects of securitization. [4] Adjusted capitalization includes adjusted debt, preferred securities and equity, but excludes deferred taxes.<br />
Opinion<br />
Credit Strengths<br />
• Purchased power contracts with affiliated utilities to fulfill<br />
provider of last resort obligations provide some stability to<br />
cash flow stream.<br />
• Low-cost baseload coal-fired power generation fleet provides<br />
competitive advantage in a deregulated electricity market,<br />
as well as adequate collateral coverage.<br />
• Reduced liquidity pressures.<br />
Credit Challenges<br />
• The company continues to have a significant debt burden,<br />
which limits its financial flexibility in the longer term.<br />
• Still weak operating cash flow relative to debt levels,<br />
although this is forecast to improve.<br />
Rating Rationale<br />
Allegheny Energy Supply's (AYE Supply) senior unsecured<br />
rating of Ba3 reflects its still limited financial flexibility and<br />
weakness in near-term cash flow. On June 3, 2005, <strong>Moody's</strong><br />
upgraded the AYE family of companies, including AYE Supply.<br />
The upgrades were prompted by the following: 1) AYE's<br />
continued progress in reducing debt and the expectation that<br />
the company will achieve its stated debt reduction target of at<br />
least $1.5B by year end 2005; 2) substantial expected improvement<br />
in financial ratios over the next 2 to 3 years, driven by<br />
rising funds from operations, the use of free cash flow and<br />
asset sales to repay debt, the winding down of unfavorable<br />
hedging transactions, and the expectation of reasonable rate<br />
relief for AYE's regulated utility subsidiaries; 3) a lower business<br />
risk profile resulting from the focus on lower risk core<br />
utility operations; 4) AYE's improving liquidity profile.<br />
The group' credit profile has been strengthened by significant<br />
debt reduction resulting from the sale of higher risk<br />
unregulated assets, such as the recent sale of OVEC and the<br />
Lincoln Generating Station, and the utilization of free cash<br />
flow for debt repayment. AYE recently announced the sale of<br />
the Wheatland generating facility, and the company intends<br />
to sell Mountaineer Gas Company by the end of 2005 and<br />
Midwest peaker Gleason in early <strong>2006</strong>. AYE has already<br />
reduced debt by approximately $1.3 billion since December 1,<br />
2003, and <strong>Moody's</strong> expects AYE to exceed its debt reduction<br />
target of at least $1.5 billion by the end of 2005, through a<br />
combination of funds from operations and additional asset<br />
sales.<br />
AYE's ratings incorporate the relatively strong and stable<br />
source of cash flow from AYE's three regulated utility subsidiaries,<br />
albeit still constrained by the heavy debt load and<br />
weaker performance at unregulated subsidiary AYE Supply.<br />
The rating of AYE Supply considers the cost competitiveness<br />
of its generating assets and the stability of its provider of last<br />
resort contractual arrangements with the regulated utilities.<br />
Its relatively low-cost base load, coal-fired power generation<br />
fleet provides a competitive advantage. However, the rating of<br />
AYE Supply also considers its high leverage and the below<br />
market pricing of its contractual sales to its utility affiliates.<br />
Since the utility operations are subject to rate limitations,<br />
including a rate cap in Pennsylvania, the AYE system as a<br />
whole does not fully benefit from the cost competitiveness of<br />
AYE Supply's generating fleet. <strong>Moody's</strong> rating action incorporates<br />
the expectation that AYE's consolidated profitability<br />
will improve due to the expiry of power supply contracts and<br />
the reset of the Pennsylvania rate cap.<br />
The rating acknowledges AYE Supply's asset base that<br />
includes AYE's legacy generating assets along with the contractual<br />
nature of a portion of AYE Supply's revenue stream<br />
due to firm contracts with its t&d affiliates.<br />
Rating Outlook<br />
AYE Supply's ratings outlook is stable, reflecting that of AYE.<br />
What Could Change the Rating - UP<br />
For the year 2005, <strong>Moody's</strong> expects that the ratio of funds<br />
from operations (FFO) to debt, on an adjusted basis, will<br />
exceed 9%, the ratio of FFO to interest will be approximately<br />
2 times, and the ratio of adjusted debt to capitalization will<br />
improve to about 70%. The upgrade already prospectively<br />
considers substantial further improvement in these ratios that<br />
is expected in <strong>2006</strong> and 2007, with <strong>Moody's</strong> calculation of<br />
projected FFO to debt improving to the range of 12% to 15%<br />
in <strong>2006</strong> and exceeding 15% thereafter.<br />
What Could Change the Rating - DOWN<br />
There could be negative consequences for the ratings if the<br />
company fails to demonstrate this expected improvement<br />
while maintaining or reducing its business risk profile.<br />
• 9 •
Alliance Pipeline L.P.<br />
Delaware, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A3<br />
Credit Strengths<br />
-Ship-or-pay contracts for 100% capacity to 2015<br />
-Authorized overrun service enhances Alliance's competitive<br />
position, although it also limits upside cash flow potential<br />
-Expectation of continued strong U.S. gas demand<br />
-Covenant limitations on leverage & distributions<br />
-Limited capex requirements expected in the medium-term<br />
-Assignment of transportation agreements and floating<br />
charge over real property<br />
Credit Challenges<br />
-Longer-term reserve/gas supply risk<br />
-Imperative of ownership structure to effect dividend distributions<br />
-Re-contracting risk as contracts expire; this is partially<br />
mitigated by economic incentives for renewal in US contracts<br />
-Debt service reserves provided by project level L/Cs,<br />
which provides less liquidity support than cash or L/C's with<br />
a third party obligor<br />
Rating Rationale<br />
The Alliance System is a high pressure natural gas pipeline<br />
that extends approximately 3,000 kilometres from northern<br />
Alberta/British Columbia to the Chicago area. It was placed<br />
in service on December 1, 2000. It has firm service capacity of<br />
1.325 billion cubic feet per day (bcfd), but its higher pressure<br />
(1740 psi) allows above-firm capacity transportation (average<br />
of 1.58 bcfd in 2004 representing 19.3% in excess of firm<br />
capacity). Alliance Pipeline Limited Partnership (Alliance<br />
Canada) is the partnership formed to finance, build, own and<br />
operate the Canadian portion of the Alliance System. Alliance<br />
Pipeline L.P. (Alliance US) is the partnership formed to<br />
finance, build, own and operate the US portion of the Alliance<br />
System.<br />
The A3 ratings of the debt issued by Alliance Canada and<br />
Alliance US reflect the cash flow stability provided by longterm<br />
ship-or-pay contracts with a diversified group of largely<br />
investment grade shippers. The ratings also reflect the fact<br />
that Alliance offers attractive all-in tolls to shippers by virtue<br />
of its authorized overrun service (AOS). The AOS represents<br />
interruptible capacity of up to 20% of Alliance’s firm capacity.<br />
When available, AOS is offered to existing shippers on an<br />
incremental cost recovery basis. This is attractive to shippers<br />
and represents a competitive advantage for Alliance but does<br />
not provide it with any cash flow benefit. The ratings also<br />
reflect the cross-collateralization of the Alliance Canada and<br />
Alliance US debt and the covenant support including the limitation<br />
on debt to 70% of rate base and suspension of distributions<br />
if DSCR falls below 1.25x. The financing documents<br />
also provide for a 6 month debt service reserve although this<br />
is currently provided by project level L/Cs which Moody’s<br />
believes provide less protection than cash reserves. The ratings<br />
also reflect the fact that the US contracts provide an economic<br />
incentive for shippers to renew their contracts beyond<br />
the 15-year term. If they fail to renew prior to the tenth year<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Daniel Gates/New York 1.212.553.1653<br />
or five years prior to the end of any one year extension, the<br />
contract provides for an acceleration of depreciation in the<br />
tolls payable for the balance of the term of the contract.<br />
The Alliance System’s firm service capacity is fully subscribed<br />
by a diversified group of 33 shippers under 15-year<br />
ship-or-pay contracts with Alliance Canada and Alliance US<br />
expiring in December 2015. About 72% of the shippers (by<br />
contracted capacity) are investment grade rated or supported<br />
by investment grade guarantors, 10% are either unrated or<br />
non-investment grade but deemed by Alliance to be of<br />
acceptable financial strength while 18% are required to provide<br />
collateral generally equal to 12 months’ demand charges<br />
or alternate security acceptable to Alliance. Approximately<br />
13% of the system capacity is contracted to the owners or<br />
affiliates of the owners.<br />
In the first quarter of 2005, the two owners of the Alliance<br />
system entered into a power purchase arrangement with<br />
SaskPower for the approximately 5MW output from a proposed<br />
project to capture waste heat from one of Alliance’s<br />
compressor stations. Construction is expected to commence<br />
in 2005 and proceed through <strong>2006</strong>. Management does not<br />
expect any impact of this project on Alliance’s pipeline<br />
throughput. The costs associated with this development are<br />
to be 100% equity funded by Alliance’s unitholders.<br />
In May 2005, Alliance Canada renewed its $190 million<br />
committed extendible revolving credit facility for a further<br />
364 days. If this facility is not extended, Alliance has a 2 year<br />
term out option. Moody’s expects this facility to provide adequate<br />
liquidity for Alliance Canada. Similarly, Moody’s<br />
expects that the US$37.3 million undrawn available credit<br />
under Alliance US’s US$125 million committed revolving<br />
term facility expiring in May <strong>2006</strong> will be sufficient for its<br />
requirements.<br />
Rating Outlook<br />
The A3 rating and stable outlook are supported by contractual<br />
cash flows from the diversified shipper group, the expectation<br />
of continuing U.S. requirements for Canadian imports,<br />
and the competitive rates on the Alliance System.<br />
What Could Change the Rating - UP<br />
-Significant term extension of contracts with a diversified<br />
group of investment grade shippers<br />
What Could Change the Rating - DOWN<br />
While none of the following is currently anticipated, the<br />
occurrence of one or more could contribute to a deterioration<br />
in credit quality and possible downgrade:<br />
-Operational challenges resulting in insufficient capacity to<br />
meet contractual requirements<br />
-Failure of Aux Sable to provide ongoing heat content<br />
management services<br />
-Appeal to the NEB or FERC of Alliance’s negotiated tolls<br />
that result in a reduction of project cash flows<br />
-Inability to re-contract capacity on favourable terms<br />
• 10 •
Alliance Pipeline Limited Partnership<br />
Calgary, Alberta, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured Shelf -Dom Curr<br />
Senior Unsecured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
(P)A3<br />
A3<br />
• 11 •<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Daniel Gates/New York 1.212.553.1653<br />
Alliance Pipeline Limited Partnership<br />
2004 2003 2002 2001<br />
Funds from Operations/Adjusted Debt[1] 12.3% 11.0% 10.8% 10.6%<br />
Retained Cash Flow/Adjusted Debt 4.3% 3.8% 4.7% 4.9%<br />
Common Dividends/Net Income available for Common 139.5% 119.8% 119.7% 109.0%<br />
(Adjusted FFO+ Adjusted Interest)/ Adjusted Interest[2] 2.8x 2.6x 2.9x 2.7x<br />
Net Income available for Common/Common Equity 12.5% 13.2% 12.1% 12.2%<br />
Adjusted Debt/Capitalization 68.6% 68.6% 70.4% 70.0%<br />
[1] Adjusted Debt includes debt equivalent of operating leases [2] Adjusted Interest includes implied interest on operating leases<br />
Opinion<br />
Credit Strengths<br />
-Ship-or-pay contracts for 100% capacity to 2015<br />
-Authorized overrun service enhances Alliance's competitive<br />
position, although it also limits upside cash flow potential<br />
-Expectation of continued strong U.S. gas demand<br />
-Covenant limitations on leverage & distributions<br />
-Limited capex requirements expected in the medium-term<br />
-Assignment of transportation agreements and floating<br />
charge over real property<br />
Credit Challenges<br />
-Longer-term reserve/gas supply risk<br />
-Imperative of ownership structure to effect dividend distributions<br />
-Re-contracting risk as contracts expire; this is partially mitigated<br />
by economic incentives for renewal in US contracts<br />
-Debt service reserves provided by project level L/Cs, which<br />
provides less liquidity support than cash or L/C's with a third<br />
party obligor<br />
Rating Rationale<br />
The Alliance System is a high pressure natural gas pipeline that<br />
extends approximately 3,000 kilometres from northern Alberta/<br />
British Columbia to the Chicago area. It was placed in service on<br />
December 1, 2000. It has firm service capacity of 1.325 billion<br />
cubic feet per day (bcfd), but its higher pressure (1740 psi) allows<br />
above-firm capacity transportation (average of 1.58 bcfd in 2004<br />
representing 19.3% in excess of firm capacity). Alliance Pipeline<br />
Limited Partnership (Alliance Canada) is the partnership formed<br />
to finance, build, own and operate the Canadian portion of the<br />
Alliance System. Alliance Pipeline L.P. (Alliance US) is the partnership<br />
formed to finance, build, own and operate the US portion<br />
of the Alliance System.<br />
The A3 ratings of the debt issued by Alliance Canada and Alliance<br />
US reflect the cash flow stability provided by long-term shipor-pay<br />
contracts with a diversified group of largely investment grade<br />
shippers. The ratings also reflect the fact that Alliance offers attractive<br />
all-in tolls to shippers by virtue of its authorized overrun service<br />
(AOS). The AOS represents interruptible capacity of up to 20% of<br />
Alliance’s firm capacity. When available, AOS is offered to existing<br />
shippers on an incremental cost recovery basis. This is attractive to<br />
shippers and represents a competitive advantage for Alliance but<br />
does not provide it with any cash flow benefit. The ratings also<br />
reflect the cross-collateralization of the Alliance Canada and Alliance<br />
US debt and the covenant support including the limitation on<br />
debt to 70% of rate base and suspension of distributions if DSCR<br />
falls below 1.25x. The financing documents also provide for a 6<br />
month debt service reserve although this is currently provided by<br />
project level L/Cs which Moody’s believes provide less protection<br />
than cash reserves. The ratings also reflect the fact that the US contracts<br />
provide an economic incentive for shippers to renew their<br />
contracts beyond the 15-year term. If they fail to renew prior to the<br />
tenth year or five years prior to the end of any one year extension,<br />
the contract provides for an acceleration of depreciation in the tolls<br />
payable for the balance of the term of the contract.<br />
The Alliance System’s firm service capacity is fully subscribed by<br />
a diversified group of 33 shippers under 15-year ship-or-pay contracts<br />
with Alliance Canada and Alliance US expiring in December<br />
2015. About 72% of the shippers (by contracted capacity) are investment<br />
grade rated or supported by investment grade guarantors,<br />
10% are either unrated or non-investment grade but deemed by<br />
Alliance to be of acceptable financial strength while 18% are<br />
required to provide collateral generally equal to 12 months’ demand<br />
charges or alternate security acceptable to Alliance. Approximately<br />
13% of the system capacity is contracted to the owners or affiliates<br />
of the owners.<br />
In the first quarter of 2005, the two owners of the Alliance system<br />
entered into a power purchase arrangement with SaskPower<br />
for the approximately 5MW output from a proposed project to<br />
capture waste heat from one of Alliance’s compressor stations.<br />
Construction is expected to commence in 2005 and proceed<br />
through <strong>2006</strong>. Management does not expect any impact of this<br />
project on Alliance’s pipeline throughput. The costs associated<br />
with this development are to be 100% equity funded by Alliance’s<br />
unitholders.<br />
In May 2005, Alliance Canada renewed its $190 million committed<br />
extendible revolving credit facility for a further 364 days.<br />
If this facility is not extended, Alliance has a 2 year term out<br />
option. Moody’s expects this facility to provide adequate liquidity<br />
for Alliance Canada. Similarly, Moody’s expects that the<br />
US$37.3 million undrawn available credit under Alliance US’s<br />
US$125 million committed revolving term facility expiring in<br />
May <strong>2006</strong> will be sufficient for its requirements.<br />
Rating Outlook<br />
The A3 rating and stable outlook are supported by contractual<br />
cash flows from the diversified shipper group, the expectation<br />
of continuing U.S. requirements for Canadian imports, and the<br />
competitive rates on the Alliance System.<br />
What Could Change the Rating - UP<br />
-Significant term extension of contracts with a diversified<br />
group of investment grade shippers<br />
What Could Change the Rating - DOWN<br />
While none of the following is currently anticipated, the<br />
occurrence of one or more could contribute to a deterioration<br />
in credit quality and possible downgrade:<br />
-Operational challenges resulting in insufficient capacity to<br />
meet contractual requirements<br />
-Failure of Aux Sable to provide ongoing heat content management<br />
services<br />
-Appeal to the NEB or FERC of Alliance’s negotiated tolls<br />
that result in a reduction of project cash flows<br />
-Inability to re-contract capacity on favourable terms
AmerenEnergy Generating Company<br />
St. Louis, Missouri, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Analyst<br />
Phone<br />
Michael G. Haggarty/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
AmerenEnergy Generating Company<br />
2Q05 LTM 2004 2003 2002<br />
Adjusted Funds from Operations / Adjusted Debt[1][2] 31.51% 18.01% 12.42% 11.19%<br />
Retained Cash Flow / Adjusted Debt[2] 22.65% 12.04% 9.52% 9.65%<br />
Common Dividends / Net Income Available for Common 52.85% 61.68% 48.00% 65.63%<br />
Funds from Operations + Adjusted Interest / Adjusted Interest[3] 4.04 3.11 2.52 2.76<br />
Adjusted Debt / Adjusted Capitalization[2][4] 61.29% 71.75% 79.44% 82.91%<br />
Net Income Available for Common / Common Equity 26.57% 24.60% 23.36% 11.43%<br />
[1] Preferred dividends have been deducted from FFO [2] Adjusted debt includes 8x next year's operating leases [3] Interest is adjusted to include preferred dividends and lease payments [4]<br />
Adjusted capitalization reflects the adjustments made to debt<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of AmerenEnergy Generating Company<br />
include:<br />
- Contracted genco with most power sold under fixed price<br />
contract to AmerenCIPS through <strong>2006</strong><br />
- Construction phase completed with no new generation<br />
planned<br />
- Transfer of 550MW of combustion turbines to AmerenUE<br />
removed some excess capacity<br />
- Opportunity for higher power prices following expiration<br />
of Illinois rate freeze<br />
Credit Challenges<br />
The credit challenges of Ameren Energy Generating Company<br />
include:<br />
- Contract with AmerenCIPS expires 12/31/06<br />
- Genco may be limited in the amount of power it can sell<br />
to affiliates post-<strong>2006</strong><br />
- Uncertainty with regard to Illinois regulatory framework<br />
following expiration of rate freeze<br />
- High capital expenditures for environmental compliance<br />
Rating Rationale<br />
The Baa2 rating for AmerenEnergy Generating Company's<br />
(Genco’s) outstanding notes due 2010 and 2032 reflect the<br />
company's relationship with AmerenCIPS, to which it provides<br />
the T&D system’s entire power supply needs, the competitiveness<br />
of its mostly coal fired generation assets, its<br />
power contracts with third parties, Ameren's knowledge of<br />
and experience with the regional power markets, and a satisfactory<br />
financial performance since the generating company<br />
was created in 2000. AmerenCIPS maintains an A3 senior<br />
secured rating, which is on review for downgrade due to the<br />
contentious political and regulatory environment in Illinois.<br />
At the end of 2004, Genco owned 4,751 MW of operating<br />
Illinois coal, gas, and oil-fired generating stations, of which<br />
2,860 MW of coal units were transferred from AmerenCIPS<br />
in 2000. Due to higher natural gas prices, coal accounted for<br />
93% of Genco's generation in 2004. The company has<br />
increased its total capacity over the last several years through<br />
the addition of gas fired peaking and combined cycle units,<br />
and recently transferred 550MW of these assets to AmerenUE<br />
at their net book value of $240 million. This removed<br />
some of Genco’s excess capacity and allowed them to be<br />
placed in AmerenUE’s rate base.<br />
Through back-to-back contracts with an Ameren power<br />
marketing subsidiary, Genco provides AmerenCIPS' commodity<br />
supply needs and sells its remaining output pursuant<br />
to certain other wholesale contracts and, to a lesser extent,<br />
into the merchant energy markets. The contract with AmerenCIPS<br />
was extended by two years through 12/31/06, consistent<br />
with the Illinois rate freeze for the same period.<br />
AmerenCIPS, Missouri-based AmerenUE (A1 senior secured,<br />
on review for possible downgrade), Illinois-based Ameren-<br />
CILCO (A3 senior secured, on review for possible downgrade),<br />
and Illinois-based AmerenIP (Baa2 senior secured, on<br />
review for possible downgrade) are the four operating utility<br />
subsidiaries of St. Louis based Ameren Corporation (Baa1<br />
senior unsecured, on review for possible downgrade).<br />
There is a significant degree of uncertainty regarding the<br />
Illinois regulatory framework following the expiration of the<br />
rate freeze currently in place in the state. Ameren has proposed<br />
an auction style system similar to that which is in place<br />
in New Jersey, although both the Governor and Attorney<br />
General have strongly opposed this system. Rates in Illinois<br />
are likely to increase to some degree following the expiration<br />
of the rate freeze, and Ameren plans to file T&D rate cases in<br />
Illinois in either late 2005 or early <strong>2006</strong>. It appears likely that<br />
Genco will be limited in the percentage of its power that can<br />
be sold to Ameren affiliates, exposing it to competition with<br />
other generators in the region.<br />
Rating Outlook<br />
The stable outlook on AmerenEnergy Generating Company’s<br />
ratings reflects Moody’s expectation that the company’s financial<br />
performance should be maintained due to its competitive,<br />
low cost generating portfolio; upside potential beyond January<br />
1, 2007 when contracts to sell power expire and the company<br />
may benefit from higher market prices; and reduced<br />
leverage as a result of retiring $225 million of long-term debt<br />
on November 1, 2005.<br />
What Could Change the Rating - UP<br />
A sustained improvement in power prices in the Midwest, a<br />
further reduction of leverage, an improvement in cash flow<br />
through the successful marketing of excess power into the<br />
merchant market at favorable prices, particularly following<br />
the expiration of its contract with AmerenCIPS in <strong>2006</strong>.<br />
What Could Change the Rating - DOWN<br />
Continued poor power market conditions in the region, particularly<br />
if they persist beyond the expiration of its contract<br />
with AmerenCIPS; the acquisition or new construction of<br />
additional generating assets; a substantial deterioration in the<br />
credit quality of the entire Ameren system.<br />
• 12 •
American Ref-fuel Company LLC<br />
Montvale, New Jersey, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Analyst<br />
Phone<br />
Michael G. Haggarty/New York 1.212.553.1653<br />
M. Sanjeeva Senanayake/New York<br />
Daniel Gates/New York<br />
American Ref-fuel Company LLC<br />
2004 2003 2002 2001<br />
Funds from Operations / Adjusted Debt[1] 18.8% 16.7% 14.3% 11.3%<br />
Retained Cash Flow / Adjusted Debt[1] 9.4% 10.9% 6.9% 7.8%<br />
Common Dividends / Net Income Available for Common 118.4% 65.3% 87.0% 67.3%<br />
Funds from Operations + Adjusted Interest / Adjusted Interest[2] 5.18 4.14 3.77 3.26<br />
Adjusted Debt / Adjusted Capitalization[1][3][4] 61.5% 62.8% 81.1% 90.4%<br />
Net Income Available for Common / Common Equity[4] 12.6% 15.0% 36.9% 48.4%<br />
[1] Debt is adjusted for 8x operating leases [2] Interest is adjusted for 1/3x operating leases [3] Adjusted Capitalization reflects the adjustment made to debt [4] Some ratios have been affected<br />
by the application of EITF-97 ("Push-Down Accounting") beginning in 2003<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of American Ref-Fuel Company LLC<br />
("ARC") include:<br />
-Relatively stable cash flows generated by the underlying<br />
waste-to-energy (WTE) projects<br />
-Solid debt service coverage ratios<br />
-All of its projects are located in the attractive Northeast<br />
region of the country<br />
-Increased scale and scope of operations following anticipated<br />
acquisition by Covanta Energy Corporation<br />
("Covanta")<br />
-A high percentage of revenues is derived from long-term<br />
contractual relationships<br />
-The WTE business is generally non-cyclical and mature,<br />
with significant barriers to entry<br />
-Management has exhibited a good track record of strong<br />
operating performance<br />
Credit Challenges<br />
The credit challenges of ARC include:<br />
-Structural subordination of ARC debt to approximately<br />
$865 million of debt at WTE projects<br />
-Anticipated ownership by more leveraged parent company,<br />
Covanta<br />
-High consolidated debt leverage throughout the Covanta<br />
organization at $3.6 billion<br />
-Concentration risk, as over half of ARC’s cashflow comes<br />
from two projects, Hempstead and SEMASS<br />
-The Hempstead contract expires in 2009, well before the<br />
maturity of ARC’s senior notes<br />
-The risk of changes in environmental laws or regulations,<br />
which could require additional capex<br />
Rating Rationale<br />
<strong>Moody's</strong> assigns a Ba1 rating to $240 million of senior notes<br />
outstanding at American Ref-Fuel Company LLC ("ARC").<br />
The rating reflects its anticipated ownership by a highly<br />
leveraged parent, Covanta Energy Corporation ("Covanta"),<br />
high consolidated debt throughout the Covanta organization,<br />
and the structural subordination of the notes at ARC to<br />
approximately $865 million of project level debt at the underlying<br />
WTE projects. These risk factors are offset by relatively<br />
stable cash flows generated by the projects, the increased scale<br />
and scope of the company’s waste-to-energy business following<br />
its acquisition by Covanta, and solid debt service coverage<br />
ratios. The rating also reflects concentration risk in that over<br />
half of the cash distributable to ARC comes from two key<br />
projects, Hempstead and SEMASS.<br />
ARC, indirectly owned by American Ref-Fuel Holdings<br />
Corp., is in the process of being acquired by Covanta for $740<br />
million in cash plus the assumption of debt. ARC operates a<br />
total of six WTE facilities in the Northeast which process<br />
over 5 million tons of waste and sells 2.7 million mwh of electricity<br />
annually. In addition, its TransRiver Marketing Company<br />
subsidiary arranges for delivery of solid waste<br />
inventories to all of ARC's plants by marketing uncommitted<br />
waste capacity. ARC derives approximately 62% of its revenues<br />
from the waste side of its business, for the most part<br />
from long-term contracts with a diverse group of municipalities,<br />
with approximately 38% derived from power sales, most<br />
of which are under long-term contracts.<br />
Four of ARC’s six subsidiary projects are rated by Moody’s:<br />
Hempstead, Niagara, SECONN, and SEMASS. The ARC<br />
senior notes are secured by ARC’s equity interests in the subsidiary<br />
projects, as well as a 6-month senior notes debt service<br />
reserve account and a shared collateral account. The senior<br />
notes require that a backward and forward looking rolling<br />
four-quarter debt service coverage ratio of 1.75x be maintained<br />
to allow distributions to ARC’s owners.<br />
Rating Outlook<br />
The stable outlook reflects Moody’s expectation that the<br />
WTE projects’ contracts with the respective municipalities<br />
and utilities will remain in place through their current maturities;<br />
that management will continue to operate the plants at<br />
high availability levels and that Covanta will generate synergies<br />
with regard to operating expenses; and that the organization<br />
will de-lever over the next several years at the subsidiary<br />
project level.<br />
What Could Change the Rating - UP<br />
An improvement in the credit quality of parent company<br />
Covanta; substantial deleveraging at the ARC subsidiary<br />
project level; a significant increase in cash flow generated<br />
from the projects; increases in the credit ratings of the project<br />
level debt.<br />
What Could Change the Rating - DOWN<br />
A deterioration in the financial performance of the parent<br />
company Covanta; increased reliance by Covanta on dividends<br />
from ARC; a decline in the financial or operating performance<br />
of ARC’s WTE projects, especially Hempstead or<br />
SEMASS; additional acquisitions or incremental debt issuances<br />
by Covanta; unforeseen capital expenditure requirements.<br />
• 13 •
ANA - Aeroportos de Portugal, S.A.<br />
Lisbon, Portugal<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
ANA - Aeroportos de Portugal, S.A.<br />
2003 2002 2001 2000<br />
EBIT Margin (before G'will Amort'n)[1] 12.7% 11.1% 13.7% 17.7%<br />
Adj RCF/ Net Adj Debt[2] 13.7% 12.3% 14.4% 10.2%<br />
Adj FFO Interest Coverage[3] 474.5% 398.9% 466.0% 478.2%<br />
Adj RCF/Capex + Investments (net of disposals)[4] 79.3% 45.5% 35.3% 19.2%<br />
Adjusted Debt / Enplaned Passenger (in currency amount)[5] € 46.3 € 44.7 € 37.8 € 30.4<br />
Total Airport Revenues / Enplaned Passenger (in currency amount) € 23.0 € 21.9 € 21.0 € 19.7<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest<br />
Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Total Debt+ 8*OpLease Expense+Guarantees+Off-balance<br />
sheet debt+Pension liabilities)/(Total passengers*0.5)<br />
Opinion<br />
Recent Developments<br />
The ratings of ANA - Aeroportos de Portugal, S.A. (“ANA”)<br />
reflect the application of Moody’s new rating methodology<br />
for government-related issuers (“GRIs”). Please refer to<br />
Moody’s Rating Methodology entitled “The Application of<br />
Joint Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled “Rating<br />
Government-Related Issuers in European Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of the<br />
GRI rating methodology to corporate issuers in Europe.<br />
Credit Strengths<br />
• Sole concessionaire for operating the Portuguese civil<br />
airport infrastructure<br />
• Limited transfer traffic and good diversification of revenue<br />
• Moderate debt leverage and a conservative debt profile<br />
Credit Challenges<br />
• Modest profitability impacted by a loss making subsidiary<br />
• Constrained alternate liquidity<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> GRI methodology, the ratings of<br />
ANA reflect the combination of the following inputs, (a) a<br />
Baseline Credit Assessment of 3, (b) the Aa2 local currency<br />
rating of the Government of the Republic of Portugal, (c) a<br />
low Dependence, and (d) medium Support.<br />
The baseline credit assessment of 3 reflects (1) ANA's status<br />
as the sole concessionaire for operating the network of<br />
Portuguese civil airport infrastructure and manager of the airports<br />
of the Madeira Islands, (2) its diverse and relatively stable<br />
revenue profile, and (3) its modest profitability on a<br />
consolidated basis and weak alternate liquidity but reasonable<br />
cash flow generation. The assessment also reflects the pari<br />
passu unsecured nature of substantially all of ANA's indebtedness.<br />
Although just over 50% of ANA's consolidated debt<br />
resides in ANAM – Aeroportos e Navegação Aérea da<br />
Madeira, S.A. (“ANAM”), all of which is currently guaranteed<br />
by the Republic of Portugal, and given that ANAM accounts<br />
for only a small percentage of ANA's consolidated revenues<br />
and cash flow, the amount of debt at ANAM does not create<br />
material structural subordination for the holders of ANA<br />
debt. The low Dependence recognises that factors other than<br />
domestic economic performance have a material impact on<br />
ANA, e.g. propensity for international travelers to visit Portugal<br />
and propensity for passengers to spend at the airports.<br />
The medium Support reflects the 100% indirect ownership of<br />
ANA by the Republic of Portugal ("RoP"), stand-alone nature<br />
of ANA's operations, and possibility that RoP may reduce its<br />
investment in ANA at some stage in the future. Consequently,<br />
a partial reduction in RoP's ownership of ANA would not<br />
necessarily result in a ratings downgrade.<br />
Rating Outlook<br />
The stable rating outlook reflects <strong>Moody's</strong> expectation that<br />
ANA will continue to manage its capital expenditure programme<br />
successfully, and that revenues and cash flow will<br />
grow moderately over the medium term. This should enable<br />
ANA to service its larger debt levels at the assumed rating<br />
level. Furthermore, <strong>Moody's</strong> does not expect that ANA will<br />
be wholly or partially privatised in the short to medium term.<br />
In the longer term, there is more uncertainty given that, at<br />
some stage over the next 3-5 years, RoP will need to consider<br />
how future airport capacity in the Lisbon area will be built<br />
and owned. Consequently, the prospect of privatisation will<br />
inevitably be raised again when government reconsiders the<br />
case for a new airport for Lisbon.<br />
What Could Change the Rating - UP<br />
ANA's rating is likely to be constrained at the current level<br />
until ANA's current capital expenditure programme is successfully<br />
completed (projected to be <strong>2006</strong>).<br />
What Could Change the Rating - DOWN<br />
ANA's rating may be pressured by a deterioration in its alternate<br />
liquidity position or a deterioration in profitability that<br />
pushed FFO Interest Cover materially below 4 times and<br />
Adjusted RCF to Net Adjusted Debt substantially below 12-<br />
15%.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 14 •
Aruba Airport Authority N.V.<br />
Aruba<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
Aruba Airport Authority N.V.<br />
2003 2002 2001 2000<br />
Enplaned Passengers[1] 772,921 835,703 907,365 982,620<br />
PFC Eligible Enplanements 747,247 756,582 814,701 868,996<br />
Revenues per Enplaned Passenger $ 49.65 $ 43.37 $ 39.73 $ 38.04<br />
Debt per Enplaned Passenger $ 89.51 $ 87.36 $ 87.40 $ 84.70<br />
Net Debt Service Coverage Ratio as per Trust Indenture 1.45 1.35 1.52 1.54<br />
[1] Enplaned passengers estimated as half of total passengers<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the Aruba Airport Authority are:<br />
- Position as the only airport in Aruba and a critical asset in<br />
the island's tourism-based economy.<br />
- Recent organizational restructuring resulting from a<br />
cooperation agreement with Schiphol International B.V.<br />
- A Passenger Departure Fee (PFC) and additional service<br />
charges that enhance the Authority's financial flexibility.<br />
Credit Challenges<br />
Credit challenges for the Aruba Airport Authority are:<br />
- Continued economic and financial stresses of the global<br />
travel industry.<br />
- Heavy reliance on tourism sector and dominance of international<br />
carriers.<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> Government Related Issuers<br />
(GRI) rating methodology, the rating of the Aruba Airport<br />
Authority reflects the combination of the following key<br />
inputs:<br />
- Baseline credit assessment of 5 on a scale of 1 to 6, where<br />
1 represents the lowest credit risk<br />
- The local currency rating of the government of Aruba -<br />
currently not published<br />
- Medium dependence<br />
- High level of support<br />
The baseline credit assessment of 5 reflects the overall<br />
challenges of operating in a highly competitive industry given<br />
the island's concentration on discretionary tourism and the<br />
continued stresses of the global travel and airline industries.<br />
The baseline credit assessment also reflects a relatively recent<br />
overall recovery in the airport’s tourist-based air services and<br />
improved operating profile under new management. Financial<br />
performance has improved moderately since 2003 and<br />
continues to show progress due to healthier market conditions,<br />
recovering enplanement levels, stronger collections of<br />
passenger facility charges and other service charges, and a<br />
series of expenditure reductions, including a personnelrestructuring<br />
plan and renegotiations of vendor and airline<br />
contracts.<br />
On April 2004, the Authority signed a cooperation agreement<br />
with Schiphol International B.V. This resulted in an<br />
organizational restructuring in 2004 and approval of the<br />
Authority's first Five-Year Business Plan in January 2005. On<br />
February 2005, the Authority announced that Universal<br />
Weather and Aviation, Inc. was awarded the concession to<br />
build and operate a new General Aviation Terminal. Actions<br />
to date that have improved the company’s credit profile<br />
include the implementation of a $2.50 per passenger security<br />
charge in March 2003, and increases of 5% in the Landing<br />
Fee and 10% in the Fuel and Throughput Charge in 2004.<br />
The $23 Passenger Departure Fee (PFC) represents approximately<br />
45% of operating revenues. The Authority’s Board has<br />
the power to increase the PFC if needed. Management does<br />
not plan to implement additional charges in 2005 but plans<br />
incremental increases beginning in 2007. Bondholders benefit<br />
from a relatively short 9-year amortization schedule, fairly<br />
restrictive covenant provisions including a 1.35 Debt Service<br />
Coverage ratio, and a cash funded Debt Service Reserve totaling<br />
almost US$10 million.<br />
Medium dependence reflects the interrelationship of the<br />
Airport to the island's important tourism and time-share<br />
industry.<br />
High support reflects the critical service that the Airport<br />
provides to transport of tourists. As the only airport serving<br />
Aruba, the airport is strategically important to the regional<br />
economy<br />
The Aruba Airport Authority N.V. is a limited liability corporation<br />
that operates Aruba’s Aeropuerto Internacional<br />
Reina Beatrix.<br />
Rating Outlook<br />
The stable outlook is based on Moody’s expectation of sustained<br />
passenger growth and improving financial flexibility as<br />
a result of new management initiatives..<br />
What Could Change the Rating - UP<br />
A sizeable and sustainable improvement in passenger growth<br />
and financial performance.<br />
What Could Change the Rating - DOWN<br />
A deterioration in traffic and financial performance and a<br />
depletion of reserves.<br />
• 15 •
Australia Pacific Airports (Melbourne) Pty<br />
Melbourne, Victoria, Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Bkd Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A3<br />
Aaa<br />
Analyst<br />
Phone<br />
David Howell/Sydney 612.9270.8167<br />
Clement K. Chong/Sydney 612.9270.8108<br />
Brian Cahill/Sydney 612.9270.8105<br />
Australia Pacific Airports (Melbourne) Pty<br />
[1]2004 2003 2002 2001<br />
EBITDA Margin (%) 71.2 69.6 71.2 71.9<br />
Funds From Operations/Senior Interest (x) 2.8 2.4 2.2 1.7<br />
Retained Cash Flow/Senior Debt (%) 9.1 6.4 4.8 0.4<br />
Retained Cash Flow/Capital Expenditure (%) 267.5 166.0 115.7 14.2<br />
Revenue per Emplaned Passenger (A$ Million) 30.1 29.0 24.8 23.0<br />
Senior Debt per Emplaned Passenger (A$ Million) 121.0 132.4 134.4 128.5<br />
[1] For the year ended 30 June 2004<br />
Opinion<br />
Credit Strengths<br />
• Melbourne Airport's dominant position in the State of<br />
Victoria, being the major domestic and only international airport.<br />
• Strong origin & destination (O&D) traffic accounts for<br />
most domestic and international traffic, with a balanced international<br />
passenger mix.<br />
• Diversification of earnings, with revenue generated from<br />
aeronautical, retail, property and commercial trading activities,<br />
which provides stability and resilience against external<br />
shocks.<br />
Credit Challenges<br />
• Highly geared financial structure which limits financial<br />
flexibility and results in relatively low debt coverage measures<br />
for its rating.<br />
• Potential occurrence of unexpected external shocks that<br />
may affect passenger numbers and liquidity over the short<br />
term.<br />
• Increased returns to shareholders could pressure the rating.<br />
Rating Rationale<br />
The Aaa rating on Melbourne Airport's Medium Term Notes<br />
("MTNs") reflects the insurance policy provided by MBIA<br />
Insurance Corporation (rated Aaa for its financial-claims paying<br />
ability). The underlying A3 rating on the MTNs and bank<br />
facilities reflects the credit quality of APAM's core asset, Melbourne<br />
Airport, and the dominant position in the State of<br />
Victoria, its diverse revenue streams, and strong O&D traffic,<br />
which supports predictable cash flow and the resultant adequate<br />
debt coverage measures. International traffic is well<br />
diversified and has a relatively high percentage of business,<br />
with less dependency on tourism. Mitigating these natural<br />
credit strengths is high leverage albeit coverage ratios are<br />
expected to improve over time, driven by growth in passenger<br />
numbers, growth in aeronautical charges and increases in<br />
non-aeronautical revenue.<br />
The A3 rating further considers the risk of volatility arising<br />
as a result of unpredictable external events that may impact<br />
passenger numbers. However, <strong>Moody's</strong> believes that Melbourne<br />
Airport has a solid track record of withstanding the<br />
impact of these events.<br />
Rating Outlook<br />
The outlook for the ratings is stable, reflecting strong cash<br />
flows, ongoing improvements in debt coverage measures and<br />
a track record of strong resilience to external shocks, which<br />
have impacted the airport and airline industries in recent<br />
years.<br />
What Could Change the Rating - UP<br />
APAM's A3 rating could be considered for an upgrade upon a<br />
sustained increased in passenger numbers, or a sustained<br />
improvement in the company's other non-aeronautical revenues,<br />
leading to a stronger financial performance, debt reduction<br />
and/or reduced debt funding of capital expenditure.<br />
Financial indicators may include:<br />
- FFO/Senior Interest exceeding 3.5x<br />
- RCF/Senior Debt exceeding 10%<br />
- Senior Debt/EBITDA below 4.0x<br />
What Could Change the Rating - DOWN<br />
APAM's A3 rating could come under downward pressure<br />
upon the occurrence of aggressive shareholder returns in the<br />
form of dividends and funded by additional senior debt, or<br />
unexpected downside events, which dramatically decrease<br />
passenger numbers over a sustained period. Financial trends<br />
could include:<br />
- FFO/Senior Interest 2.0-2.2x<br />
- RCF/Senior Debt close to 0%<br />
- Senior Debt/EBITDA 6.0-6.5x<br />
• 16 •
Autopista del Mayab<br />
Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Unsecured -Dom Curr<br />
Bkd Subordinate -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Ba2<br />
Credit Challenges<br />
Challenges include:<br />
• Dependence on restoration of tourism in Cancún and<br />
Cozumel<br />
• Expected reduction in credit metrics for 2005 and <strong>2006</strong><br />
Credit Strengths<br />
Strengths include:<br />
• Vital transportation link for reconstruction efforts, especially<br />
with free alternative closed<br />
• Debt service and liquidity reserves currently cover more<br />
than 12-months of debt service<br />
Rating Rationale<br />
The ratings of Autopista Del Mayab reflect Moody’s expectation<br />
that cash flow coverages in 2005 and <strong>2006</strong> will be weaker<br />
than previously expected due to the lingering effects of hurricane<br />
Wilma. The storm resulted in the closure of part of the<br />
road for several weeks due to flooding, the subsequent need to<br />
make certain improvements to sections of the road as<br />
required by the Secretaría de Comunicaciones y Transportes<br />
(“SCT”), as well as a reduction in tolls charged for part of the<br />
road.<br />
Moody’s expects that financial performance will continue<br />
to be relatively weak in <strong>2006</strong> since the rebuilding of the tourist<br />
areas in Cancún and Cozumel is not expected to be fully<br />
completed until at least the end of the first quarter. While the<br />
damage caused by Wilma was unprecedented for the region<br />
prior to this year, the rating also considers the toll road’s ongoing<br />
exposure to similar events that could affect the overall<br />
level of tourism in the region.<br />
The reduction in cash flow for <strong>2006</strong> may be partially offset<br />
by proceeds from the SCT to compensate ADM for the suspension<br />
of tolls from Xcan to Cancún since October 21 and<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
for the improvements required for certain sections of the<br />
road. However, the potential for funding by the SCT is<br />
uncertain at this time. No proceeds are expected from ADM’s<br />
insurance providers since the company’s policies do not cover<br />
hurricane-related damage or business interruptions.<br />
Consorcio del Mayab, S.A. de C.V. holds the concession<br />
until 2020 for the 245.5-km toll road linking the cities of<br />
Cancún and Kantunil (Autopista Kantunil-Cancún). Given<br />
the transportation needs and network limitations in the<br />
region, <strong>Moody's</strong> expects sufficient continued traffic demand<br />
in the corridor over the life of the CPOs. The service area is<br />
fueled by the tourism industry and has experienced sustained<br />
economic growth largely due to tourist activity.<br />
Rating Outlook<br />
The stable outlook reflects significant progress in restoring<br />
the tourist areas and the view that Cancún and Cozumel will<br />
ultimately remain highly attractive tourist destinations. Barring<br />
an unforeseen delay in the restoration of the tourist areas<br />
and, or a prolonged delay in the return of tourism to previous<br />
levels, Moody’s anticipates that traffic levels and cash flow<br />
coverages will improve significantly in 2007.<br />
What Could Change the Rating - UP<br />
An upgrade is not likely in the near to medium term, given<br />
the relatively small revenue base and continuing exposure to<br />
events that could disrupt traffic, such as strong hurricanes.<br />
What Could Change the Rating - DOWN<br />
A further downgrade could occur if there is a significant delay<br />
in restoring the road to full operation and toll collection, a<br />
significant or prolonged deterioration in traffic, or a delay in<br />
recovery of tourism in the region.<br />
• 17 •
Autopista del Sol<br />
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Autopista Del Sol<br />
2005<br />
Outstanding debt US $154,000,000<br />
Toll Road length<br />
105-km<br />
Average annual traffic growth (2002-2004) 2.0%<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Autopista del Sol are:<br />
- Road's favorable alignment connecting Chile's largest city<br />
and largest port<br />
- Sound history of tolling operations<br />
- Lack of construction and ramp up risk<br />
Credit Challenges<br />
Credit challenges for Autopista del Sol are:<br />
- Vulnerability to general economic conditions<br />
Rating Rationale<br />
The Sociedad Concesionaria Autopista del Sol, S.A.'s toll<br />
road revenue bonds, Series A and B carry an underlying<br />
project rating of Baa2 (global scale) and a Aaa-insured rating<br />
based on an unconditional guaranty provided by Financial<br />
Security Assurance Inc.<br />
The Baa2 underlying rating reflects the road's favorable<br />
alignment, lack of competitive alternatives, tolling history<br />
prior to concession, lack of construction and ramp up risk,<br />
and sufficient bondholder structural protections. The bonds<br />
are secured by a pledge of the concession contract, by project<br />
accounts, and by a joint and several sponsor guarantee of<br />
principal and interest payments in the event of early concession<br />
termination or failure to perform.<br />
Autopista del Sol is a special purpose company owned by<br />
Infraestructura Dos Mil, S.A. In 2003 Endesa, Chile sold its<br />
60% stake in Infraestructura Dos Mil to Obrascon Huarte<br />
Lain (rated Baa3). Autopista del Sol holds the toll road concession<br />
granted by the Ministry of Public Works (MOP) until<br />
2018 for the 105-kilometer toll road connecting Santiago and<br />
the Port of San Antonio. One of the earliest infrastructure<br />
concessions successfully let by the MOP, the Autopista’s location<br />
spanning the Metropolitan Region and the Fifth Region<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
– the most densely populated and economically important<br />
regions in Chile - supports the road’s long term viability as a<br />
link within the country’s essential transportation network.<br />
The Autopista is one of the few high speed, limited access<br />
highways in Chile, without at-grade crossings, enhancing the<br />
road’s safety and efficiency. The road has over thirty years of<br />
tolling history and benefits from limited competitive alternatives.<br />
Third quarter financials reflect a debt service coverage<br />
ratio of 1.48x based on operating cash flow calculations. The<br />
toll road is well positioned in terms of its essential alignment<br />
between the capital city Santiago and the Port of San Antonio<br />
and stands to benefit from general economic improvements in<br />
the country and the region in general.<br />
Traffic growth has averaged 2.3% per year since 2001.<br />
Autopista del Sol has structured the Bonds to provide sufficient<br />
bondholder protections including a twelve-month Debt<br />
Service Reserve Fund.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook is based upon the expectation that<br />
financial and operational forecasts will be met over the near<br />
term.<br />
What Could Change the Rating - UP<br />
Upward uderlying rating pressure could result from a sizeable<br />
and sustainable improvement in the road's cash flow in combination<br />
with a significant increase in traffic growth.<br />
What Could Change the Rating - DOWN<br />
Downward rating pressure could result from a significant<br />
decline in national economic conditions and traffic as well as<br />
the company's failure to succesfully manage any potential<br />
fluctuations due to traffic or revenue downfalls.<br />
• 18 •
Autostrade S.p.A.<br />
Rome, Italy<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Unsecured<br />
Autostrade Participations S.A.<br />
Outlook<br />
Bkd Sr Unsec MTN -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A3<br />
Stable<br />
A3<br />
Analyst<br />
Phone<br />
Monica Merli/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
Autostrade S.p.A.<br />
2004 2003 2002 2001<br />
EBIT Margin[1] 45.6% 44.6% 45.3% 41.6%<br />
Adj RCF/ Net Adj Debt[2] 7.5% 9.0% 31.6% 60.7%<br />
Adj FFO Interest Coverage[3] 2.6 3.4 10.7 11.7<br />
Adj RCF/Capex + Investments[4] 2.6 0.7 1.1 3.7<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt + 8*OpLease Expense + Guarantees + Off-balance sheet debt + Pension liabilities - (Cash + Marketable Securities)); for 2003, Schemaventotto's debt is included [3] (Funds From Operation<br />
post Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Credit Strengths<br />
- High predictability and stability of the cash flows generated<br />
by Autostrade's motorway operations as the largest<br />
European toll road operator.<br />
- Stabilisation of the tariff framework into the long term<br />
following successful finalisation of discussions with the Italian<br />
government.<br />
- Strengthened liquidity arrangements.<br />
Credit Challenges<br />
- The company's relatively high debt burden after its<br />
merger with NewCo28.<br />
- The constraints that a large capital expenditure programme<br />
will place on Autostrade's ability to reduce debt.<br />
Rating Rationale<br />
Autostrade's A3 senior unsecured debt rating reflects (i) the<br />
high predictability and stability of the cash flows generated by<br />
Autostrade's motorway operations as the largest European<br />
toll road operator; (ii) stabilisation of the tariff framework<br />
into the medium term following successful finalisation of discussions<br />
with the Italian government; (iii) the company's relatively<br />
high debt burden after its merger with NewCo28; (iv)<br />
the constraints that a large capital expenditure programme<br />
will place on Autostrade's ability to reduce debt; (v) the company's<br />
strengthened liquidity arrangements; and (vi) guarantees<br />
applying to notes issued under the programme, which, in<br />
<strong>Moody's</strong> opinion, should be effective to avoid structural subordination.<br />
The rating also assumes that Autostrade's management will<br />
continue to focus predominantly on the company's core business<br />
of investing in and maintaining Italian toll roads, and<br />
that the shareholders of Autostrade's majority owner, Schemaventotto<br />
S.p.A., will continue to support this strategy.<br />
<strong>Moody's</strong> further expects that the company will consistently<br />
achieve funds from operations (FFO) interest cover of at least<br />
3.5x and retained cash flow (RCF)-to-debt at or above 10%<br />
over the next three to five years.<br />
Rating Outlook<br />
The outlook for the rating is stable.<br />
What Could Change the Rating - UP<br />
- A material decrease in leverage.<br />
- Sustained and successful execution of Autostrade's capex<br />
commitments.<br />
What Could Change the Rating - DOWN<br />
- A shift in management focus toward diversification away<br />
from the core business.<br />
- Material unfavourable changes to the tariff regime or its<br />
application.<br />
• 19 •
BAA plc<br />
London, United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Baa1<br />
Senior Unsecured -Dom Curr<br />
Baa1<br />
Commercial Paper P-2<br />
Other Short Term -Dom Curr P-2<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
BAA plc<br />
Mar-2004 Mar-2003 Mar-2002 Mar-2001<br />
EBIT Margin (before G'will Amort'n)[1] 32.1% 34.2% 31.1% 29.6%<br />
Adj RCF/ Net Adj Debt[2] 12.9% 15.4% 22.2% 22.0%<br />
Adj FFO Interest Coverage[3] 3.6 3.9 4.8 4.8<br />
Adj RCF/Capex + Investments (net of disposals)[4] 0.3 0.9 0.7 1.1<br />
Adjusted Debt / Enplaned Passenger (in currency amount)[5] GBP 64.9 GBP 61.5 GBP 51.6 GBP 41.8<br />
Total Airport Revenues / Enplaned Passenger (in currency amount) GBP 29.5 GBP 29.5 GBP 32.6 GBP 35.7<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/<br />
Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Total Debt+ 8*OpLease Expense+Guarantees+Off-balance<br />
sheet debt+Pension liabilities)/(Total passengers*0.5)<br />
Opinion<br />
Credit Strengths<br />
• Very strong position in the London and south east<br />
England air travel market<br />
• Diverse airline and market segment base<br />
• Solid liquidity<br />
• Proven regime of economic regulation<br />
Credit Challenges<br />
• Management of large complicated £ multi-billion capital<br />
expenditure programme<br />
• Increase in debt leverage through the current price cap<br />
period<br />
• Maximisation of opportunties at Budapest Airport<br />
• Potential exposure to short term revenue shocks from<br />
events beyond management control<br />
Rating Rationale<br />
The Baa1/P-2 ratings reflect BAA’s dominant market position<br />
through its ownership of Heathrow, Gatwick and Stansted<br />
Airports (the Designated Airports), the system of price cap<br />
economic regulation to which they are subject, BAA’s significant<br />
capital expenditure programme over the medium term,<br />
Moody’s expectation that BAA’s indebtedness will increase<br />
materially and debt protection measures will weaken, mitigated<br />
somewhat by BAA’s financial policies and its regulatory<br />
framework. The ratings seek to accommodate the impact of<br />
the permitted tariff increases and higher debt service costs<br />
over the current regulatory period. The Designated Airports<br />
comprise the majority of BAA’s revenues and operating profits<br />
and will remain the key cash flow driver of BAA going forward.<br />
Given the large capital expenditure programme and the<br />
material increases in charges that BAA will be implementing<br />
over the current regulatory period, management will need to<br />
keep focused on delivering the infrastructure upgrades on<br />
time and to budget and maintaining service quality. The Baa1<br />
rating also factors Moody’s expectation that the aggregate<br />
business risk for the group will not deteriorate materially following<br />
the debt financed acquisition of Budapest Airport and<br />
that over the intermediate term BAA’s credit metrics will show<br />
limited sensitivity to the performance of Budapest Airport<br />
given its size relative to BAA’s other businesses.<br />
Like all major airport owners BAA is exposed to short term<br />
losses of revenue from external factors, but generally operates<br />
in a growth industry that requires significant increases in<br />
capacity to accommodate this growth. This dynamic is somewhat<br />
mitigated by BAA’s ability to reduce some of its planned<br />
capital expenditure in the event of a sustained downturn, and<br />
its conservative liquidity profile.<br />
Rating Outlook<br />
The outlook reflects Moody’s expectation that, notwithstanding<br />
the increase in debt resulting from the acquisition of<br />
Budapest Airport and the ongoing large capital programme at<br />
the London airports, BAA will maintain Adj FFO Interest<br />
Cover at or above 3.0x and a ratio of Adj RCF to Net<br />
Adjusted Debt at or above 7.5%.<br />
What Could Change the Rating - DOWN<br />
Persistent failure to achieve the above ratio thresholds would<br />
likely pressure the ratings, as could any material negative<br />
implications of the Budapest Airport acquisition on the next<br />
regulatory price period commencing April 2008, a significant<br />
decline in traffic levels at BAA’s London airports below expectations<br />
for an extended period of time (e.g. following a major<br />
catastrophic event), or further sizeable debt-financed acquisitions,<br />
which are not currently anticipated.<br />
What Could Change the Rating - UP<br />
BAA’s ability to consistently achieve an Adj FFO Interest<br />
Cover above 3.5x or a ratio of Adj RCF to Net Adjusted Debt<br />
above 10% would likely create positive pressure on the ratings.<br />
• 20 •
Bina-Istra d.d.<br />
Croatia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
Bina-Istra d.d.<br />
2004 2003 2002<br />
EBIT Margin (before G'will Amort'n)[1] 66.2% 62.0% 61.2%<br />
Adjusted RCF/ Net Adjusted Debt[2] -8.1% 1.8% 10.5%<br />
Adjusted FFO Interest Coverage[3] 0.7 1.6 3.2<br />
Adjusted RCF/Capex + Investments (net of disposals)[4] -0.3 0.1 8.3<br />
Adj debt (HRK)/Vehicle kilometre[5] 6.9 7.5 3.9<br />
Toll revenues (HRK)/Vehicle kilometre[6] 0.4 0.4 0.3<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash<br />
Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Total debt+Off-balance sheet debt+Pension liabilities)/(Annual traffic*Network kilometres)<br />
[6] (Toll revenues excl government subsidies)/(Annual traffic*Network kilometres)<br />
Opinion<br />
Recent Developments<br />
The ratings of Bina-Istra reflect the application of Moody’s<br />
rating methodology for government-related issuers (“GRIs”).<br />
Phases 1B-1 and 1B-2 (financed by the bonds) were completed<br />
in May 2005. The toll plaza on viaduct Mirna was<br />
opened in June 2005. Whilst phase 1B-3 has been delayed by<br />
administrative issues on the part of the Government in securing<br />
land, this should not impact bondholders.<br />
Key indicator ratios for 2004 were negatively impacted by<br />
working capital outflows. However, the underlying fundamentals<br />
of the credit remain sound, with 10% increase in traffic<br />
in that year. Traffic volumes for 2005 are slightly lower to<br />
date.<br />
The appeals department of the Ministry of <strong>Finance</strong> has<br />
ruled in favour of Bina-Istra in relation to the VAT and<br />
income tax claims raised by the Rijeka district tax office. The<br />
decision cannot be appealed, although the tax office may<br />
bring a lawsuit against the ruling.<br />
Credit Strengths<br />
- Financial Contribution mechanism effectively guarantees<br />
the project's annual revenues on a cost-plus basis, with any<br />
within-year shortfalls made up the following year. The<br />
project has been structured to be essentially immune to traffic<br />
risk<br />
- favorable concession agreement including good termination<br />
compensation payment provisions<br />
- good liquidity<br />
Credit Challenges<br />
- limited practical experience of enforcing security in Croatia<br />
- risk of inadequate shareholder motivation after 2009<br />
- project effectively relies on Government subsidy<br />
- current tax disputes raise uncertainty about concession<br />
agreement. Whilst Bina-Istra is exempt from VAT and<br />
income taxes, regional tax authorities submitted a claim for<br />
111 million Kuna (about EUR 15 million) for historic income<br />
tax and VAT liabilities.<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Bina-Istra reflect the combination of the following<br />
inputs: baseline credit assessment of 5 (on a scale of 1 to 6,<br />
where 1 represents lowest credit risk); Baa1 local currency<br />
rating of the Croatian government; medium dependence; and<br />
high support.<br />
The baseline credit assessment of 5 is underpinned by the<br />
stable cash flows expected through the favourable concession<br />
agreement with the Government, including the Financial<br />
Contribution mechanism. However, Bina-Istra's debt is not a<br />
direct unconditional obligation of the Government.<br />
Medium dependence reflects the fact that in the event of an<br />
economic downturn, the Government could have difficulty<br />
meeting its obligations under the Financial Contribution<br />
mechanism. Bina-Istra requires these funds from the Government<br />
to meet its debt service obligations.<br />
High support reflects <strong>Moody's</strong> view that Croatia's road<br />
network is a significant constraint to its growth, and development<br />
of a nationwide road system has been a top priority for<br />
many years. The Government (indirectly) owns 44% of the<br />
company.<br />
The rating has pierced the Croatian Baa3 foreign currency<br />
ceiling. This reflects <strong>Moody's</strong> views on the likelihood of the<br />
Croatian Government imposing a moratorium on the payment<br />
of foreign currency debt, and Bina-Istra being excluded<br />
from any such moratorium.<br />
Rating Outlook<br />
The outlook is stable. The ratings of the Croatian Government<br />
are also stable.<br />
Drivers of Rating Change<br />
A rating upgrade could follow a period of continued traffic<br />
growth and reduced dependence on the Financial Contribution<br />
mechanism.<br />
A rating downgrade could arise if the Government disputes<br />
material obligations in the concession agreement, particularly<br />
regarding the Financial Contribution mechanism.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 21 •
Borger Energy Associates, L.P.<br />
Amarillo, Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd First Mortgage Bonds<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Credit Strengths<br />
Credits strengths for Borger include:<br />
• 25-year purchase power agreement with Southwestern<br />
Public Service Company provides stability to projected revenues.<br />
• 20-year steam sales & operating agreement with Conoco-<br />
Phillips.<br />
• Minimal fuel risk, under normal operating conditions,<br />
due to structure of the issuer's contracts.<br />
Credit Challenges<br />
Credit challenges for Borger include:<br />
• Recent unscheduled extended outages will significantly<br />
impact the project's debt service coverage into 2005 and <strong>2006</strong>.<br />
• Anticipated reduction in steam usage by ConocoPhillips<br />
prolongs the period of weakened financial results into <strong>2006</strong><br />
and potentially 2007.<br />
• Shortfall in major maintenance reserve funding will persist<br />
in 2005.<br />
• Additional debt service related to financing for a new<br />
generator.<br />
Rating Rationale<br />
Borger Energy Associates, L.P. (Borger) is a 230 MW gasfired<br />
cogeneration facility located near Borger, Texas. For the<br />
next few years, Borger's projected debt service coverage ratio<br />
(DSCR) will likely remain depressed. The lower coverages<br />
reflect the further extension of the projected time period during<br />
which Borger’s capacity revenues will be reduced as a<br />
result of recent and current unplanned outages; a significant<br />
and prolonged reduction in steam revenues; and to a lesser<br />
extent, the project’s intention to incur additional debt in conjunction<br />
with the purchase and installation of a new generator.<br />
During 2004, the plant experienced extended and<br />
unplanned outages which caused availability and capacity payments<br />
to be reduced. During a scheduled overhaul on Unit<br />
#1, it was determined that a rewind of the generator was<br />
required. The outage ultimately lasted four months. Similarly,<br />
in 2005, a scheduled overhaul of Unit #2 tubine ran longer<br />
than expected and was followed by an unplanned 19-day outage.<br />
The Unit #2 generator subsequently failed in September.<br />
Fortunately, Borger had already ordered a new generator in<br />
early 2005 following the problems experienced by the plant in<br />
2004. The generator arrived at the end of October; installation<br />
is in process. Borger expects Unit #2 to be back on line<br />
sometime later in November. <strong>Project</strong>ions indicate that the<br />
project will not be entitled to its full capacity payment until<br />
October <strong>2006</strong>.<br />
Financing for the Unit #2 generator and its installation was<br />
obtained through a $3 million loan facility that is secured by<br />
the generator. The generator loan is scheduled to be repaid<br />
primarily in <strong>2006</strong>, 2007 and 2008, with a maturity in 2009.<br />
The new financing was expected to add approximately<br />
$500,000 to $1.2 million to annual debt service costs. The<br />
aforementioned debt service costs will likely be reduced to the<br />
extent that Borger is able to utilize insurance proceeds rather<br />
than term loan proceeds to finance the generator and its<br />
installation.<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
ConocoPhillips began to reduce its steam purchases<br />
towards the end of 2004 and intends to continue the reduction<br />
at even more severe levels than previously anticipated<br />
during 2005 and <strong>2006</strong>. Steam sales make up a significant component<br />
of the project’s revenue and operating margin and can<br />
fluctuate dramatically based on volumes. The project will be<br />
able to offset this loss to some extent via a steam delivery<br />
reduction (SDR) provision in its Power Purchase Agreement<br />
with Southwest Public Service Company. The SDR provision<br />
allows Borger to be paid for energy at its actual heat rate<br />
rather than its guaranteed heat rate, in exchange for the passthrough<br />
of steam revenues. This provision essentially creates<br />
a fuel pass-through for the project. Implementation of the<br />
SDR provision began in August.<br />
Preliminary projections for 2005 show debt service coverage<br />
to be approximately 1.0x with the potential for significant<br />
shortfalls in the funding of the major maintenance reserve;<br />
nevertheless, no utilization of the project’s $5.5 million sixmonth<br />
debt service reserve is expected. In <strong>2006</strong>, debt service<br />
coverage is also projected to again be close to 1.0x; however,<br />
the project currently anticipates that it will be able to fully<br />
fund its major maintenance reserve and that it will not need to<br />
access the debt service reserve.<br />
Borger Energy Associates L.P.'s benefits from an original<br />
25-year purchased power agreement (PPA) with Southwestern<br />
Public Service Company (SPS: Baa1 senior unsecured;<br />
stable outlook), a 20-year steam sales & operating agreement<br />
(SSOA) with ConocoPhillips Company, (ConocoPhillips: A3<br />
senior unsecured; ratings under review for possible upgrade).<br />
Borger's revenues are exposed to potential reductions in<br />
steam off-take, deterioration in the plant's heat rate, plant<br />
availability, and to dispatch decisions by SPS.<br />
The financing structure includes protections for the debt<br />
holders, which include a first mortgage and equity pledge, a<br />
6-month cash debt reserve, amortization that fits the expected<br />
cash flow profile reasonably well, and a dividend restriction<br />
test of 1.2 times coverage after funding of major maintenance<br />
(on a 1 year look back and look forward basis).<br />
Rating Outlook<br />
The stable outlook reflects Moody’s view that the Ba3 rating<br />
is not likely to be revised in the near term, and assumes that<br />
the project will be able to maintain a coverage around 1.0x in<br />
2005 and <strong>2006</strong> and will not need to utilize the debt service<br />
reserve.<br />
What Could Change the Rating - UP<br />
The rating is not likely to be revised upward in the near term.<br />
The rating outlook could be revised to positive if the project<br />
returns to full operation as expected such that it produces<br />
debt service coverage ratios above 1.20 times on a sustainable<br />
basis. Additional positive rating action would depend on additional<br />
clarity surrounding the amount of steam sales expected<br />
in 2007 and beyond.<br />
What Could Change the Rating - DOWN<br />
The rating could be revised downward should the current<br />
operating outage extend significantly longer or cost more<br />
than anticipated or if there were a need to utilize the debt service<br />
reserve.<br />
• 22 •
Brilliant Power Corporation<br />
British Columbia, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured -Dom Curr<br />
Senior Unsecured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A1<br />
A1<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Daniel Gates/New York 1.212.553.1653<br />
Recent Developments<br />
The A1 ratings of Brilliant Power Corporation (“BPC”)<br />
reflect the application of Moody’s new rating methodology<br />
for government-related issuers (“GRIs”). Please refer to<br />
Moody’s Rating Methodology entitled “The Application of<br />
Joint Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled<br />
“Rating Government-Related Issuers in the Americas Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of<br />
the GRI rating methodology to corporate issuers in the<br />
Americas.<br />
Credit Strengths<br />
-Low cost hydro facility<br />
-Stable cash flows from long-term BPPA with FBC<br />
-FBC requires output of Brilliant Dam to serve its customers<br />
-Back-stop arrangement with Powerex<br />
-No major capex expected in the intermediate term<br />
-<strong>Project</strong>’s key role in BC’s strategy for deploying benefits of<br />
Columbia River Treaty<br />
-Full amortization of Series A, B and C bonds during the<br />
fixed price period of the PPA<br />
Credit Challenges<br />
- Reliance on FBC for entire revenue stream<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the A1<br />
ratings of BPC reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 3 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- Aa1 local currency rating of the province of British<br />
Columbia<br />
- Low dependence<br />
- Medium support<br />
The baseline credit assessment of 3 is underpinned by a<br />
number of strengths including the project’s stable financial<br />
performance, its low cost hydro production, the long-term<br />
contract with BCUC-regulated Fortis BC (FBC), the fact that<br />
FBC needs the project’s output to meet the demands of its<br />
customers and the additional support provided by the Powerex<br />
Backstop. It also recognizes the project’s dependence on<br />
a single customer, FBC, although this risk is largely mitigated<br />
by i) the fact that FBC is a regulated utility that requires the<br />
project’s output to satisfy the demands of its customer base<br />
and ii) the backstop arrangement with Powerex, the non-government<br />
guaranteed power marketing subsidiary of BC<br />
Hydro.<br />
BPC is equally owned by Columbia Power Corporation<br />
(CPC) and Columbia Basin Trust (CBT) both of which are<br />
100% owned by the province of British Columbia. BPC<br />
(including its predecessors) was formed to acquire the Brilliant<br />
Dam, a hydroelectric facility on the Kootenay River in<br />
south-central British Columbia. The project is part of British<br />
Columbia's strategy to deploy the benefits it receives under<br />
the 1963 Canada-US Columbia River Treaty. The treaty provides<br />
for sharing the benefits of flood control and power production<br />
derived by regulating the flow of the Columbia River.<br />
The province uses a portion of the benefits it receives under<br />
the Treaty to make payments to CBT and CPC for purposes<br />
of investing in power projects including Brilliant Dam. Brilliant<br />
Dam was purchased for $130 million in 1995, with a<br />
combination of the proceeds of the Series A bonds and equity<br />
provided by CBT and CPC. BPC issued $28 million Series B<br />
bonds in 2001 and $50 million Series C bonds in 2004 to<br />
retire short-term debt incurred to complete certain upgrade<br />
and sustaining capital projects at Brilliant Dam. Pursuant to<br />
the bonds’ trust deed, BPC maintains a 6 month P+I Debt<br />
Service Reserve and must demonstrate a forward looking<br />
minimum 1.3x DSCR before issuing additional bonds. In<br />
addition, BPC maintains a 3 month O&M reserve.<br />
The bonds are limited recourse obligations whose ultimate<br />
repayment is dependent upon the financial performance of<br />
Brilliant Dam. Under the Canal Plant Agreement (CPA) with<br />
BC Hydro, which coordinates the operation of all dams on<br />
the Kootenay River, including Brilliant Dam, BPC is entitled<br />
to a specified amount of energy and capacity from BC<br />
Hydro's system. The CPA essentially eliminates the project’s<br />
exposure to hydrology risk which is instead borne almost<br />
exclusively by BC Hydro. BPC sells its entitlement under the<br />
CPA to FBC under the 60 year Brilliant Power Purchase<br />
Agreement (BPPA) expiring 2056. The BPPA provides for the<br />
recovery of additional capital invested in Brilliant Dam for<br />
agreed-upon upgrades, life extensions and sustaining capital.<br />
FBC manages Brilliant dam on behalf of BPC under a contract<br />
that expires coincident with the BPPA. In the event that<br />
the BPPA is terminated due to a default by FBC, Powerex is<br />
obligated, under the Powerex Backstop Agreement expiring<br />
in 2026, to purchase the energy and capacity to which BPC is<br />
entitled under the CPA.<br />
Low dependence reflects BPC’s operational and financial<br />
independence from the provincial government and the fact<br />
that 100% of BPC is indirectly owned by the province. Furthermore,<br />
because of BPC’s relatively small size, it is not in<br />
and of itself essential to the functioning of the provincial<br />
economy.<br />
Medium support reflects BPC’s relatively small size and<br />
limited role in the provincial economy.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook reflects the expected continuation of<br />
the BPC's sound financial and operational record.<br />
What Could Change the Rating - UP<br />
-A sustained increase in free cash flow<br />
-A substantial debt reduction<br />
-An upgrade of the Province<br />
What Could Change the Rating - DOWN<br />
-Significant change in the underlying demand within FBC’s<br />
service territory for BPC’s energy and capacity entitlement.<br />
-Prolonged operational challenges resulting in a weakening<br />
of the project’s financial position.<br />
-Any potential change in the ownership structure resulting<br />
in loss of tax exempt status or resulting in the Province owning,<br />
directly or indirectly, less than 100% of the project.<br />
• 23 •
Brisa-Auto-Estradas de Portugal, S.A.<br />
Lisbon, Portugal<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Senior Unsecured MTN -Dom Curr<br />
Brisa <strong>Finance</strong> B.V.<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A3<br />
A3<br />
Stable<br />
Bkd Senior Unsecured -Dom Curr<br />
A3<br />
Analyst<br />
Phone<br />
Monica Merli/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
Brisa-Auto-Estradas de Portugal, S.A.<br />
Dec-2004 Dec-2003 Dec-2002 Dec-2001<br />
EBIT Margin[1] 51.5% 51.1% 53.4% 56.3%<br />
Adj RCF / Net Adj Debt[2] 9.2% 11.1% 8.8% 11.7%<br />
Adj FFO Interest Coverage[3] 4.1 4.3 4.0 5.0<br />
Adj RCF / Capex + Investments (net of disposals)[4] 1.0 1.8 0.4 0.3<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest<br />
Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Credit Strengths<br />
- Low business risk of core motorway concession activities.<br />
- Formula for annual toll adjustments is straightforward<br />
and tested.<br />
- Limited diversification.<br />
Credit Challenges<br />
- Continuing large capital expenditure commitments to complete<br />
roads under concession.<br />
- Event risk associated with history of debt-funded opportunistic<br />
investments in other concessions with medium-term<br />
impact on credit metrics.<br />
Rating Rationale<br />
Brisa's A3 rating reflects its position as concessionaire until<br />
2032 for one of the largest privately operated motorway networks<br />
in Europe. Brisa enjoys stable and highly predictable<br />
cash flows thanks to the following factors:<br />
(1) Its network is relatively large and comprises essential<br />
transport links, albeit with some traffic concentration on a<br />
single corridor and material construction activities still ongoing.<br />
Brisa operates a network of 11 motorways under its main<br />
concession plus one further motorway under a separate new<br />
concession for a total of 1,198 km of which 1,010 in operation<br />
at the end of 2004. About 50% traffic contribution is from the<br />
A1 Lisbon-Oporto, but this is Portugal's main motorway link<br />
with a diversified traffic.<br />
(2) Competition from alternative transport modes is limited;<br />
the railway network is undeveloped and air travel is the<br />
only alternative on the long-distance Lisbon-Oporto route,<br />
which comprises a minority of journeys on the A1. Although<br />
there is some limited competition from the new shadow tolls<br />
SCUT motorways, particularly Costa da Prata, which offers a<br />
free alternative to a stretch (c. 30%) of the A1, the consequent<br />
overall reduction on traffic is expected to be single-digit.<br />
(3) The service area and traffic profile exhibit good characteristics.<br />
Brisa's motorways principally serve domestic users<br />
and the domestic economy, but Portugal is a developed country<br />
with a long track record of tolled motorways (Brisa's main<br />
concession was granted in 1972).<br />
(4) The concession framework is established and relatively<br />
straightforward, allowing Brisa to increase tolls annually by a<br />
percentage of previous year inflation (100% until 2011, 90%<br />
thereafter).<br />
Brisa’s non-concession businesses, which are being developed<br />
by management, exhibit much weaker margins and cash<br />
flow generation, but <strong>Moody's</strong> expects that their contribution<br />
to group revenues will remain single-digit over the medium<br />
term.<br />
Brisa's rating takes into account the significant capital<br />
expenditure requirements under its main concession and the<br />
more recent Litoral Centro concession. These are expected to<br />
continue to exceed Retained Cash Flow (RCF) over the next<br />
few years, thus resulting in increasing debt levels.<br />
Brisa's credit metrics, as calculated by <strong>Moody's</strong>, will also<br />
weaken as a result of the proposed acquisition of an additional<br />
40% stake in Auto-Estradas do Atlantico (AEA), which will<br />
give it an overall 50% stake in this Portuguese concessionaire<br />
for 170 km of motorways. <strong>Moody's</strong> will seek to effectively<br />
consolidate AEA proportionally with Brisa. Based on Brisa’s<br />
current activities and capital expenditure commitments,<br />
Moody’s expects that Brisa will achieve Funds From Operations<br />
(FFO) Interest Cover at or above 3.5x, a ratio of FFO to<br />
Net Adjusted Debt in the low to mid teens and a ratio of RCF<br />
to Net Adjusted Debt at or above 8%.<br />
Rating Outlook<br />
The stable outlook reflects our assumption that any additional<br />
investments will not materially impact Brisa's financial profile.<br />
What Could Change the Rating - UP<br />
- Faster-than-anticipated revenue growth used to reduce debt<br />
earlier than expected, resulting in a material and persistent<br />
improvement in credit metrics (e.g. FFO/Net Adjusted Debt<br />
above 15% and RCF/Net Adjusted Debt above 12%).<br />
What Could Change the Rating - DOWN<br />
- Credit metrics falling materially and persistently below<br />
those currently expected by <strong>Moody's</strong> (e.g. FFO/Net Adjusted<br />
Debt below 11-12%, RCF/Net Adjusted Debt below 7-8%).<br />
- Significant new debt-funded investments placing further<br />
pressure on Brisa's financial parameters.<br />
• 24 •
Brooklyn Navy Yard Cogeneration Partners L.P.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Credit Strengths<br />
Credit Strengths for BNY Cogen<br />
- Long-term energy sales agreement for electricity and<br />
steam with ConEd<br />
- Importance of the BNY Cogen asset to the power and<br />
steam needs of the city of New York<br />
- Completion of the major overhaul on both units at BNY<br />
Cogen which should improve operating and financial performance<br />
Credit Challenges<br />
Credit Challenges for BNY Cogen<br />
- Single asset concentration<br />
- Historical volatile coverage ratios due in part to operating<br />
plant performance<br />
- Very high leverage<br />
Rating Rationale<br />
Brooklyn Navy Yard Cogeneration Partners L.P.’s (BNY<br />
Cogen) Ba1 senior secured debt rating reflects the strength of<br />
its 40-year energy sales agreement for electricity and steam<br />
with Consolidated Edison of New York (ConEd: Issuer Rating<br />
at A1), the importance of the project’s steam to the city of<br />
New York and its valuable “in-city generation” location.<br />
The Ba1 rating also considers the historically less stable<br />
coverage ratios that have persisted at the project, the reliance<br />
on cash flow generated by a single asset to service debt, and<br />
the substantial leverage placed on the project's cash flows.<br />
The rating also considers an expectation that the recently<br />
completed capital improvement program, which successfully<br />
modified and upgraded two heat recovery steam generators<br />
(HRSG), is likely to improve future operating performance,<br />
resulting in lower operating and maintenance costs, fewer<br />
plant outages, and better and more consistent availability factors<br />
over a sustainable period. While financial metrics for<br />
2005 are expected to remain weak, due to extended outages to<br />
complete the HRSG upgrades, <strong>Moody's</strong> expects BNY<br />
Cogen's financial metrics to strengthen during <strong>2006</strong> and<br />
beyond, enabling the project to attain a Debt Service Coverage<br />
Ratio (DSCR) that is in excess of 1.30x on a sustainable<br />
basis.<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
An important rating consideration is the fact that BNY<br />
Cogen's profitability is influenced by the price of natural gas.<br />
The prices that ConEd pays for delivered steam are fully<br />
indexed to the NYMEX natural gas price, which is the basis<br />
for BNY Cogen's fuel purchases. By contrast, 35% of the<br />
electricity price is indexed to NYMEX; the remaining 65% is<br />
indexed to inflation. As such, electric revenues are negatively<br />
impacted during periods of high natural gas prices. However,<br />
steam sales, which are generally profitable to BNY Cogen<br />
regardless of natural gas prices, are more profitable when<br />
prices are higher. Consequently, higher profits from steam<br />
sales compensate BNY Cogen for the lower profits earned<br />
from electric sales during a period of high natural gas prices.<br />
The rating further considers the operational benefits and<br />
capital investment that followed the purchase by Tyche Power<br />
Partners, LLC, of Edison Mission Energy's 100% interest in<br />
the stock of Mission Energy New York, Inc., which holds a<br />
50% partnership interest in BNY Cogen.<br />
Tyche Power Partners, LLC is a joint venture between<br />
Morgan Stanley Capital Partners and a Delta Power Company<br />
affiliate.<br />
BNY Cogen is a 286 mw gas-fired cogeneration facility<br />
located in New York.<br />
Rating Outlook<br />
The rating outlook for BNY Cogen is stable reflecting the<br />
continued predictability of cash flows from Con Edison, a<br />
financially strong off-taker, and the expectation for a sustained<br />
improvement in the project's financial metrics given<br />
the completion of the plant overhaul during 2005.<br />
What Could Change the Rating - UP<br />
In light of the historical weak operating and financial performance<br />
at BNY Cogen, the prospects for a rating upgrade in<br />
the near-term is limited.<br />
What Could Change the Rating - DOWN<br />
Failure of the recent overhaul to measurably improve the<br />
financial performance at BNY Cogen and a reemergence of<br />
weak operating performance which negatively impacts the<br />
project's financial metrics could impact BNY Cogen's rating.<br />
• 25 •
Caithness Coso Funding Corp.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Subordinate<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Ba2<br />
Credit Strengths<br />
Credit Strengths for Caithness Coso are:<br />
-Successful operating history and fairly predictable financial<br />
results<br />
-Slowly declining geothermal resource<br />
-As a Qualifying Facility under PURPA, SCE has a musttake<br />
obligation to the electric output<br />
-Importance of assets as a proven renewable resource to<br />
broader energy policy in California<br />
-While energy price uncertainty exists after April 2007, the<br />
project's low operating costs position it well to manage this<br />
risk.<br />
Credit Challenges<br />
Credit Challanges for Caithness Coso are:<br />
-Geothermal resource exposes bondholders to ongoing<br />
volumetric risk<br />
-Counterparty concentration risk<br />
-Cash flows for debt service are derived from specific standalone<br />
assets.<br />
-High leverage<br />
-Financial results can be more volatile relative to other<br />
power projects due to changes in operating expenses and capital<br />
expenditure requirements necessary to maintain the geothermal<br />
reserve.<br />
Rating Rationale<br />
Caithness Coso Funding Corp.'s (Caithness Coso) rating<br />
reflects the predictable source of cash flow expected to be<br />
generated from energy and capacity payments received under<br />
three power purchase agreements (PPAs) that expire at varying<br />
times though 2019 with Southern California Edison<br />
Company (SCE: Baa1 senior unsecured debt; Stable Outlook).<br />
The rating also incorporates the strong operating history<br />
of these plants, as demonstrated by the plants’ average<br />
capacity factor of 102.4% over the past five years and by the<br />
partnerships’ stable financial performance over the past few<br />
years as annual revenues, operating income and cash from<br />
operations have been virtually unchanged since 2002. The<br />
rating considers the experience of the operator, Coso Operating<br />
Company (COC), which has operated these plants since<br />
their inception in the 1980’s and the experience of Caithness<br />
Energy, COC’s parent, which obtained a controlling interest<br />
in these plants in 1999 and owns other geothermal plants.<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
The rating also reflects the importance of these existing<br />
geothermal assets to the California electric market, given the<br />
state’s focus on renewable resources as a core component of<br />
their energy policy. The rating considers the benefits resulting<br />
from the recent signing of a new agreement between two<br />
of the Coso partnerships and the U.S. Navy, which extended<br />
the partnerships’ exclusive right to the geothermal resources<br />
through October 31, 2034.<br />
The rating acknowledges the plants’ very competitive operating<br />
cost profile relative to other generating resources within<br />
the region. The Coso partnerships’ variable costs of 1.4 cents/<br />
kwh are below all fossil-fuel options in the western US,<br />
including base load coal. This competitive position helps to<br />
mitigate future cash flow concerns for the period, when<br />
changes to the energy payment are expected to occur. Under<br />
the current tariff arrangement with SCE, the utility pays the<br />
Coso partnerships a capacity payment and an energy payment<br />
of 5.37 cents/kWh. The energy payment arrangement expires<br />
at the end of April 2007. Thereafter, the Coso partnerships<br />
are expected to receive compensation for energy based upon<br />
SCE's short-run avoided costs (SRAC), an amount which is<br />
indexed to natural gas prices.<br />
Rating Outlook<br />
The rating outlook is stable and incorporates the expectation<br />
of a stable operating and financial performance due to COC's<br />
history of being able to effectively manage costs at this geothermal<br />
resource, the existence of a predictable capacity payment<br />
through the life of the PPAs and a fixed energy payment<br />
through April 2007, and the belief that the Coso partnerships'<br />
exposure to SRAC risk is modest given the low operating<br />
costs and the expectation for continued high natural gas<br />
prices, a key determinant of the SRAC price.<br />
What Could Change the Rating - UP<br />
Limited upside rating potential exists in the near-term given<br />
the single asset nature of this project financing, the reliance<br />
on one source for all of Caithness Coso’s revenue stream, and<br />
the expectation that senior DSCR will remain in the 1.60x<br />
range over the near-term.<br />
What Could Change the Rating - DOWN<br />
The rating could be downgraded should there be an unexpected<br />
decline in the operating performance at the three<br />
Coso partnerships or a substantial change in the credit quality<br />
at SCE, the sole source of cash flow for the project.<br />
• 26 •
California Petroleum Transport Corporation<br />
Boston, Massachusetts, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
First Mortgage Bonds<br />
Opinion<br />
Moody’s Rating<br />
Negative<br />
Baa2<br />
Credit Strengths<br />
— Bareboat charters structured at sufficiently low rates to<br />
remain competitive with spot market rates. Current market<br />
suggests the existing charters will remain competitive.<br />
— Staggered termination schedule and cash termination<br />
payments provide liquidity for debt service and time to<br />
arrange replacement charters in event of termination.<br />
— Bareboat charter breakeven day rates decline over time<br />
as term debt amortizes.<br />
— Major oil companies have a long-term need for well<br />
maintained OPA complaint oil tankers.<br />
— Frontline Ltd., as ultimate vessel owner, provides marketing<br />
expertise in event of charter termination.<br />
Credit Challenges<br />
— Tankers operate in commodity shipping markets subject to<br />
highly volatile day rates and shifting vessel values.<br />
— Charter termination is entirely at the charterer’s option<br />
for any reason, including changing vessel needs, market day<br />
rates, supply and demand, etc.<br />
— Unknown counterparty risk in the event of a replacement<br />
charter.<br />
— Single hull tanker faces regulatory phase out, which<br />
could affect ability to recharter or sell it at profitable rates.<br />
— Termination risk could increase as vessels age, possibly<br />
due to environmental issues or ready availability of newer<br />
replacement vessels.<br />
Rating Rationale<br />
On December 20, 2005, <strong>Moody's</strong> confirmed the Baa2 rating for<br />
California Petroleum Transport Corporation's (CPTC) 8.52%<br />
First Preferred Mortgage Notes (term notes) with a negative<br />
outlook. The term notes had been under review for downgrade,<br />
prompted by Chevron Transport Corporation's notice to terminate<br />
the long-term time charter of the Virgo Voyager, one of<br />
four Suezmax tankers (and the only single hull vessel) that provide<br />
the charterhire payments and underlying debt service for<br />
CPTC. Chevron Transport gave irrevocable notice in April 2005<br />
and must make a $5.05 million termination payment into a<br />
trustee account by April 1, <strong>2006</strong>. CPTC is a special purpose corporation<br />
originally formed to finance the acquisition of the Suezmax<br />
crude tankers. (CPTC's Serial First Preferred Mortgage<br />
Notes are rated Aa2 based on the guarantee of Chevron Corporation<br />
and were not affected by the rating action.)<br />
The term note rating reflects the inherent risk in Chevron's<br />
option to cancel each vessel's bareboat charter after the initial termination<br />
date. Bareboat charters are irrevocable contractual obligations<br />
covering principal and interest, and eliminate operating<br />
risk because they are paid under all circumstances. Structural features<br />
that mitigate termination risk include a termination fee equal<br />
to 24 months of principal and interest, staggered termination dates<br />
that create a beneficial portfolio effect, pre-notification provisions<br />
on intent to terminate, declining charter breakeven levels as the<br />
term debt amortizes, and prohibitions on cash distributions upon<br />
termination. Chevron guarantees the charters and termination<br />
fees of Chevron Transport. The fee is designed to cover two years<br />
of debt service based on the allocated portion of debt assigned to<br />
each vessel in the CPTC portfolio. The termination fee provides<br />
liquidity for debt service and time to arrange an acceptable<br />
replacement charter or to sell the vessel. Frontline Ltd. (unrated),<br />
a Bermuda based operator of a large fleet of petroleum tankers and<br />
• 27 •<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
Michael Doss/New York<br />
John Diaz/New York<br />
the indirect owner of the CPTC tankers, will perform the re-chartering<br />
function.<br />
The confirmation reflects the high portion of protection (about<br />
87% of total principal outstanding) that Chevron Transport continues<br />
to provide under the bareboat charters on the three remaining<br />
double hull tankers, and the likelihood that incremental<br />
revenue generated by replacement time charters or cash proceeds<br />
from the sale of the Virgo Voyager would provide additional cash<br />
to amortize Virgo’s allocated portion of term notes outstanding.<br />
<strong>Moody's</strong> views the Chevron counterparty risk at Aa2 on the bulk<br />
of California Petroleum's debt as sufficient to offset unknown<br />
counterparty risk on the Virgo Voyager. To date, Frontline Ltd.,<br />
the ultimate owner and manager of the tankers, has not<br />
announced how it will re-deploy the Virgo tanker.<br />
In Moody’s view, obsolescence risk and re-sale valuation for<br />
the Virgo are negative factors, given International Maritime<br />
Organization regulations requiring the accelerated phase out<br />
of single hull tankers in major markets such as the U.S. and<br />
European Union by April 2010. This will affect the demand,<br />
charter rates and asset values for these vessels in the mediumterm,<br />
and remove them from the market in the longer-term.<br />
However, current robust spot charter rates on Suezmax tankers,<br />
including single-hulls, reflect a tight balance of vessel<br />
supply and demand in a strong global petroleum market. In<br />
addition, the Virgo Voyager is only thirteen years old. During<br />
the transition period, even fairly modest day rates on the<br />
rechartered vessel and conservative valuations on the re-sale<br />
of the single hull would provide incremental debt service protection<br />
and reduction in allocated principal on the Virgo as<br />
the phase-out date for single hulls approaches.<br />
Rating Outlook<br />
Moody’s is maintaining a negative outlook on the Baa2 rated term<br />
notes pending receipt of the termination payment from Chevron<br />
on April 1, <strong>2006</strong> and clarification of Frontline’s ability to re-charter<br />
or sell the Virgo Voyager for amounts sufficient to amortize its<br />
allocated principal. Further visibility on Virgo’s redeployment with<br />
alternative charter arrangements or vessel sales proceeds would<br />
enable Moody’s to stabilize the Baa2 rating outlook.<br />
What Could Change the Rating - UP<br />
The term notes reflect fundamental termination risk. We<br />
would not expect to upgrade them except in the event that the<br />
charterer relinquished the termination option or acceptable<br />
replacement charters were obtained that in total were superior<br />
to the terms and counterparty risk of the current charters.<br />
What Could Change the Rating - DOWN<br />
In the absence of an acceptable replacement charter, Frontline<br />
could ultimately sell the vessel or seek other higher risk chartering<br />
arrangements acceptable to noteholders, the proceeds of which<br />
would be used to pay down the Virgo Voyager's allocated debt service.<br />
Inability to secure incremental charter revenue or to sell the<br />
Virgo Voyager at profitable levels to amortize allocated debt could<br />
affect the rating. In addition, two of the double hull tankers, Cygnus<br />
Voyager and Sirius Voyager, have potential termination notifications<br />
due by September <strong>2006</strong>. If Chevron were to cancel the<br />
charter on one or more of the double hull charters, each of which<br />
has allocated principal in the range of 27%-30%, Moody’s would<br />
be likely to downgrade the term note rating to reflect a significantly<br />
higher portion of the total debt service subject to both volatile<br />
tanker rates and unknown counterparty risk.
CE Casecnan Water and Energy Company, Inc.<br />
Luzon, Philippines<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Positive<br />
B2<br />
Credit Strengths<br />
Credit strengths for CE are:<br />
• Contract terms - 20 years with National Irrigation<br />
Administration (NIA)<br />
• Importance of the project as it is part of the irrigation<br />
program of the government<br />
• No construction risk - the project is operational<br />
Credit Challenges<br />
Credit challenges for CE are:<br />
• Uncertainties in the power sector is expected to remain as<br />
the reform process remains incomplete<br />
Rating Rationale<br />
The B2 rating reflects that the project is now fully operational.<br />
It reflects the terms of CE's 20-year BOT contract<br />
with NIA. The rating also reflects the importance of the<br />
project as it is part of the irrigation program of the government.<br />
CE and NIA executed an agreement settling the arbitration<br />
case - which started in August 2002 - between CE and the<br />
NIA. <strong>Moody's</strong> understands that the settlement agreement<br />
provides for the dismissal with prejudice of all claims by CE<br />
and counterclaims by NIA in the arbitration and institutes<br />
certain new tariffs and amendments to their <strong>Project</strong> Agreement.<br />
As part of the settlement, NIA paid the sum of USD17.7<br />
million plus Philippine pesos 39.9 million and delivered to<br />
CE a USD97 million ROP bond. Also at closing, CE paid to<br />
the Philippine Bureau of Internal Revenue approximately<br />
USD24.4 million in respect of Philippine income taxes on the<br />
foregoing consideration. On Jan 14, 2004, CE exercised its<br />
rights to put the bond to the ROP at a price of par plus<br />
accrued interest. A total of USD99.2 million representing the<br />
principal and interest due on the bond has been received from<br />
the ROP by CE.<br />
Analyst<br />
Phone<br />
Jennifer W. Wong/Hong Kong 852.2916.1173<br />
Ken Chan/Hong Kong 852.2916.1162<br />
Brian Cahill/Sydney 612.9270.8105<br />
However, <strong>Moody's</strong> notes that some uncertainties persist as<br />
reform of the Philippines' power sector remains incomplete<br />
and there remains the risk that reform could yet impact on<br />
the contractual structure of CE, albeit there is no indication<br />
of this currently.<br />
Rating Outlook<br />
<strong>Moody's</strong> recently changed to positive from stable its B2 rating<br />
outlook for CE's senior secured notes following the reaching<br />
of agreement between CE and its construction contractor<br />
which settles all the claims and counterclaims between the<br />
two before the International Chamber of Commerce. The<br />
Contractor had initiated the case in February 2001. <strong>Moody's</strong><br />
understands that the agreement involves the Contractor paying<br />
CE USD18.9 million, which is additional to the approximately<br />
USD6 million previously received by CE from<br />
demands made on bank guarantees posted as security under<br />
the Contractor's construction contract. The parties have furthermore<br />
executed mutual releases and have agreed to end the<br />
arbitration case.<br />
<strong>Moody's</strong> says that the positive outlook reflects the fact that<br />
the settlement reduces the uncertainties created by the arbitration<br />
case. At the same time the completion last year of<br />
negotiations with the NIA regarding its offtake contract with<br />
CE should result in a relatively stable operating environment<br />
for the company and provide more certainty to growing cashflow<br />
coverages of debt in coming years.<br />
What Could Change the Rating - DOWN<br />
- If there is indication by the government to reopen discussion<br />
on the contract<br />
What Could Change the Rating - UP<br />
- Greater clarity in the power reform process such that it<br />
translates into more certainty and stability for CE's future<br />
cash flow<br />
• 28 •
CE Generation LLC.<br />
Omaha, Nebraska, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
CE Generation LLC. [1]<br />
LTM 1Q2005 2004 2003 2002 2001<br />
Cash Available For Debt Service[2] 164,629 162,755 193,496 245,604 176,136<br />
Interest + Principle Repayment 145,397 146,717 154,670 159,626 148,696<br />
Debt Service Coverage 1.13 1.11 1.25 1.54 1.18<br />
Adjusted Total Debt/Capitalization[3] 62.5% 63.1% 62.8% 61.7% 64.5%<br />
FFO / Adjusted TD[3] 18.4% 17.6% 17.0% 16.7% 18.0%<br />
CAFDS / Adjusted TD[2][3] 22.9% 22.5% 24.5% 28.1% 18.4%<br />
[1] Figures are based on consolidated financials; CE Generation's last SEC filing was first quarter 2005. [2] Cash available for debt service CAFDS = CFO + Interest - Capex [3] Adjusted debt<br />
excludes the Salton Sea Funding Corp. debt allocated to the Zinc Recovery <strong>Project</strong>, which had been guaranteed by MidAmerican Energy Holdings Company, and which was entirely paid off<br />
in January 2004.<br />
Opinion<br />
Credit Strengths<br />
• Cash flows primarily derived from long-term contracts with<br />
Southern California Edison, which has an improving credit<br />
profile.<br />
• Ownership in three projects operating outside the California<br />
markets provide geographic and fuel source diversification.<br />
Credit Challenges<br />
• Uncertainties related to prospective cash flows when Southern<br />
California Edison reverts to its avoided cost in 2007.<br />
• Exposure to volatile commodity prices in the competitive<br />
California electricity market.<br />
• Debt structurally subordinated to project level debt.<br />
Rating Rationale<br />
The Ba1 senior secured rating of CE Generation (CEG)<br />
reflects exposure of 10 of the 13 projects to the California<br />
electricity market and to Southern California Edison Company<br />
(SCE) (Sr. Sec. A3, Stable Outlook). However, the portfolio<br />
benefits from geographical and fuel source<br />
diversification of the non-California projects, located in New<br />
York, Texas and Arizona. CEG has an aggregate ownership<br />
interest of 757 MWs of electrical generating capacity. CEG’s<br />
ratings also consider the higher debt service coverage and the<br />
low leverage of the three non-California projects. This is balanced<br />
against the substantial negative effect of structural subordination<br />
to project level debt below CEG, primarily the<br />
debt at Salton Sea (also Ba1 senior secured, stable).<br />
CEG's debt rating reflects a balance between the favorable<br />
impact of SCE’s improving credit quality and the project’s<br />
weaker than expected operating and financial performance.<br />
The debt service coverage ratios for CEG and Salton Sea are<br />
below the base case levels as outlined in the Offering Circulars<br />
for both projects, but these coverages are showing<br />
improvement. The rating also considers that revenues will be<br />
exposed to the uncertainty of variable energy payments equal<br />
to SCE’s avoided energy cost once fixed energy payments end<br />
in 2007, potentially reducing cash flow available for debt service<br />
should those energy payments fall below current levels.<br />
Rating Outlook<br />
CEG’s ratings outlook is stable reflecting the improved<br />
longer term prospects for SCE, but balanced with the<br />
projects' weaker than expected operating and financial performance,<br />
although the project has begun to show some<br />
improvement in the DSCRs.<br />
What Could Change the Rating - UP<br />
Potential exists for an upgrade if the operating and financial<br />
performance of the plants is improved and the establishment<br />
of energy payments from SCE that are not radically different<br />
from the current level after the expiry of the fixed rate<br />
arrangement in May 2007.<br />
What Could Change the Rating - DOWN<br />
Likewise, any deterioration in SCE’s credit quality and<br />
decline of payments for purchased power to CEG could negatively<br />
pressure the ratings.<br />
• 29 •
Cedar Brakes I, L.L.C.<br />
United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths include:<br />
• Contracted nature of cash flow streams provide structural<br />
stability to debt service coverage<br />
• Amended PPA with Public Service Electric & Gas Company<br />
(PSE&G) was approved by the New Jersey Board of<br />
Public Utilities, included in rate base as part of stranded costs,<br />
and is provided additional protection against renegotiation by<br />
the NJ Electric Discount and Energy Competition Act<br />
• Funded Liquidity Account equal to the interest payable<br />
on the next semi-annual interest payment date<br />
Credit Challenges<br />
Credit challenges include:<br />
• Contracts structured to provide 1.03x coverage ratio,<br />
which provides little flexibility to deal with adverse events<br />
Rating Rationale<br />
Cedar Brakes I (CB) is a bankruptcy remote, limited liability<br />
company formed to monetize the positive margin between its<br />
agreement to provide capacity and electricity to Public Service<br />
Electric & Gas Company (PSE&G) at fixed prices and a<br />
back-to-back agreement to purchase capacity and electricity<br />
from Constellation Energy Commodities Group (CECG), a<br />
subsidiary of Constellation Energy (Constellation), at lower<br />
fixed prices.<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
Based on the counterparty arrangements, <strong>Moody's</strong> views<br />
the performance of PSE&G under its power purchase agreement<br />
(PPA) and the performance of Constellation under the<br />
guaranty that it provides for CECG’s obligations under a mirror<br />
PPA as the primary credit drivers for CB.<br />
Accordingly, the CB’s Baa2 senior secured rating reflects<br />
the probability of either PSE&G (Baa1 senior unsecured) or<br />
Constellation (Baa1 senior unsecured) defaulting on their<br />
respective contractual obligations.<br />
Rating Outlook<br />
The stable rating outlook for CB reflects the contractual<br />
nature of CB’s cash flows and the currently stable credit quality<br />
of its counterparties.<br />
What Could Change the Rating - UP<br />
An upgrade of either PSE&G or Constellation could result in<br />
an upgrade of CB if the resulting reduction in combined<br />
default probabilities were sufficient to be more consistent<br />
with a higher rating.<br />
What Could Change the Rating - DOWN<br />
A downgrade of either PSE&G or Constellation or failure by<br />
either counterparty to perform under its agreements could<br />
result in a downgrade.<br />
• 30 •
Cedar Brakes II, L.L.C.<br />
United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths include:<br />
• Contracted nature of cash flow streams provide structural<br />
stability to debt service coverage<br />
• Amended PPA with Public Service Electric & Gas Company<br />
(PSE&G) was approved by the New Jersey Board of<br />
Public Utilities, included in rate base as part of stranded costs,<br />
and is provided additional protection against renegotiation by<br />
the NJ Electric Discount and Energy Competition Act<br />
• Funded Liquidity Account equal to the interest payable<br />
on the next semi-annual interest payment date<br />
Credit Challenges<br />
Credit challenges include:<br />
• Contracts structured to provide 1.03x coverage ratio,<br />
which provides little flexibility to deal with adverse events<br />
Rating Rationale<br />
Cedar Brakes II (CB) is a bankruptcy remote, limited liability<br />
company formed to monetize the positive margin between its<br />
agreement to provide capacity and electricity to Public Service<br />
Electric & Gas Company (PSE&G) at fixed prices and a<br />
back-to-back agreement to purchase capacity and electricity<br />
from Constellation Energy Commodities Group (CECG), a<br />
subsidiary of Constellation Energy (Constellation), at lower<br />
fixed prices.<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
Based on the counterparty arrangements, <strong>Moody's</strong> views<br />
the performance of PSE&G under its power purchase agreement<br />
(PPA) and the performance of Constellation under the<br />
guaranty that it provides for CECG’s obligations under a mirror<br />
PPA as the primary credit drivers for CB.<br />
Accordingly, the CB’s Baa2 senior secured rating reflects<br />
the probability of either PSE&G (Baa1 senior unsecured) or<br />
Constellation (Baa1 senior unsecured) defaulting on their<br />
respective contractual obligations.<br />
Rating Outlook<br />
The stable rating outlook for CB reflects the contractual<br />
nature of CB’s cash flows and the stable credit quality of its<br />
counterparties.<br />
What Could Change the Rating - UP<br />
An upgrade of either PSE&G or Constellation could result in<br />
an upgrade of CB if the resulting reduction in combined<br />
default probabilities were sufficient to be more consistent<br />
with a higher rating.<br />
What Could Change the Rating - DOWN<br />
A downgrade of either PSE&G or Constellation or failure by<br />
either counterparty to perform under its agreements could<br />
result in a downgrade.<br />
• 31 •
Cerro Negro <strong>Finance</strong>, Ltd.<br />
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Recent Developments<br />
The Ba3 rating of Cerro Negro <strong>Finance</strong>, Ltd. reflects the<br />
application of Moody’s new rating methodology for government-related<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Cerro Negro include:<br />
- life-of-project ExxonMobil offtake agreement to a jointly<br />
owned U.S. refinery<br />
- trustee-controlled, U.S. $, offshore accounts, dividend<br />
restrictions and waiver of sovereign immunity<br />
- extensive, dedicated fields<br />
Credit Challenges<br />
Credit challenges for Cerro Negro include:<br />
- Venezuela location amid socio-political unrest<br />
- operational and financial independence of PDVSA, a<br />
sponsor and supplier<br />
- unilateral imposition of a 1600% increase in royalty tax<br />
claims by the Chavez administration<br />
- greater risk of future sovereign actions which could affect<br />
the creditworthiness of the projects.<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Cerro Negro reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 6 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
Cerro Negro <strong>Finance</strong>, Ltd. is a Cayman Islands special<br />
purpose financing vehicle for the $1.9 billion Cerro Negro<br />
extra-heavy oil project in Venezuela. Under an association<br />
agreement with the government, the project is designed to<br />
develop, transport, upgrade and market extra-heavy crude<br />
from the Orinoco belt in southeastern Venezuela. Sponsor/<br />
offtakers are Exxon Mobil (41.67%), PDVSA (41.67%) and<br />
BP (16.67%). BP is not a party to the financing.<br />
Similar to the other three Venezuelan heavy oil projects,<br />
the baseline credit assessment of 6 primarily reflects the operating<br />
environment in Venezuela amid lingering volatility,<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Alexandra S. Parker/New York<br />
Daniel Gates/New York<br />
political uncertainties and recent actions the Chavez administration<br />
has taken against the oil/gas industry. These factors<br />
are balanced against strong fundamental economics, continued<br />
operational improvements and increased financial flexibility<br />
at the project. During 2004 Cerro Negro achieved<br />
record production and earnings levels, and distributed its first<br />
dividends to the respective sponsors, totaling $600 million.<br />
The project continues expansion of its upstream gas handling<br />
facilities to process additional amounts of associated gas and<br />
sell it into the PDVSA grid.<br />
The operating environment in Venezuela encompasses lingering<br />
socio-political unrest and its resultant impact on the<br />
operating capacity and financial condition of entities operating<br />
within Venezuela including the unilateral imposition of a<br />
16.67% royalties tax in place of the 1% tax documented in the<br />
project's agreements. This change reduces cash flow coverage<br />
of debt service on an on-going basis. At current oil prices and<br />
production levels, the increase in royalty taxes has not prevented<br />
the project from achieving strong cash flow coverages.<br />
However, the royalty increase would become more significant<br />
to cash flow coverage if oil prices were to decline to more historic<br />
norms. In addition, the unilateral nature of the change<br />
suggests that there might be a greater risk of future sovereign<br />
actions which could affect the creditworthiness of the project.<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the government and a default by the<br />
project. While the hydrocarbons industry is important to the<br />
Venezuelan government, the project which was financed is<br />
equally shared by ExxonMobil and PDVSA. All of its product<br />
is sold for U.S. Dollars into offshore trustee accounts to a<br />
U.S. situated jointly owned refinery.<br />
Low support reflects Moody’s opinion that the government<br />
would not be likely to step in to support the project should it<br />
incur financial difficulties.<br />
What Could Change the Rating - UP<br />
Resolution of the simmering socio-political turmoil in Venezuela,<br />
greater long term predictibility of legal and tax<br />
regimes.<br />
What Could Change the Rating - DOWN<br />
A resumption of strikes, social upheaval or increased interference<br />
with the operating capacity and financial condition of<br />
PDVSA.<br />
• 32 •
Choctaw Generation Limited Partnership<br />
Delaware, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
• 30 year power purchase and operating agreement<br />
(PPOA) with the Aaa rated Tennessee Valley Authority (TVA)<br />
• The <strong>Project</strong> represents a low cost power supply contract<br />
for TVA<br />
• Financial and operating support of Suez Tractebel as the<br />
project’s owner;<br />
• Fuel cost pass through under the PPOA;<br />
• Satisfactory level of availability demonstrated by the plant<br />
Credit Challenges<br />
• Steam turbine performance has not achieved design<br />
expectations<br />
• Higher than expected forced outage rates that negatively<br />
impacts heat rate<br />
• Load curtailment by TVA requires that the plant be operated<br />
in an off design manner impacting the plant heat rate<br />
negatively<br />
• Lower than expected fixed charge coverage ratios;<br />
• Potential for future environmental costs<br />
Rating Rationale<br />
Choctaw Generation L.P.'s (CGLP) Baa3 senior secured debt<br />
rating reflects the project cash flows from a single asset lignite<br />
fired generation facility under a 30-year power purchase and<br />
operating agreement (PPOA) with the Aaa rated Tennessee<br />
Valley Authority (TVA). The PPOA is a take or pay contract,<br />
and features a fixed capacity payment, which can be adjusted<br />
for forced outages, and a variable energy payment.<br />
The rating reflects the attractiveness of the asset to TVA as<br />
the plant's all-in production cost is below the average wholesale<br />
rate charged to TVA customers. The rating considers the<br />
mitigation of fuel risks through a 30-year lignite fuel supply<br />
agreement that supports CGLP’s supply obligations under<br />
the TVA PPOA. Fuel costs are generally a pass-through to<br />
TVA, assuming that the plant can consistently operate at a<br />
heat rate of 10,200 btu/kWh. <strong>Moody's</strong> further notes that<br />
Analyst<br />
Phone<br />
M. Sanjeeva Senanayake/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
TVA has the ability to unilaterally raise wholesale power rates<br />
on its customers, which reduces the risk that the PPOA could<br />
become an onerous obligation at some future date.<br />
Rating also considers the financial strength and operating<br />
experience of the project's owners, Suez-Tractebel USA, Inc.<br />
and Suez - Tractebel S.A. The project maintains a $16.5 million<br />
letter of credit that supports a rent reserve equivalent to<br />
cover approximately six-months of upcoming rent payments.<br />
The rating considers that there are few similar lignite fired<br />
generation plants of this size in the world thereby raising a<br />
concern about the operating performance, particularly in the<br />
early years. CGLP continues to perform satisfactorily, demonstrating<br />
average availability and capacity factors of 93.9%<br />
and 82.9%, respectively during 2004 and 93.1% and 83.5%<br />
during the first seven months in 2005. However, load curtailment<br />
by TVA has resulted in the plant operating in an off<br />
design manner, which has negatively impacted the plant’s heat<br />
rate. <strong>Moody's</strong> also notes that over the life of the 30-year<br />
PPOA, CGLP will likely be faced with environmental expenditures<br />
relating to the burning of coal.<br />
Rating Outlook<br />
The rating outlook for Choctaw is stable reflecting the ongoing<br />
operational performance, the 30 year PPOA with TVA<br />
and the strong sponsor support and operational experience of<br />
Suez –Tractebel S.A<br />
What Could Change the Rating - UP<br />
Limited opportunity for upward rating movement due to<br />
leverage, financial structure, and expected fixed charge coverages.<br />
What Could Change the Rating - DOWN<br />
Continued worse than expected heat rate levels, which negatively<br />
impacts financial performance and fixed charge coverage<br />
ratios that are below 1.40x on a sustained basis could place<br />
downward pressure on the rating.<br />
• 33 •
Cleco Evangeline LLC<br />
Pineville, Louisiana, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
B1<br />
Credit Strengths<br />
Credit Strengths for Cleco Evangeline are:<br />
-Existence of contracted revenue for a substantial portion<br />
of the project's revenue stream<br />
-Importance of the plant to the local utility's service territory<br />
-Existence of a six-month debt service reserve.<br />
Credit Challenges<br />
Credit Challenges for Cleco Evangeline are<br />
-Reliance on Williams Companies, Inc. (Williams: B1<br />
Senior Unsecured Debt; Stable Outlook) as guarantor of the<br />
tolling contract for the principal source of cash flow.<br />
-Asset operates in an extremely overbuilt market, which has<br />
lowered the capacity factor on the Evangeline plant<br />
-Single asset risk<br />
Rating Rationale<br />
Cleco Evangeline LLC's B1 senior secured rating reflects the<br />
counterparty risk associated with the tolling agreement<br />
between Williams Energy and Trading Company (EMT) and<br />
the project that expires in 2020 for the sale of capacity and<br />
energy conversion services. EMT's obligation is guaranteed<br />
by The Williams Companies, Inc. (Williams: B1 Senior<br />
Unsecured Debt; Stable Outlook).<br />
Cleco Evangeline's B1 senior secured debt rating further<br />
incorporates the willingness and ability of Williams to perform<br />
under the guarantee that supports the tolling agreement.<br />
In the absence of the tolling agreement, Cleco<br />
Evangeline could sell its electricity output into the merchant<br />
market or could seek a new tolling agreement with another<br />
party. Given the amount of excess capacity that exists in the<br />
Southeastern wholesale power market, cash flow from either<br />
of these options would likely be significantly lower than the<br />
amount anticipated under the current tolling arrangement,<br />
potentially jeopardizing repayment of the debt.<br />
The power project, which is located in the overbuilt southeastern<br />
U.S., has been dispatched less often than had been<br />
originally anticipated. However, the project continues to<br />
receive regular capacity payments, which represent the core<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
component of cash flow for debt service, and are based upon<br />
the plant's average and peak availability target levels. Given<br />
the historical operating performance of the plant, <strong>Moody's</strong><br />
anticipates that Evangeline will be able to continue to achieve<br />
required availability levels and receive associated capacity<br />
payments. <strong>Moody's</strong> notes that while the overbuilt market has<br />
impacted the capacity levels and associated operating margins,<br />
Cleco Evangeline's ability to cover required debt service obligations<br />
has remained robust due to the receipt of contracted<br />
capacity payments. To that end, Cleco Evangeline's funds<br />
from operation to total debt approximates 13%.<br />
On August 1, 2005, Cleco Power, LLC (Cleco Power) executed<br />
a power purchase agreement with Williams Power<br />
which calls the sale of 500 MW of capacity from <strong>2006</strong><br />
through 2009. <strong>Moody's</strong> believes that Williams Power will use<br />
output from the Evangeline <strong>Project</strong> to support this power<br />
purchase agreement with Cleco Power.<br />
Cleco Evangeline LLC is the owner of the Evangeline<br />
<strong>Project</strong>, a 784 MW operating combined cycle gas fired<br />
project in St. Landry, Evangeline Parish, Louisiana.<br />
Rating Outlook<br />
The rating outlook is stable reflecting, in large part, the stable<br />
rating outlook for Williams, the guarantor of the tolling payments.<br />
What Could Change the Rating - UP<br />
As the Cleco Evangeline rating is effectively capped by Williams'<br />
rating, the Cleco Evangeline rating could be upgraded<br />
with an improvement in Williams' senior unsecured debt rating.<br />
What Could Change the Rating - DOWN<br />
The Cleco Evangeline rating could be downgraded should<br />
the plant experience substantial operating problems, impacting<br />
availability factors for the plant, if the credit quality of<br />
Williams were to deteriorate, or if the Williams tolling agreement<br />
no longer existed, causing the plant to rely upon the<br />
merchant energy market for debt service.<br />
• 34 •
CMS Energy Corporation<br />
Dearborn, Michigan, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Sr Sec Bank Credit Facility<br />
Senior Unsecured<br />
Subordinate<br />
Preferred Stock<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Ba3<br />
B1<br />
B3<br />
Caa1<br />
Speculative Grade Liquidity<br />
SGL-2<br />
Analyst<br />
Phone<br />
M. Sanjeeva Senanayake/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
CMS Energy Corporation<br />
LTM 3Q05 2004 2003 2002<br />
Adj. FFO - Cap. Interest + Adj. Interest / Adj. Interest[1][2] 2.4 1.9 2.1 1.9<br />
Adj. FFO / Adj. Debt[1][3] 10% 7% 9% 6%<br />
Adj. Retained Cash Flow / Adjusted Debt[1][3] 10% 7% 9% 4%<br />
Adj. Debt / Adj. Capitalization[3][4] 71% 72% 79% 87%<br />
Adj. Net Income Available for Common / Adj. Common Equity -2% 6% -2% -52%<br />
Common Dividends / Adj. Net Income Available for Common 0% 0% 0% -27%<br />
[1] FFO is adjusted for preferred dividends [2] Interest is adjusted for preferred dividends and imputed interest on operating leases [3] Debt is adjusted for trust preferred securities and operating<br />
leases [4] Adjusted Capitalization reflects the adjustments made to debt<br />
Opinion<br />
Credit Strengths<br />
• Continued debt reduction at the parent level has increased<br />
the company’s financial flexibility;<br />
• A lower business risk profile following the divestiture of a<br />
number of non-regulated businesses;<br />
• A narrower focus of its operations in the U.S. that is centered<br />
around its lower risk regulated utility subsidiary, Consumers<br />
Energy Company (Consumers: Baa3 senior secured);<br />
• A meaningful improvement in the liquidity profile of the<br />
parent company.<br />
Credit Challenges<br />
• High consolidated leverage relative to its cash flows continues<br />
to pressure the company’s overall credit profile.<br />
• Company will be challenged with its requirements to<br />
fund significant near term capital expenditure.<br />
• Significant holding company debt maturities in 2007.<br />
• Uncertainty with regard to the outcome of the ongoing<br />
Consumers Energy electric and gas rate cases.<br />
Rating Rationale<br />
CMS Energy’s Ba3 Corporate Family Rating and B1 senior<br />
unsecured rating reflect the company's high consolidated<br />
leverage relative to its cash flow and large near term capital<br />
funding requirements. CMS's operating cash flows are<br />
derived primarily from Consumers Energy Company (senior<br />
secured Baa3), its wholly-owned utility subsidiary. In an effort<br />
to relieve the financial strain associated with the company's<br />
prior growth strategy, management has implemented a strategy<br />
to refocus its business on U.S. markets and principally<br />
along its regulated utility. The company has sold a substantial<br />
portion of its non-core assets including certain non utility<br />
electric generation, gas transmission, oil & gas and commodity<br />
trading assets, which has enabled the company to meet<br />
certain maturing debt obligations, pension funding requirements<br />
and significantly improve its overall liquidity position.<br />
CMS maintains a meaningful cash balance, which was approximately<br />
$400 million as of June 30, 2005, and reflects in part<br />
the retention of proceeds from recent asset sales.<br />
The company successfully executed a common stock offering<br />
in April 2005, deriving proceeds of approximately $272<br />
million. These proceeds were invested as equity into Consumers<br />
Energy in order to finance the utility's capital expenditure<br />
program and to strengthen the utility's balance sheet.<br />
Near term capital outlays are primarily at Consumers Energy<br />
given the need for environmental system upgrades at the utility's<br />
mainly coal fired generating facilities. The company<br />
anticipates funding approximately $590 million related capital<br />
expenditure at Consumers throughout the year. Proceeds<br />
from the Company's recent equity offering along with internally<br />
generated cash flow and cash balances are deemed sufficient<br />
to fund these obligations. CMS' external liquidity<br />
sources have also improved with the recent refinancing of<br />
CMS’ $300 million revolving credit facility and Consumers<br />
Energy $500 million revolving credit facility, extending the<br />
maturities of these facilities through 2010.<br />
CMS' near term maturing debt obligations are manageable.<br />
With the recent refinancing activities, the company has<br />
no significant debt maturities until October 2007 when<br />
approximately $468 million of senior notes at CMS Energy<br />
are due. However, the company could be faced with the need<br />
to cash settle its convertible securities should the company's<br />
stock price remains above the conversion triggers.<br />
Rating Outlook<br />
CMS Energy’s stable outlook reflects improvements in the<br />
company’s financial profile due to the extension of debt maturities,<br />
reduced debt levels, an improved liquidity profile and<br />
the resolution of all significant regulatory investigations. It<br />
also considers the relative stability and predictability of cash<br />
distributions from Consumers Energy and the company's<br />
strategic initiative to streamline CMS around Consumers<br />
Energy.<br />
What Could Change the Rating - UP<br />
<strong>Moody's</strong> will focus on the prospects for continued improvement<br />
of the company's overall leverage through further debt<br />
reduction initiatives and will look towards a reasonable outcome<br />
of the ongoing electric and gas rate cases for Consumers.<br />
In combination with the above, ratings could be upgraded<br />
if the company continues to improve its consolidated credit<br />
metrics such as the adjusted funds from operation (FFO) to<br />
debt ratio achieves levels in the range of 10-13% and adjusted<br />
FFO to interest ratio in the range of 2-2.5x.<br />
What Could Change the Rating - DOWN<br />
With its recent improvement in liquidity and progress made<br />
to date in reducing overall business risk, the downward pressure<br />
on the rating remains limited.<br />
• 35 •
Cogentrix Energy, Inc.<br />
Charlotte, North Carolina, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Bkd Senior Unsecured<br />
Ult Parent: Goldman Sachs Group, Inc. (The)<br />
Outlook<br />
Issuer Rating<br />
Senior Unsecured<br />
Subordinate Shelf<br />
Preferred Stock<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Aa3<br />
Stable<br />
Aa3<br />
Aa3<br />
(P)A1<br />
A2<br />
Rating Rationale<br />
The Aa3 rating assigned to Cogentrix Energy Inc.'s (CEI)<br />
$354 million senior unsecured notes due 2008 reflects an<br />
unconditional payment guarantee provided by The Goldman<br />
Sachs Group, Inc. (Goldman Sachs: Aa3 senior unsecured).<br />
These senior notes constitute all of the debt obligations of<br />
CEI.<br />
CEI's Ba2 Corporate Family Rating rating reflects the predictable<br />
cash flows that Cogentrix derives from a diverse portfolio<br />
of generating assets operating under long-term contracts<br />
with creditworthy utility counterparties. The rating also considers<br />
high consolidated leverage, and the large amount of<br />
Commercial Paper P-1<br />
Other Short Term P-1<br />
Parent: Goldman Sachs & Co.<br />
Outlook<br />
Stable<br />
Commercial Paper P-1<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Laura Schumacher/New York<br />
Daniel Gates/New York<br />
non-recourse debt at subsidiaries and projects in which<br />
Cogentrix has an ownership interest.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
The rating for the senior notes due 2008 will be consistent<br />
with that of Goldman Sachs due to its unconditional payment<br />
guarantee.<br />
What Could Change the Rating - DOWN<br />
The rating for the senior notes due 2008 will be consistent<br />
with that of Goldman Sachs due to its unconditional payment<br />
guarantee.<br />
• 36 •
Coleto Creek WLE, LP<br />
Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3/B1<br />
Credit Strengths<br />
- The competitive cost position of Coleto's coal-fired generating<br />
assets within the Electric Reliability Council of Texas<br />
(ERCOT) region<br />
- Predictable cash flows from contracts with investment<br />
grade counterparties for about 90% of Coleto's 632 MW<br />
generating capacity in the initial five years<br />
- The strong historical operating performance and relatively<br />
young age of the facility<br />
- Standard proven technology<br />
Credit Challenges<br />
- Increasing dependence on merchant sales in the ERCOT<br />
market<br />
- Limited financial flexibility and liquidity sources to<br />
address unexpected operating problems or to provide collateral<br />
for future PPAs<br />
- Lack of some traditional project finance structural protections<br />
for debt holders, including controls on cash, accrual of<br />
debt service, and major maintenance reserve<br />
- Increasing coal prices have reduced projected cash flow<br />
- Increased capex due to planned conversion to 100% PRB<br />
coal-fired facility<br />
- Single asset risk<br />
- Highly leveraged transaction<br />
Rating Rationale<br />
The Ba3 first lien and B1 second lien ratings of the credit<br />
facilities of Coleto Creek WLE, LP (Coleto) reflect the<br />
slower pace for debt reduction that is now expected over the<br />
intermediate term as a result of Coleto's use of $35 million of<br />
additional debt along with $15 million of project cash to pay a<br />
special $50 million dividend, increased capital expenditure<br />
plans and somewhat lower projected funds from operations.<br />
Coleto initially projected significant capex in 2004-<strong>2006</strong><br />
related to its planned conversion to a fuel source of 100%<br />
low-sulfur, lower cost, lower Btu, Powder River Basin (PRB)<br />
coal. At the end of 2004, Coleto re-evaluated the benefits of<br />
conversion in light of improved operational performance, and<br />
at that time, decided not to proceed. Due to increased coal<br />
costs, and management’s view on recent EPA rulings concerning<br />
mercury and other emissions, Coleto is once again planning<br />
on converting the facility to burn 100% PRB coal. The<br />
current planned conversion involves a different technology,<br />
and will cost more than the originally planned conversion;<br />
however it will require less ongoing maintenance.<br />
Coleto’s increased debt, and its renewed capital expenditure<br />
plans, have delayed the originally anticipated deleveraging of<br />
the project. Coleto’s projected future fuel cost have also<br />
increased significantly, although these cost have been somewhat<br />
offset by reductions in property taxes, reduced cost for<br />
emissions allowances and lower assumed interest rates.<br />
Coleto’s funds from operations (FFO) as a percentage of total<br />
debt is projected to remain around 12-13% though 2008.<br />
Approximately 75% of the original Term Loan B balance is<br />
expected to be outstanding in 2009 when the majority of the<br />
current contracts expire. Annual debt service coverage is also<br />
lower than originally expected. In 2007, when significant capital<br />
expenditures are planned, cash available for required<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
(interest plus 1% amortization) debt service is projected to<br />
cover required debt service by only about 1.1 times. This<br />
could be mitigated by prudent reserving and/or timing of<br />
capex.<br />
The ratings also reflect the expected long term competitiveness<br />
of Coleto's 632 MW of coal-fired generating capacity<br />
and its cost position relative to natural gas plants that generally<br />
set the market price for power at the margin in ERCOT.<br />
The ratings consider the stability of near term cash flows due<br />
to the significant amount of contracted capacity. Through<br />
June of 2008, 93% of the project's capacity is contracted.<br />
From June 2008 through June 2009, 68% of capacity is contracted.<br />
The contracts provide fixed payments for capacity<br />
assuming availabilities of 90-92% (adjusted for planned outages)<br />
are maintained as well as variable (per Mwh) payments<br />
for energy. The ratings reflect the strong operating experience<br />
of the facility. The plant's average equivalent forced outage<br />
rate for the past five years is 1.7%. The project will<br />
benefit from the power marketing expertise of Sempra Generation,<br />
which will be responsible for day-to-day operations<br />
through its subsidiary Sempra Texas Services LP (STS).<br />
The ratings also reflect the fact that a portion of Coleto's<br />
capacity remains un-contracted and that increasing amounts<br />
will be exposed to merchant risk when its PPAs expire, particularly<br />
after 2009. The project has very limited capacity to post<br />
additional collateral if needed to expand or extend its contract<br />
base. The credit facilities would allow the granting of additional<br />
second lien positions, if necessary, to provide collateral<br />
for additional PPAs. The facility is configured with only one<br />
boiler and steam turbine. Failure of either component would<br />
render the project entirely unavailable and hence subject the<br />
project to market price exposure to fulfill its power obligations<br />
should it choose to under its power purchase agreements.<br />
Under the existing contracts, capacity payments are<br />
reduced when availability is below 92%. The project has the<br />
option to deliver alternative energy to avoid a reduction in<br />
capacity payments.<br />
Rating Outlook<br />
The rating outlook is stable, reflecting the project's solid<br />
operating performance, increased revenue predictability during<br />
<strong>2006</strong>-2008 as a result of an additional 150 MW of capacity<br />
that was contracted in December 2004, and lower projected<br />
non-fuel and interest expenses that have somewhat offset<br />
increased coal prices.<br />
What Could Change the Rating - UP<br />
The outlook or ratings could be revised upward if there were<br />
to be a greater than expected degree of deleveraging of the<br />
project, or a faster pace for deleveraging than is currently<br />
anticipated.<br />
What Could Change the Rating - DOWN<br />
The outlook or ratings could be revised downward if there<br />
were to be prolonged operational difficulties, significant<br />
increases in fuel or other operating or interest expense, further<br />
additions to leverage or significant cost over-runs on capital<br />
expenditures.<br />
• 37 •
Colowyo Coal Funding Corp.<br />
Meeker, Colorado, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Negative<br />
Ba2<br />
Credit Strengths<br />
Colowyo Coal Funding Corp.'s credit strengths include:<br />
- Long-term take-or-pay coal contracts provide predictability<br />
of revenues and cash flow.<br />
- The Kennecott Colorado management agreement obligates<br />
Kennecott Colorado, the general partner, to preserve<br />
1:1 debt service coverage ratio through adjustments to the<br />
transfer payment.<br />
- Liquidity provided by a letter of credit for which W.R<br />
Grace is the obligor.<br />
Credit Challenges<br />
Colowyo Coal Funding Corp.'s credit challenges include:<br />
- The Craig Station 1&2 contracts contain price reopeners<br />
which bring the contractual coal prices in line with prevailing<br />
spot market prices every five years.<br />
- Certain force majeure events are not covered under Kennecott<br />
Colorado’s management agreement.<br />
Rating Rationale<br />
The Ba2 rating of Colowyo Coal Funding Corp. (CCFC)<br />
reflects the strength of Colowyo Coal’s (Colowyo) long-term<br />
take-or-pay contracts, the quality of its coal, the performance<br />
obligations under the Kennecott Colorado management<br />
agreement and the $22 million letter of credit debt service<br />
reserve provided by W.R. Grace, the ultimate parent of the<br />
limited partner of Colowyo. However, it also considers the<br />
risk of certain force majeure events not covered under the<br />
agreement.<br />
CCFC was established to provide financing for the sale of<br />
Colowyo Coal Company LP (Colowyo) to Kennecott Colorado<br />
(KC), an indirect wholly owned subsidiary of Rio Tinto<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
plc. Colowyo sells over 2.5 million tons of coal per year under<br />
long-term contracts to the Craig power station and the City<br />
of Colorado Springs (CCS).<br />
However, the Craig Station 1&2 contracts contain price<br />
reopeners that every five years can increase or decrease coal<br />
prices by a maximum of 15%. In addition, the base price<br />
under all of the Craig Station contracts (1, 2 & 3) is adjusted<br />
based on inflation indicators. Under the Kennecott Colorado<br />
management agreement, the Company is required to maintain<br />
a projected debt service coverage ratio of 1:1 through<br />
adjustments to the transfer price, which is computed semiannually.<br />
The transfer payment is the portion of the revenues<br />
from collateral contracts which is transmitted to Colowyo to<br />
cover costs of production to the benefit of the general partner,<br />
Kennecott Colorado.<br />
Rating Outlook<br />
Debt coverage will continue to be pressured as the assumed<br />
inflation adjustment factor increases debt service amounts<br />
while the actual inflation rate keeps price adjustments low.<br />
Any debt service shortfall will be cushioned by a $22 million<br />
letter of credit debt service reserve.<br />
What Could Change the Rating - UP<br />
Since the rating currently has a negative outlook, it is unlikely<br />
that the rating would be upgraded in the near term.<br />
What Could Change the Rating - DOWN<br />
Continued downward adjustments of the Craig Station contract<br />
prices and reliance on the $22 million letter of credit<br />
debt service reserve to make up the shortfall for debt service.<br />
• 38 •
Compania Nationala de Cai Ferate CFR S.A.<br />
Bucharest, Romania<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
Ba2<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
Compania Nationala de Cai Ferate CFR S.A.<br />
2003 2002 2001<br />
EBIT Margin[1] -47.7% -63.0% -52.3%<br />
Adj RCF / Net Adj Debt[2] -58.2% -46.3% -1.1%<br />
Adj FFO Interest Coverage[3] -145.6 -417.8 32.7%<br />
Adj RCF / Capex + Investments[4] -125.5% -76.1% -1.2%<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/<br />
Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Recent Developments<br />
The rating reflects the application of <strong>Moody's</strong> rating methodology<br />
for government-related issuers ("GRI's"). Please refer<br />
to <strong>Moody's</strong> Rating Methodology entitled "The Application of<br />
Joint Default Analysis to Government-Related Issuers", published<br />
in April 2005, and its accompanying press release.<br />
Please also refer to <strong>Moody's</strong> Special Comment entitled "Rating<br />
Government-Related Issuers in European Corporate<br />
<strong>Finance</strong>" for a detailed discussion of the application of the<br />
GRI methodology to corporate issuers in Europe.<br />
Credit Strengths<br />
• Operates the whole of the Romanian rail infrastructure<br />
• Owned 100% by the Romanian Government with limited<br />
prospects for privatisation<br />
• Benefits from regular Government funding for infrastructure<br />
upgrade and debt service<br />
Credit Challenges<br />
• Poor liquidity and structurally weak profitability<br />
• Problems with revenue collection from customers<br />
• Poor reliability of financial data<br />
Rating Rationale<br />
The Ba2 rating reflects the following combination of inputs:<br />
(a) a Baseline Credit Assessment of 6, (b) the Ba1 local currency<br />
rating of the Government of Romania (the “Government”),<br />
(c) high Dependence, and (d) high Support.<br />
CFR’s Baseline Credit Assessment of 6 reflects (i) the company’s<br />
very poor financial position, evidenced by continued<br />
operating losses and negative net worth, (ii) its precarious<br />
liquidity position which has been further hindered by operational<br />
problems caused by the extensive floods in Romania<br />
this year, (iii) the transport infrastructure charging framework<br />
which should enable CFR to cover all costs from revenues,<br />
which is somewhat mitigated by the constrained ability to do<br />
so given the financial status of the rail industry as a whole.<br />
The high Dependence recognises CFR’s strong reliance on<br />
funding from the Government. This occurs through the Government<br />
requirement to fund railway infrastructure upgrades<br />
directly, as well as the subsidies the Government pays to the<br />
railway industry (both directly to CFR and through the<br />
Romanian passenger railway company, CFR Calatori), and<br />
through the guarantees of debt service that the Government<br />
has given to cover most of CFR’s debt obligations.<br />
The high Support factors Moody’s expectation that, if<br />
required, the Government would most likely provide or<br />
would procure the provision of financial support for CFR on<br />
a timely basis. While CFR does not have a special legal status,<br />
it is the provider of most of Romania’s railway infrastructure,<br />
a critical means of transportation given the country’s relatively<br />
underdeveloped road network. Furthermore, Romanian<br />
law requires the Government to fund the modernisation and<br />
refurbishment of the railway system, which is implemented<br />
predominantly by raising debt through CFR which is guaranteed<br />
by the Government. Privatisation of CFR is unlikely in<br />
the foreseeable future.<br />
Rating Outlook<br />
The rating outlook reflects the positive outlook of the Government’s<br />
rating. Given the high Dependence and high Support<br />
incorporated into CFR’s rating, its rating is likely to be<br />
upgraded if the Government’s rating is upgraded, even if the<br />
Baseline Credit Assessment was positioned more weakly in<br />
the 6 category.<br />
What Could Change the Rating - UP<br />
An upwards move in the rating of the Government.Given the<br />
nature of CFR’s business and its role in Romania, the high<br />
Dependence factor is not likely to change.<br />
What Could Change the Rating - DOWN<br />
A downwards move in the rating of the Government.<br />
The Baseline Credit Assessment could be reduced to a level<br />
that positions it more weakly in the 6 category if CFR’s legal<br />
ability to recover costs through its charging mechanism was<br />
weakened or if it were to encounter materially greater difficulties<br />
in meeting its ongoing payment obligations.<br />
The high Support factor may be reduced if Moody’s<br />
believes that the likelihood of timely support by the Government<br />
was reduced. This would require a material re-appraisal<br />
of the importance of railway infrastructure to Romania or a<br />
policy change with regard to the Government’s support for<br />
state-owned companies.<br />
• 39 •
Conproca, S.A. de C.V.<br />
Cadereyta de Jimenez, Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
- Payment obligations of Pemex Refinación, guaranteed by<br />
PEMEX<br />
- Strategic importance of Cadereyta refinery<br />
- Sponsor support obligations<br />
- Collateral support<br />
Credit Challenges<br />
- Collection rights under Pemex Notes governed by Mexican<br />
law<br />
- No security interest in Pemex assets<br />
- Legal dispute with PEMEX<br />
- Limited sponsor involvement<br />
Rating Rationale<br />
The Baa3 rating of Conproca S.A. de C.V.'s US$370 million<br />
secured bonds due 2010 reflects the payment obligations of<br />
Petroleos Mexicanos (PEMEX), Mexico’s state-owned oil<br />
company (rated Baa1 for foreign currency obligations), under<br />
a long-term contract (the Pemex Contract) with Conproca for<br />
the modernization of PEMEX’s Cadereyta refinery near<br />
Monterrey. The rating also considers the importance of the<br />
Cadereyta refinery to PEMEX and the support provided to<br />
Conproca by the project sponsors (Siemens, rated Aa3, SK<br />
Engineering & Construction, not rated, and Grupo Tribasa,<br />
not rated) in the form of a joint and several Support Agreement.<br />
In addition, Conproca's bonds are secured by all of its<br />
assets.<br />
However, Moody’s also recognizes that the Pemex Contract<br />
and the pledge of Conproca’s collection rights under the<br />
Pemex Contract are governed by Mexican law, and that bondholders<br />
do not hold a security interest in the Cadereyta refinery<br />
units constructed under the Pemex Contract (due to<br />
Mexican legal constraints). In addition, Conproca has still not<br />
obtained final acceptance on the Cadereyta project from<br />
PEMEX, and PEMEX and Conproca are involved in a contractor<br />
dispute over technical issues and project costs. Furthermore,<br />
Conproca remains liable for Mexican income and<br />
Analyst<br />
Phone<br />
Alexandra S. Parker/New York 1.212.553.1653<br />
Thomas S. Coleman/New York<br />
John Diaz/New York<br />
asset taxes, and the sponsors have less incentive to support<br />
Conproca now that the project is complete.<br />
Bondholders are relying on payments from PEMEX and/<br />
or Pemex-Refinación sufficient to cover 100% of debt service<br />
through final maturity. The Cadereyta project has been completed,<br />
and Pemex Refinación has issued notes (the "Pemex<br />
Notes") to Conproca, which have been PLEDGED to the<br />
Collateral Agent for the benefit of the bondholders. The payment<br />
obligations of Pemex Refinación are guaranteed by<br />
PEMEX. However, because Conproca has not ASSIGNED<br />
the Pemex Notes to the Collateral Agent, Conproca (a<br />
"sociedad anónima de capital varable" under the laws of Mexico)<br />
remains directly liable for debt service payments.<br />
<strong>Moody's</strong> has not rated Coproca's bonds at the same level as<br />
PEMEX's ratings because we believe that Conproca is not<br />
likely to legally assign the Pemex Notes to the bondholders in<br />
the foreseeable future, and that therefore the Conproca bonds<br />
cannot be viewed as direct obligations of PEMEX.<br />
Rating Outlook<br />
The rating outlook is stable. Conproca's Baa3 rating remains<br />
closely linked to the ratings of PEMEX, whose rating outlook<br />
is stable.<br />
What Could Change the Rating - DOWN<br />
A downgrade in the foreign currency ratings of PEMEX<br />
could be negative for Conproca's rating.<br />
What Could Change the Rating - UP<br />
If Conproca elected to assign the Pemex Notes to the Collateral<br />
Agent by entering into an Assignment of Collection<br />
Rights Agreement (as permitted under the project documents),<br />
there is a strong likelihood that <strong>Moody's</strong> would<br />
upgrade Conproca's Baa3 rating to Baa1. An upgrade of<br />
PEMEX's foreign currency ratings could also have favorable<br />
rating implications for Conproca, but would be contingent<br />
upon Conproca obtaining final acceptance on the Cadereyta<br />
project from PEMEX and PEMEX and Conproca resolving<br />
their legal dispute.<br />
• 40 •
Constructora Intl de Infraestructura<br />
Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for CIISA's El Cajón Hydroelectric <strong>Project</strong><br />
are:<br />
-Historic and on-going support of the Comisión Federal de<br />
Electricidad (CFE)<br />
-Clear and well-defined structure provided by the Public<br />
Works Contract and Memorandums of Clarification<br />
-Construction, contractor and technology risks are adequately<br />
addressed<br />
-Debt service reserve for payment of all interest payments<br />
Credit Challenges<br />
Credit challenges for CIISA's El Cajón Hydroelectric <strong>Project</strong><br />
are:<br />
-CFE contract payment is only made in the event of project<br />
completion and acceptance, or an event of Termination.<br />
-Prolongued disputes between CFE and CIISA regarding<br />
monthly contruction progress may disrupt monthly construction<br />
disbursements.<br />
-CFE might not accept the project at completion.<br />
-CFE payments under an Event of Termination might not<br />
be sufficient to pay outstanding debt obligations.<br />
Rating Rationale<br />
The Baa3 rating for Constructora International de Infraestructura<br />
S.A. de C.V.'s (CIISA) senior secured debt is based<br />
on the role of the Comisión Federal de Electricidad (CFE), a<br />
clear indication of support from the Mexican Congress, adequate<br />
provisions for risk mitigation during construction, and<br />
structural features that provide protection to debt holders.<br />
The two-unit 750 MW build-transfer hydroelectric generation<br />
project was developed, and is under construction, under<br />
the CFE's Proyecto de Inversion Diferida en el Registro del<br />
Gasto (Pidiregas) program. Upon completion and acceptance<br />
in 2007, the project is expected to be assumed by CFE in<br />
exchange for payment of the contract price in two installments:<br />
60% at provisional acceptance of the first unit (February<br />
28, 2007) and the remaining 40% at project completion<br />
(August 31, 2007). The El Cajón Hydroelectric <strong>Project</strong> is the<br />
largest undertaking under the Pidiregas Program to date.<br />
Given its size and complexity, the project faces a relatively<br />
higher degree of construction and execution risk than previous<br />
CFE Pidiregas build-transfer projects.<br />
As the project meets its schedule of milestones and accumulates<br />
monthly acceptances, the financing will shift incrementally<br />
from construction/execution risk to CFE acceptance<br />
risk. Moody’s believes that the risk of CFE not accepting the<br />
project at completion is unlikely given that the project is<br />
being built to CFE specifications, its importance to CFE’s<br />
long term investment program in hydroelectric projects, and<br />
approval of the project under the Pidiregas program. In<br />
Analyst<br />
Phone<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daisy Dominguez/New York<br />
Daniel Gates/New York<br />
assigning the Baa3 rating, Moody’s considered the sponsors'<br />
experience with similar projects and the contractual obligations<br />
under the Public Works Contract (PWC) and subsequent<br />
Memorandums of Clarification. The PWC and<br />
Memorandums of Clarification provide a clear and welldefined<br />
structure for project management, coordination and<br />
oversight by CFE, as well as calculation of Termination Value<br />
in the case of an early termination and dispute resolution.<br />
Moody’s also considered the liquidity enhancements provided<br />
by a $26 million Disbursement Guarantee in the form of<br />
stand-by-letters of credit provided pro-rata by the members<br />
of CIISA, joint and several junior Performance Guarantees<br />
from the sponsors, and retention amounts withheld from<br />
monthly construction funding disbursements.<br />
The latest Consultant's report of December, 2004 indicates<br />
that project construction is behind schedule by about 4%<br />
caused in part by poor geological conditions in the foundation<br />
of the main dam. The Public Works Contract has been modified<br />
by three Change Orders negotiated between CIISA and<br />
CFE. However, despite the delays and Change Orders, the<br />
Consultant Engineers are of the opinion that CIISA's performance<br />
is still satisfactory from a productivity point of view,<br />
CIISA will still be able to reach critical path milestones by<br />
increasing production volumes, that timely project completion<br />
is not jeopardized under the current conditions, and<br />
there is no major risk to the project at the current time.<br />
CIISA is a Mexican corporation whose shareholders are:<br />
Promotora e Inversora Adisa S.A. de C.V. and Ingenerios<br />
Civiles Asociados S.A. de C.V., La Peninsular Compania<br />
Constructora S.A. de C.V., Open Joint Stock Co. Power<br />
Machines – ZTL, LMZ, Electrosila, Energomachexport.<br />
CFE is Mexico's principal state electric generation, transmission<br />
and distribution company.<br />
Rating Outlook<br />
Moody’s stable outlook is based upon the expectation that the<br />
project will be completed on time and in accordance with the<br />
Public Works Contract. The outlook also assumes that CFE<br />
will work closely with CIISA to ensure cooperation and<br />
timely resolution of issues that may arise during the lengthy<br />
four and a half-year construction schedule.<br />
What Could Change the Rating - UP<br />
The Baa3 is constrained by the financing structure and<br />
progress and length of the construction schedule.<br />
What Could Change the Rating - DOWN<br />
Significant delays or prolonged disputes over monthly construction<br />
disbursements and any associated lack of economic<br />
value recognition by CFE.<br />
• 41 •
Deer Park Refining Limited Partnership<br />
Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Bkd Senior Unsecured<br />
A2<br />
Bkd Commercial Paper P-1<br />
Opinion<br />
Credit Challenges<br />
- Deer Park's processing fee revenues reflect underlying<br />
refinery margin volatility and the impact of changing light/<br />
heavy crude price differentials.<br />
- Investments for environmental, processing control, and<br />
capital return investments will increase capital spending for<br />
the next 2-3 years.<br />
Credit Strengths<br />
- Importance of refining asset to Shell Oil and to Pemex.<br />
- High operating rates and improved economic efficiency<br />
for state-of-the-art facility.<br />
- Tangible partner supports, including flexible distributions<br />
and subordinated partner loan facilities in the event of<br />
earnings/liquidity problems.<br />
Rating Rationale<br />
Deer Park Refining Limited Partnership is a refinery joint<br />
venture 50% owned by Shell Oil Company (Aa2 Issuer Rating<br />
with a stable outlook), which acts as general partner, and<br />
50% by P.M.I Norteamerica, a subsidiary of Petroleo Mexicano<br />
(PEMEX, rated Baa1 foreign currency). <strong>Moody's</strong> downgraded<br />
Deer Park's long-term debt rating to A2 from A1 in<br />
2004, but confirmed the Prime-1 commercial paper rating,<br />
both with a stable outlook. The ratings action followed the<br />
resolution of reviews of Shell Oil Company's Aa2 issuer rating<br />
and of Shell Oil's ultimate owners, the Royal Dutch/Shell<br />
Group, whose guaranteed subsidiary ratings were downgraded<br />
to Aa1 (with a negative outlook) in the wake of the<br />
Group's reserve accounting problems.<br />
Deer Park's downgrade reflects Shell Oil's marginally<br />
weaker credit support following its downgrade in April 2004.<br />
However, Deer Park continues to benefit from the considerable<br />
ratings uplift above its fundamental credit quality as a<br />
standalone project, based on its significance as a refining<br />
investment and integration within Shell Oil's downstream<br />
portfolio, as well as on Shell's significant liquidity and prorata<br />
capital support to the project. These supports include<br />
Shell's pro-rata equity funding of the $310 million Maya II<br />
upgrading project, which was completed in 2001, Shell's<br />
offtake purchase obligations, and liquidity backstops to the<br />
project.<br />
Deer Park's importance to both Shell Oil and P.M.I. is supported<br />
by its efficient economics as a well-located heavy coking<br />
refinery on the U.S. Gulf Coast. Shell operates Deer<br />
Park, while P.M.I. is contractually obligated long-term to<br />
provide 220,000 bpd of heavy Mayan crude, a supply level<br />
that is frequently exceeded. The Maya II expansion increased<br />
plant capacity by more than 20% to 340,000 bpd of crude distillation<br />
and 85,000 bpd of coking, and allows for higher runs<br />
of heavy Mayan crude and low sulfur diesel output.<br />
Deer Park’s debt service depends on refinery operating cash<br />
flows and is not guaranteed by Shell or by P.M.I. Deer Park<br />
acts as a toll refiner for Shell and P.M.I., receiving a processing<br />
fee, which is calculated as the difference between the value<br />
of products produced and the feedstocks consumed. While it<br />
does not incur inventory risk, the fee revenues and earnings<br />
largely reflect underlying refining margin trends and changes<br />
in light/heavy crude price differentials. However, Shell Oil is<br />
contractually obligated to purchase at the gate its own and<br />
P.M.I’s pro-rata shares of the output, and the products are<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
Alexandra S. Parker/New York<br />
John Diaz/New York<br />
then re-sold to various Shell entities, to P.M.I., and to third<br />
parties. Moreover, Deer Park is on site and highly integrated<br />
with Shell's major petrochemical and lube facilities that service<br />
its key Gulf and East Coast product markets.<br />
Deer Park's structural supports include strong, albeit limited,<br />
partner liquidity support in the form of subordinated<br />
partner loans, which have never been drawn on. In addition,<br />
Shell must always retain a minimum 50% ownership and<br />
repurchase P.M.I.’s stake if P.M.I. fails to meet certain support<br />
obligations. Deer Park's balance sheet was bolstered by equity<br />
financing of the Maya II expansion. The partners also<br />
amended the partnership agreement to require retention of<br />
cash equal to the next twelve months of principal, a liquidity<br />
protection that restricts distributions at a level sufficient to<br />
retire approximately $400 million of long-term debt coming<br />
due from 2005-2008. The intent is also to manage debt balances<br />
so as to reduce Deer Park’s financial leverage over time.<br />
Rating Outlook<br />
The stable outlook for Deer Park's A2 and Prime-1 ratings is<br />
supported by strong processing fees operating cash flows as<br />
light heavy crude differentials have widened, and by refinancings<br />
that have paid down short-term debt. In addition, the<br />
partnership amendment requiring cash retention of the next<br />
twelve months' debt maturities enhances Deer Park's flexibility<br />
in meeting substantial debt maturities in the next few<br />
years. Deer Park is also an important investment for P.M.I, as<br />
the refinery provides an assured outlet under a long-term<br />
contract for Mayan crude produced by PEMEX.<br />
What Could Change the Rating - UP<br />
There are no events or credit factors on the horizon that<br />
would be likely to lead to an upgrade of the A2 long-term rating.<br />
What Could Change the Rating - DOWN<br />
A downgrade of the Shell shareholder ratings could affect the<br />
Deer Park ratings, given the importance of the Shell relationship.<br />
On a more fundamental level for Deer Park, significant<br />
leveraging relative to capital projects, or poor financial results<br />
that result in undue or sustained reliance on partner liquidity<br />
backstops, could put pressure on the ratings.<br />
Recent Developments<br />
<strong>Moody's</strong> has applied its new rating methodology for government<br />
related issuers (GRIs) to Deer Park to assess the potential<br />
impact of PEMEX's 50% ownership, through P.M.I., on<br />
the joint venture. (Please refer to <strong>Moody's</strong> Rating Methodology<br />
entitled "The Application of Joint Default Analysis to<br />
Government-Related Issuers," dated April 2005, and its<br />
accompanying press release.) Our analysis considered a combination<br />
of Deer Park's category 3 baseline credit assessment<br />
using its current A2 rating (which includes uplift from Shell<br />
but excludes potential support by PEMEX), combined with<br />
PEMEX's Baa1 local currency rating and a low level of<br />
dependence, or correlation of default, between Deer Park and<br />
PEMEX. However, application of the GRI methodology did<br />
not result in uplift to Deer Park's debt rating, primarily<br />
because we imputed a low level of support from PEMEX for<br />
Deer Park's debt service in the event of a default by Deer<br />
Park.<br />
• 42 •
Derby Healthcare plc<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
- Bonds benefit from an unconditional, irrevocable financial<br />
guarantee from MBIA Assurance S.A. (Aaa)<br />
- the underlying credit benefits from the stable cash flows<br />
that should be produced under the <strong>Project</strong> Agreement and<br />
Mobilisation Services Agreement with the Southern Derby<br />
Acute Hospitals NHS Trust<br />
- under a Deed of Safeguard the Secretary of State would<br />
become a joint obligor of the Trust’s obligations under the<br />
project’s funding documents in the event of a Trust default or<br />
Trust insolvency event. This mitigates against possible risks<br />
from the Trust now having attained Foundation Trust status<br />
- revenues under the <strong>Project</strong> Agreement are scheduled to<br />
commence during construction (upon completion of Phase 1<br />
in May <strong>2006</strong>)<br />
- construction appears to be progressing well, and is on<br />
schedule. The value of works completed at the end of April<br />
2005 was £167m i.e. about 50% of the total Design and Build<br />
contract sum of £335m. Relationships between the project<br />
company, construction contractor (Skanska) and Trust appear<br />
to be harmonious<br />
- all services other than estates maintenance are market<br />
tested or benchmarked, with the Trust carrying 100% of the<br />
risk of price adjustments<br />
- A proportion of payments under the <strong>Project</strong> Agreement<br />
has a fixed escalator (rather than full RPI indexation), reducing<br />
mismatch with fixed rate bonds<br />
Credit Challenges<br />
- the underlying credit is exposed to the lack of diversity of<br />
revenues and highly leveraged financial structure typical for a<br />
PFI financing. However, this does not impact on the financial<br />
guarantee or the Aaa rating on the bonds<br />
Analyst<br />
Phone<br />
Johan Verhaeghe/London 44.20.7772.5454<br />
Chetan Modi/London<br />
Stuart Lawton/London<br />
- final project completion is scheduled for December 2008;<br />
the five year overall construction period is among the longest<br />
to date for rated hospital projects<br />
- decanting process in Q2 <strong>2006</strong> upon completion of Phase<br />
1, prior to commencement of works on Phase 2, will be challenging<br />
- third party liquidity support during construction is at the<br />
low end of comparable projects, although the progress of construction<br />
works and the involvement of Skanska currently<br />
provide adequate mitigation<br />
- The project company has retained life cycle cost risk, and<br />
total lifecycle costs estimated at about £55m are at the low<br />
end for comparable projects. Whilst a Maintenance Reserve<br />
Account will be funded on a three year look forward basis,<br />
lifecycle cost overrun may be the principal risk faced by bondholders<br />
during operations<br />
- This is the first NHS PFI project where the Retention of<br />
Employment model is being used. Whilst this mechanism<br />
reduces wage inflation risk, it introduces uncertainties regarding<br />
the effective management of 75% of staff employed under<br />
the model<br />
Rating Rationale<br />
The company is a UK PFI Hospital project, currently under<br />
construction, which upon completion will maintain and providing<br />
certain non-clinical services for an acute general hospital<br />
in Derby. The Aaa rating on the £447 million secured<br />
bonds reflects the unconditional and irrevocable guarantee<br />
provided by MBIA Assurance S.A. (Aaa).<br />
The underlying credit is based on a long term <strong>Project</strong><br />
Agreement with the Southern Derby Acute Hospitals NHS<br />
Trust, and the underlying rating of the bonds is Baa3.<br />
Rating Outlook<br />
The stable outlook on the bonds reflects the stable outlook on<br />
the guarantor, MBIA Assurance S.A.<br />
• 43 •
DFS Deutsche Flugsicherung GmbH<br />
Langen, Germany<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Senior Unsecured<br />
Aaa<br />
Commercial Paper -Dom Curr P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Johan Verhaeghe/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
DFS Deutsche Flugsicherung GmbH<br />
2004 2003 2002 [1]2001 2000<br />
EBIT Margin[2] 10.1% 7.6% -0.3% -1.2% 4.2%<br />
Adj RCF / Net Adj Debt[3] 144.7% 63.6% 14.5% 14.3% 3.7%<br />
Adj FFO Interest Coverage[4] 13.5 10.4 4.4 4.6 2.1<br />
Adj RCF / Capex + Investments[5] 3.3 3.1 0.8 0.4 0.1<br />
(EBIT + Interest Income) / Interest Expense 4.8 3.0 0.1 -0.1 1.8<br />
Adjusted FFO / Net Adjusted Debt[6] 152.9% 63.6% 14.5% 15.1% 5.4%<br />
[1] Restated [2] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [3] (Retained Cash Flow post Working Capital + 2/3 Operating Lease<br />
Expense)/(Total Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [4] (Funds From Operation post Working Capital + Cash<br />
Interest Expense)/Interest Expense [5] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [6] (Funds From Operations post Working<br />
Capital + 2/3 Operating Lease Expense)/(Total Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities))<br />
Opinion<br />
Recent Developments<br />
The ratings of DFS Deutsche Flugsicherung GmbH ("DFS")<br />
reflect the application of Moody’s new rating methodology<br />
for government-related issuers (“GRIs”). Please refer to<br />
Moody’s Rating Methodology entitled “The Application of<br />
Joint Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled “Rating<br />
Government-Related Issuers in European Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of the<br />
GRI rating methodology to corporate issuers in Europe.<br />
Credit Strengths<br />
• Monopoly provider of core German air traffic control<br />
• Key strategic role and current ownership imply high Support<br />
from the Federal Republic of Germany<br />
• Current rate setting mechanism ensures full recovery of<br />
operating and debt service costs over time<br />
Credit Challenges<br />
• Inability to build reserves from revenues creates potential<br />
for capital reduction when traffic levels fall below projections<br />
• Limited bank liquidity support may place reliance on<br />
uncommitted sources of funds in a stress scenario<br />
• Uncertainty as to the form of DFS post privatisation, e.g.<br />
charging mechanism and capital structure<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> GRI methodology, the ratings of<br />
DFS reflect the combination of the following inputs, (a) a<br />
Baseline Credit Assessment of 3, (b) the Aaa local currency<br />
rating of the Government of the Federal Republic of Germany<br />
("FRG"), (c) low Dependence, and (d) high Support.<br />
The Baseline Credit Assessment of DFS reflects its status<br />
as the monopoly provider of core air traffic control services in<br />
Germany, its current rate setting mechanism which ensures<br />
full recovery of operating and debt service costs over time,<br />
tempered with an inability to build reserves, and moderate<br />
bank liquidity support which may place undue reliance on<br />
uncommitted sources of funds in a downside scenario. In Dec<br />
2004 FRG announced its intention to sell up to 74.9% of<br />
DFS, but gave no specific guidance as to the charging model<br />
or financial profile of DFS post privatisation. <strong>Moody's</strong> understands<br />
this is still being developed by FRG . Furthermore, the<br />
timing and process of privatisation will be less certain until<br />
after the next German election.<br />
The low Dependence recognises that factors other than<br />
domestic economic performance have a material impact on<br />
DFS, e.g. propensity for international travelers to visit Germany<br />
by air, and the substantial amount of air traffic that<br />
transits trough German airspace. The high Support reflects<br />
DFS's critical role in the transport operations, commercial<br />
prospects, and defence of Germany, underpinned by the constitutional<br />
requirement for FRG to maintain air navigation<br />
services, together with the current FRG ownership. The level<br />
of assumed Support may decline following any partial privatisation,<br />
but a material level of Support is likely to be factored<br />
into <strong>Moody's</strong> ratings even if FRG's ownership falls to 25%.<br />
The terms of the senior unsecured euro medium-term notes<br />
(“the Notes”) provide that it would be an event of default if<br />
FRG were to cease holding directly or indirectly at least 75%<br />
of the voting share capital of DFS, unless FRG unconditionally<br />
and irrevocably guarantees the Notes. This would imply<br />
continued high Support for the Notes in this scenario.<br />
Rating Outlook<br />
With regard to the long-term rating, the stable outlook factors<br />
a view that while FRG remains a substantial shareholder<br />
of DFS, Support remains high, and that a guarantee of the<br />
Notes by FRG would be provided if FRG’s ownership falls<br />
below 75%. With regard to the short term rating, the stable<br />
outlook factors a view that a range of possible post privatisation<br />
credit profiles, together with an assumption as to the<br />
likely Support levels post privatisation, would most likely be<br />
consistent with a Prime-1 rating.<br />
What Could Change the Rating - DOWN<br />
The form of privatisation is currently unknown and may represent<br />
a Baseline Credit Assessment lower than 3. Given<br />
FRG's intention to sell up to 74.9% of DFS, there is a significant<br />
probability that un-guaranteed long-term debt would<br />
warrant a medium term rating lower than Aaa, and may warrant<br />
a short-term rating lower than Prime-1. DFS’s un-guaranteed<br />
ratings would likely be downgraded if DFS were<br />
privatised on a basis that implied a materially lower Baseline<br />
Credit Assessment, and Moody’s perceived that Support was<br />
materially reduced. There is a possibility of divergence in<br />
short-term and long-term ratings in the event that an FRG<br />
guarantee was provided to the Notes but not to short term<br />
debt in this scenario.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 44 •
East Coast Power L.L.C.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Negative<br />
Baa3<br />
Credit Strengths<br />
East Coast Power's credit strengths are:<br />
- Long-term power purchase agreements with credit worthy<br />
counterparties.<br />
- Strategic location of Linden 1 to 5, supplying power to<br />
New York City.<br />
- Ownership by a strong credit entity.<br />
Credit Challenges<br />
East Coast Power's credit challenges include:<br />
-Structural subordination of the senior notes.<br />
-Single asset concentration risk.<br />
-Likely sale of its majority ownership in the project by The<br />
Goldman Sachs Group Inc.<br />
Rating Rationale<br />
The Baa3 rating of the senior secured notes issued by East<br />
Coast Power LLC. (ECP) is supported by the strengths and<br />
predictability of cash flows as more than 90% of its consolidated<br />
cash flows are derived from contractual sources. The<br />
power purchase agreements extend beyond the tenor of the<br />
senior notes, and are with creditworthy entities, Consolidated<br />
Edison Company of New York Inc. (sr. unsec., A1) and ConocoPhillips<br />
(sr. unsec., A1).<br />
The Baa3 rating also reflects the strategic location and the<br />
historical operating performance of the ECP's generating<br />
assets and its majority ownership by The Goldman Sachs<br />
Group Inc., a Aa3-rated entity. Linden 1 to 5 are located in<br />
the New York City Zone J market and considered "in-city"<br />
generation, supplying power to New York City. Linden 6 is<br />
located in the PJM market.<br />
The rating however also reflects the structural subordination<br />
of ECP's senior secured notes to an approximately $80<br />
million term loan at Cogen Technologies Linden Ltd. (Linden<br />
Ltd.) and to certain cash distributions to preferred limited<br />
partners at Cogen Technologies Linden Venture, LP.<br />
The term loan prohibits any cash distribution to ECP unless<br />
the DSCR at Linden Ltd. is greater than 1.2x. In the event of<br />
a brief interruption of funds upstreamed to ECP to meet debt<br />
payment for other reasons, the noteholders would rely upon a<br />
debt service reserve that provides liquidity support for up to 6<br />
months of debt service.<br />
ECP's cash flow is concentrated in one group of assets, the<br />
Linden 1 to 5 and Linden 6 facilities, resulting in a greater<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
concentration of operating risk than was the case before ECP<br />
divested other power facilities.<br />
Another risk in the transaction is that Consolidated Edison's<br />
fuel payments to Linden 1 to 5 are subject to a fuel cap<br />
which equals Consolidated Edison's weighted average cost of<br />
gas (WACOG). As a result, there is potential for an adverse<br />
mismatch between ECP's gas purchase costs and the gas price<br />
component of the power sales contract. However, the natural<br />
gas purchase patterns of ECP and Consolidated Edison substantially<br />
mitigate this risk. Following Consolidated Edison's<br />
divestiture of its generating assets, its WACOG has increased,<br />
and Linden has generally been able to purchase gas at a lower<br />
price than Consolidated Edison. Consolidated Edison buys<br />
more gas in the winter months when natural gas prices are<br />
high relative to the rest of the year, while Linden buys<br />
throughout the year with larger purchases in the summer<br />
when gas prices tend to be lower.<br />
Rating Outlook<br />
The rating outlook is negative reflecting an announcement by<br />
Goldman Sachs in December 2005 of an intention to sell its<br />
majority ownership in ECP through an auction process.<br />
The negative outlook reflects the risk that ECP's credit<br />
profile could be adversely impacted if the new owner has substantially<br />
lower credit quality than Goldman Sachs, if the<br />
acquisition is financed in a manner that results in a heavy reliance<br />
upon funds being withdrawn from ECP to service debt,<br />
or if the transaction significantly increases the leverage in<br />
ECP's consolidated capital structure. The outlook and rating<br />
will be reevaluated when a prospective buyer has been identified<br />
and there is an indication of the financing plan for the<br />
acquisition.<br />
What Could Change the Rating - UP<br />
The Baa3 rating is currently constrained by structurally subordinated<br />
to the GECC term loan and to certain cash distributions<br />
to preferred limited partners at Cogen Technologies<br />
Linden Venture, LP.<br />
What Could Change the Rating - DOWN<br />
In addition to those discussed under the Rating Outlook<br />
header, a significant mismatch of ECP’s gas cost with ConEd’s<br />
WACOG and operating plant performance that is less than<br />
the level required under the power purchase agreement with<br />
ConEd could negatively impact the rating.<br />
• 45 •
Edison Mission Energy<br />
Irvine, California, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Senior Unsecured<br />
Jr Subordinate Shelf<br />
Ult Parent: Edison International<br />
Outlook<br />
Senior Unsecured Shelf<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B1<br />
B1<br />
(P)B3<br />
Stable<br />
(P)Baa3<br />
Subordinate Shelf<br />
(P)Ba1<br />
Preferred Shelf<br />
(P)Ba1<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
Edison Mission Energy<br />
6/30/05 LTM 2004 2003 2002<br />
Funds from Operations / Adjusted Debt[1] 4.9% -7.0% 8.8% 6.4%<br />
Retained Cash Flow / Adjusted Debt[1] -2.4% -8.2% 8.0% 5.9%<br />
Common Dividends / Net Income Available for Common 56% 61% 217% 157%<br />
Adjusted Funds from Operations + Adjusted Interest / Adjusted Interest[2] 1.70 (0.10) 2.23 2.31<br />
Adjusted Debt / Adjusted Capitalization[1][3] 78.1% 78.8% 69.0% 79.3%<br />
Net Income Available for Common / Common Equity 46.8% 7.3% 1.0% 1.5%<br />
[1] Debt is adjusted for operating leases, preferred stock subject to mandatory redemption, sale leaseback transactions and company obligated mandatorily redeemable security. [2] Adjusted<br />
Interest reflects adjustments for operating leases, capitalized interest and preferred stock dividends. [3] Adjusted Capitalization reflects the inclusion of adjusted debt.<br />
Opinion<br />
Credit Strengths<br />
Credit Strengths for EME are:<br />
-Completed asset sales should enable EME to substantially<br />
de-leverage<br />
-Merchant cash flows are provided by well-placed, coalfired<br />
generating assets<br />
-Greater predictability and higher future earnings and cash<br />
flow are anticipated, based upon hedges in place for <strong>2006</strong> and<br />
2007<br />
-Substantial liquidity to be used for hedging and for future<br />
debt repayment at EME and at MEHC.<br />
Credit Challenges<br />
Credit Challenges for EME are:<br />
-High leverage relative to operating cash flow<br />
-Structural subordination given the amount of debt at each<br />
of the EME subsidiaries.<br />
-Reliance on merchant energy marketplace increases volatility<br />
of future cash flows.<br />
-Existence of substantial debt at EME's parent places an<br />
additional call on EME's cash flow.<br />
Rating Rationale<br />
Edison Mission Energy’s (EME) B1 senior unsecured rating<br />
reflects high consolidated leverage relative to consolidated<br />
operating cash flow, the degree of structural subordination<br />
throughout EME due to the significant amount of debt that<br />
exists at each of the subsidiaries, a reliance on the merchant<br />
energy market for a material portion of future revenues and<br />
cash flows, and the existence of dividend restrictions at several<br />
of EME's subsidiaries and projects.<br />
The rating considers EME's improved liquidity profile following<br />
the successful completion of the international asset<br />
sale, which balances the continuing high financial leverage at<br />
EME and at its parent, Mission Energy Holding Company<br />
(MEHC: B2 senior secured debt). While EME has consolidated<br />
cash of around $1.6 billion at September 30, 2005,<br />
EME's ability to apply such proceeds to debt reduction at<br />
EME and at MEHC is constrained by call provisions in the<br />
companies' respective indentures. Management currently<br />
intends to maintain high cash balances over the next several<br />
years and to use the cash on hand to repay MEHC and EME<br />
debt at their respective maturities and to provide liquidity for<br />
hedging programs in support of MWGand at Homer City.<br />
Given the negative arbitrage entailed in holding large<br />
amounts of cash for several years, the ratings of MEHC and<br />
EME consider the possibility that some portion of this cash<br />
could be used for other purposes than debt repayment at<br />
MEHC and EME. Approximately $1.2 billion of MEHC and<br />
EME debt matures in 2008, while an additional $600 million<br />
of EME debt matures in 2009. Until this debt is paid down,<br />
EME's and MEHC's consolidated credit metrics will continue<br />
to reflect high leverage.<br />
EME's business will be domestically focused and centered<br />
around three distinct business units, Homer City Generating<br />
Station (Homer City Funding: Ba2 sr. secured debt), a threeunit<br />
1,884 mw coal-fired merchant plant in PJM; Midwest<br />
Generation (MWG: Ba3 sr. secured bank facilities), a 5,621<br />
mw fleet of merchant coal-fired plants in the midwest US;<br />
and its California business, which consist of interests in natural<br />
gas plants that sell electric output under contract (Edison<br />
Mission Energy Funding Co: Ba1 sr. secured debt). The bulk<br />
of EME's future earnings and cash flows will be heavily reliant<br />
on the U.S. merchant power market.<br />
Rating Outlook<br />
The stable rating outlook for EME incorporates expectations<br />
for relatively predictable cash flow over the next few years<br />
from the company's predominantly coal-fired generating fleet<br />
located in the Midwest and in PJM. The stable outlook is buttressed<br />
by the significant amount of liquidity that exists at<br />
EME, which to some degree balances the high degree of<br />
leverage at EME and at MEHC.<br />
What Could Change the Rating - UP<br />
The ratings could be upgraded if EME completes the final<br />
phase of its restructuring program by repaying the holding<br />
company debt at MEHC and EME, if merchant coal prices in<br />
the Midwest and in PJM remain at healthy levels, and if EME<br />
continues to execute on a domestically focused strategy centered<br />
around its coal assets and its contracted natural gas<br />
portfolio in California.<br />
What Could Change the Rating - DOWN<br />
The ratings could be downgraded if EME does not follow<br />
through on its plans to repay holding company debt at EME<br />
and MEHC, if operating problems at Homer City or at<br />
MWG were to significantly impact capacity factors and operating<br />
costs, or if EME substantially depletes the amount of<br />
cash on its balance sheet through growth strategies that call<br />
for sizeable capital investments.<br />
• 46 •
Edison Mission Energy Funding Corporation<br />
Irvine, California, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Credit Strengths<br />
Credit Strengths for EME Funding are:<br />
• Contracted cash flows from four underlying projects that<br />
have PPAs with SCE and sell steam to major oil companies<br />
• Robust and predictable historical and projected debt service<br />
coverage ratios.<br />
• Underlying cogeneration assets have importance to the<br />
off-takers, particularly the major oil companies<br />
• Lack of project level debt reduces structural subordination<br />
issues<br />
• Six-month debt service reserve and cross collateralized<br />
upstream guarantees enhances security package<br />
Credit Challenges<br />
Credit Challenges for EME Funding are :<br />
• Cash flow is highly dependent on one source, SCE, for<br />
the majority of its cash flows<br />
• Ownership and substantial involvement by EME<br />
• Dividends from four holding companies are the sole<br />
source of cash flow for debt repayment<br />
• Collateral is weak<br />
Rating Rationale<br />
The Ba1 rating of Edison Mission Energy Funding Corp.<br />
(EME Funding) reflects in large part the predictability of cash<br />
flows derived principally from long-term power purchase<br />
agreements (PPAs) with Southern California Edison Company<br />
(SCE: Baa1 senior unsecured debt rating; stable outlook)<br />
for sales of electric capacity and energy, and from steam<br />
sales agreements with various oil companies, including Chevron<br />
and BP America. The rating considers the strategic<br />
importance of the four underlying projects to the oil companies<br />
for steam use in enhanced oil recovery operations (for<br />
three of the four projects) and at a refinery.<br />
The rating further reflects the stable operating performance<br />
and robust financial metrics generated at EME Funding<br />
over the past several years. Through 12 months ending<br />
12/31/03, 12/31/04, 03/31/05, 06/30/05, and 09/30/05, EME<br />
Funding’s debt service coverage ratio (DSCR) was 2.55x,<br />
2.63x, 2.91x, 2.97x and 3.14x, respectively. Moody’s expects<br />
EME Funding’s future financial performance to be in line<br />
with these results.<br />
The rating considers the substantial involvement by Edison<br />
Mission Energy (EME: B1 senior unsecured debt; stable outlook),<br />
which has significant management participation,<br />
including owning a subsidiary that operates the four underlying<br />
projects. EME also owns 100% of the entities that guarantee<br />
payment of debt service on the bonds and relies upon<br />
distributions from EME Funding as a source of holding company<br />
cash.<br />
The rating also considers the weak collateral package<br />
afforded to note holders at EME Funding, particularly when<br />
compared to other project financing structures in the power<br />
sector. EME's Funding's collateral package consists of the<br />
pledge of the promissory notes issued by the four Guarantors<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
and 99% of the capital stock in EME Funding. Unlike the<br />
collateral packages in most power project financings, which<br />
generally include tangible assets, EME Funding's collateral<br />
effectively amounts to an unsecured obligation of each of the<br />
Guarantors, on a joint and several basis, to provide sufficient<br />
cash flow for debt service at EME Funding. This is a consideration<br />
in the rating notching between the ratings of EME<br />
Funding and EME.<br />
The rating reflects the structural protections that are<br />
afforded to bondholders in the financing, including a project<br />
waterfall, a six month debt service reserve in the form of letter<br />
of credit facility that exists through the final maturity of the<br />
bonds, and a restricted payment test requiring EME Funding’s<br />
DSCR to be at least 1.25x for distributions to be paid to<br />
EME.<br />
EME Funding is a special purpose Delaware corporation<br />
owned 99% by Broad Street Contract Services, Inc. and 1%<br />
by EME. It was formed for the sole purpose of issuing notes<br />
and bonds on behalf of the four Guarantors.<br />
EME owns 100% of Camino Energy Company, San<br />
Joaquin Energy Company, Western Sierra Energy Company,<br />
and Southern Sierra Energy Company (collectively, the Guarantors).<br />
All of these entities are holding companies, all provide<br />
upstream guarantees to EME Funding and all receive<br />
project level dividends that are used to service the debt at<br />
EME Funding. Each of the Guarantors own an approximately<br />
50% interest in the respective project companies: Watson<br />
Cogeneration Company, Midway-Sunset Cogeneration<br />
Company, Sycamore Cogeneration Company, and Kern River<br />
Cogeneration Company. Each of the four project companies<br />
have power purchase agreements with investment grade California<br />
utilities, principally SCE, and each have steam sales<br />
agreements with different major energy companies.<br />
Rating Outlook<br />
EME Funding’s stable rating outlook incorporates the predictable<br />
and robust contracted DSCRs expected over the<br />
remaining life of the bonds, provided principally by cash flows<br />
from investment grade counterparties.<br />
What Could Change the Rating - UP<br />
The near-term prospects for a rating upgrade of EME Funding<br />
are limited in the absence of rating upgrade at EME, due<br />
to the relatively weak collateral package, the high reliance on<br />
a few counterparties for the project’s cash flow, and the substantial<br />
involvement and ownership by EME. Longer-term,<br />
the rating could be upgraded if the project's DSCRs continue<br />
to exceed 2.0x as projected and if EME is upgraded.<br />
What Could Change the Rating - DOWN<br />
The rating could be downgraded if the credit quality of EME,<br />
the sponsor and operator, weakened, if the credit quality of<br />
the principal off-taker, SCE, declined measurably or if the<br />
operations of several of the power plants were to deteriorate<br />
significantly causing DSCRs to fall below 1.50x.<br />
• 47 •
EES Coke Battery Company, Inc.<br />
Ann Arbor, Michigan, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Credit Strengths<br />
Credit strengths for EES Coke include:<br />
1. Contractual coke supply agreements with five manufacturing<br />
facilities wholly-owned by International Steel Group,<br />
Inc. (ISG: senior unsecured Ba2);<br />
2. Advantageous contractual pricing;<br />
3. An unconditional, irrevocable guarantee from DTE<br />
Energy Company (senior unsecured Baa2) equal to six<br />
months of debt service.<br />
Credit Challenges<br />
Credit challenges for EES Coke include:<br />
1. Payment obligations are from the various steel manufacturing<br />
facilities without parental support from ISG.<br />
2. <strong>Project</strong> is required to produce significant quantity of<br />
coke to generate cashflow sufficient to meet required debt<br />
service.<br />
Rating Rationale<br />
The Ba2 rating for the Series B Secured Notes due 2007<br />
issued by EES Coke Company, LLC reflect the improved<br />
credit profile of its primary customer International Steel<br />
Group, Inc. (ISG: senior unsecured Ba2) due in large part to<br />
its recently completed merger with Mittal Steel Co. NV (Mittal:<br />
Ba1 senior unsecured). The majority of the project’s coking<br />
production is provided to five ISG steel facilities under<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
M. Sanjeeva Senanayake/New York<br />
Daniel Gates/New York<br />
existing long-term contractual arrangements maturing post<br />
the 2007 due date of the Notes. Collectively, these five steel<br />
facilities represent the bulk of ISG’s manufacturing capacity.<br />
Their payment obligations however are without parental support<br />
from ISG.<br />
The rating is supported by continued improvement in the<br />
project’s cash flow. Robust demand for coke has resulted in<br />
advantageous contractual pricing and Moody’s expects the<br />
project’s annual debt service coverage in all remaining years to<br />
exceed two times.<br />
Rating Outlook<br />
The stable rating outlook reflects the EES Coke's strong<br />
operating performance and the credit quality of its contractual<br />
counterparties. Bondholders benefit from an unconditional,<br />
irrevocable guarantee from DTE Energy Company<br />
(senior unsecured Baa2) equal to six months of debt service.<br />
What Could Change the Rating - UP<br />
A rating upgrade might result if the credit quality of the company's<br />
contractual offtakers improve.<br />
What Could Change the Rating - DOWN<br />
A rating downgrade might result if the credit quality of the<br />
company's contractual offtakers decline or if the project<br />
encounters significant operating difficulties.<br />
• 48 •
El Habal Funding Trust<br />
Mexico City, Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for El Habal are:<br />
- Unconditional lease payment obligations of Comision<br />
Federal de Electricidad (CFE)<br />
- Debt obligations rank parri-passu with CFE's senior<br />
unsecured debt<br />
- Strong government support<br />
Credit Challenges<br />
Credit challenges for El Habal are:<br />
- National efforts to reform the electric sector<br />
- Considerable level of capital expenditures for CFE<br />
- CFE's reliance on government subsidies<br />
- Large underfunded pension plan at CFE<br />
Rating Rationale<br />
The Baa2 rating of El Habal Funding Trust’s (El Habal)<br />
senior secured debt is based on the unconditional lease payment<br />
obligations of Comision Federal de Electricidad (CFE),<br />
the Mexican national utility. The lease obligations rank paripassu<br />
with all CFE unsecured indebtedness.<br />
The Baa2 rating reflects the importance of the transmission<br />
lines and the critical role that CFE plays in the Mexican electric<br />
market. The rating recognizes CFE's interlocking relationship<br />
with the Mexican government (Local currency rating<br />
of Baa1; Foreign Currency Rating of Baa1) and the degree of<br />
subsidy provided by the Mexican government for electric service.<br />
CFE implemented a rate increase in 2002 in an effort to<br />
address the sizeable government subsidy that exists for electricity.<br />
The impact on cash flow resulting from the rate<br />
increase has been moderate and no further rate increases have<br />
been proposed.<br />
The Baa2 rating also incorporates the challenges facing<br />
CFE and the Mexican government as it attempts to entice<br />
third party international capital to support this growth. The<br />
rating further considers the growing amount of debt that will<br />
need to be refinanced by CFE over the next few years and the<br />
marketplace uncertainty that exists around reforming the<br />
electric sector.<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
A key rating consideration remains the progress in approving<br />
electric legislation which is broadly intended to spur<br />
investment in electric generation and infrastructure. Energy<br />
demand is expected to increase by 5.6% on average in the<br />
near to medium term. The current electric reform proposal<br />
remains a key policy objective of the Fox administration and a<br />
primary agenda item at each national assembly. However, it<br />
remains to be approved by governmental representatives of<br />
the divergent political parties. Under the proposal, currently<br />
contested among various public entities, CFE would continue<br />
to provide electricity to small end-users and would continue<br />
to transmit and distribute power throughout the country.<br />
Large end-users would be free to purchase power from independent<br />
private firms.<br />
El Habal is a trust established to finance the construction of<br />
6 transmission lines covering 579 kilometers in western Mexico.<br />
CFE owns and operates the lines, and makes quarterly<br />
debt service payments to the trust covering quarterly interest<br />
and principal at maturity.<br />
CFE is Mexico's principal state electric generation, transmission<br />
and distribution company.<br />
Rating Outlook<br />
The stable outlook incorporates the strong interlocking relationship<br />
between the government of Mexico and CFE balanced<br />
against the need to raise capital to meet demand as well<br />
as the need, at some point, to address unfunded pension obligations.<br />
What Could Change the Rating - UP<br />
An improvement in CFE's credit metrics. Clarity around the<br />
plans to restructure the electric sector. Solid, satisfactory<br />
progress in the country's economic progress and credit profile.<br />
What Could Change the Rating - DOWN<br />
Deterioration in CFE's credit metrics. Changes in the electric<br />
sector that negatively impact CFE's credit quality.<br />
• 49 •
Ellenbrook Developments plc<br />
Wolverhampton, United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
- the £59.7 million secured bonds issued by Ellenbrook<br />
Developments are unconditionally and irrevocably guaranteed<br />
by FSA UK Ltd (Aaa)<br />
- project is now operational<br />
- the underlying credit benefits from the stable cash flows<br />
that should be produced under the <strong>Project</strong> Agreement with<br />
the University of Hertfordshire<br />
- revenues under the project agreement are partially<br />
indexed to LPI and partially to RPI, matching the LPI bonds<br />
and the RPI indexed contract with CSL<br />
Credit Challenges<br />
Ellenbrook is a special purpose company whose principal purpose<br />
is to undertake a project to design, construct, finance,<br />
service, maintain and develop new student residences, sports<br />
and leisure facilities and associated works for the University<br />
of Hertfordshire, as a UK PFI scheme. The underlying credit<br />
is exposed to the lack of diversity of revenues and tight financial<br />
structuring typical for a PFI financing.<br />
Following completion, there were a number of problems<br />
regarding service delivery by the subcontractor, Carillion Services<br />
Limited, and the project accumulated service penalty<br />
points. Whilst the financial impact of these penalty points is<br />
limited (and has been passed on to CSL), the accumulation of<br />
18 penalty points in a rolling 12 month period would be a<br />
Trigger Event per the Collateral Deed; 23 points would permit<br />
CSL to be replaced; and 37 points would permit the University<br />
to terminate the <strong>Project</strong> Agreement. The University<br />
has been actively monitoring service delivery. Following managerial<br />
changes at CSL, <strong>Moody's</strong> understands that service<br />
delivery improved and service penalty points accumulated in<br />
early 2004 have rolled off.<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
However, the University has recently issued warning<br />
notices in relation to cleaning; Ellenbrook is discussing a<br />
remedial plan with the University. Funds that would otherwise<br />
have been distributed to sponsors have been locked-up in<br />
the project until the matter is resolved; however, these warning<br />
notices do not lead to penalty points.<br />
Ellenbrook carries lifecycle cost risk. A Maintenance<br />
Reserve Account will be funded on a three-year look forward<br />
basis, with potentially a five year mechanism if lifecycle cost<br />
forecasts increase materially.<br />
The credit strength of the University, whilst not constraining<br />
the project at the underlying Baa2 level, is lower than the<br />
counterparty rating on most UK PFI accommodation<br />
projects.<br />
Rating Rationale<br />
The Aaa rating on the bonds reflects the unconditional and<br />
irrevocable guarantee provided by FSA UK Ltd (Aaa).<br />
The underlying Baa2 rating of the bonds reflects the risk<br />
allocation under the <strong>Project</strong> Agreement, together with the<br />
low debt service cover ratios (1.20 minimum and 1.22 average).<br />
Rating Outlook<br />
The stable outlook on the bonds reflects the ratings of FSA<br />
UK Ltd.<br />
Drivers of Rating Change<br />
The ratings on the bonds will follow the rating of the guarantor,<br />
FSA UK. The underlying rating may be downgraded if<br />
the service delivery by CSL does not improve on a sustained<br />
basis, or if a revised profiling of life cycle costs led to debt service<br />
cover ratios in any year lower than those projected at<br />
financial close.<br />
• 50 •
Elwood Energy LLC<br />
Elwood, Illinois, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Credit Strengths<br />
Credit strengths for Elwood Energy include:<br />
-Contracted cash flows through 2016<br />
-55% of the contracted cash flow comes from Exelon<br />
-Existence of Structural Enhancements<br />
Credit Challenges<br />
Credit challenges for Elwood Energy include:<br />
-45% of the contracted capacity comes from Aquila<br />
-Merchant tail that begins in 2017 for $133.6 million of<br />
remaining debt<br />
-Overcapacity of generating assets that exists in the Midwest.<br />
Rating Rationale<br />
Elwood Energy LLC's (Elwood) Ba2 senior secured rating<br />
reflects the certainty of cash flow associated with power sales<br />
agreements with Exelon Generation (Exelon: Sr. Uns. Debt -<br />
Baa1) and Aquila Inc. (Aquila: Sr. Uns. Debt - B2), structural<br />
enhancements that mitigate counterparty risk and merchant<br />
risk, and the relative importance of these assets to the Midwest<br />
power markets. The Ba2 senior secured rating also considers<br />
the amount of collateral, in the form of cash or letters<br />
of credit and equal to one-year of Aquila's capacity payments,<br />
that have been pledged to bondholders, which helps to mitigate<br />
the deterioration in Aquila's credit quality that has<br />
occurred in the past few years.<br />
The project's average debt service coverage through 2012,<br />
a period when 100% of Elwood's capacity and energy is under<br />
contract, is expected to be 1.50x. From 2013 through 2017,<br />
contracted cash flows cover debt service on average 1.40 x.<br />
While the remaining $133.6 million of principal is expected<br />
to be repaid from merchant cash flows, structural enhancements<br />
exist that are intended to trap excess cash during the<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
contracted period for potential use during the merchant<br />
period.<br />
Elwood's financial results are impacted by the continued<br />
receipt of monthly capacity payments under the power sales<br />
agreements with Exelon and Aquila. Higher capacity payments<br />
are typically paid during the summer months given the<br />
peaking nature of these assets. Elwood's fiscal year runs from<br />
October through September. As such, results during the first<br />
nine months of each fiscal year are not reflective of the<br />
expected results for the entire year.<br />
During 2004 (fiscal year ends in September) and the 12<br />
month period ending in June 2005, Elwood's operating performance<br />
remains relatively consistent with other twelve<br />
month periods as revenues were around $100 million and<br />
funds from operations were around $40 million. Consistent<br />
with other twelve month periods, Elwood's debt service coverage<br />
ratio for the 12 month period was at least 1.50x.<br />
Elwood is jointly-owned by subsidiaries of Dominion<br />
Resources, Inc. and Peoples Energy Corporation. Both subsidiaries<br />
jointly provide a $20 million working capital facility<br />
to meet potential seasonal funding requirements at the<br />
project.<br />
Rating Outlook<br />
Elwood's Ba2 rating outlook is stable and incorporates the<br />
structural enhancements in place that provide debt service<br />
protection in the event Aquila fails to make monthly capacity<br />
payments to Elwood.<br />
What Could Change the Rating - UP<br />
In the near-term, the rating is not likely to be upgraded, given<br />
the credit quality of Aquila.<br />
What Could Change the Rating - DOWN<br />
Further deterioration in the credit quality of the project's<br />
counterparties.<br />
• 51 •
Empresa Eléctrica Guacolda S.A.<br />
Santiago, Chile<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Senior Secured<br />
Baa3<br />
Parent: AES Gener S.A.<br />
Outlook<br />
Rating(s) Under Review<br />
Senior Unsecured Ba3*<br />
* Placed under review for possible upgrade on October 13, 2005<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
Empresa Eléctrica Guacolda S.A.<br />
2004 2003 2002 2001<br />
Funds from Operations / Debt 6.6% 8.6% 12.1% 8.9%<br />
Retained Cash Flow / Debt 6.6% 8.6% 12.1% 8.9%<br />
Dividends / Net Income Available for Common 0.0% 0.0% 0.0% 0.0%<br />
Funds from Operations + Interest / Interest 1.78 2.12 2.58 2.11<br />
Debt / Capitalization 53.3% 57.0% 62.9% 64.6%<br />
Net Income Available for Common / Common Equity 5.2% 16.1% 2.0% -11.5%<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of Guacolda are:<br />
- Provides electricity to the SIC, the largest interconnected<br />
system in Chile.<br />
- One of the lowest cost thermal plants in the system.<br />
- Sizeable portion of the company's revenues are from<br />
long-term power purchase agreements.<br />
Credit Challenges<br />
Credit challenges of Guacolda are:<br />
- Single asset concentration.<br />
- Chilean system is dominated by hydro facilities.<br />
- Dependence on the Chilean copper mining industry.<br />
Rating Rationale<br />
The Baa3 senior secured debt rating of Empresa Eléctrica<br />
Guacolda S.A. (Guacolda) reflects the risks of single-asset<br />
concentration, the highly leveraged capital structure, re-contracting<br />
risk, and substantial dependence upon the Chilean<br />
electric and mining industry.<br />
The rating considers the efficiency of Guacolda’s generating<br />
units, the presence of a liquid spot market for electricity<br />
sales, the contractual nature of approximately 93% of Guacolda's<br />
electric output, and manageable timing of contractual<br />
expirations. The rating also considers Guacolda’s principal<br />
owners, Aes Gener (Ba3, senior unsecured) and Compañia de<br />
Petróleos de Chile.<br />
Guacolda owns and operates a 304-mw coal-fired station at<br />
the northern end of Chile’s main electrical transmission grid.<br />
The Central Interconnected System (SIC) serves over 90% of<br />
Chile's population and about two thirds of total power in the<br />
country. The company sells electricity under contract (93% of<br />
output in 2004) to an electric distribution company, as well as<br />
to copper and other mining concerns. These power purchase<br />
agreements are denominated in U.S. dollars, indexed to U.S.<br />
inflation, and paid in Chilean pesos, providing a significant<br />
hedge against Guacolda's foreign currency debt exposure.<br />
Structural protections include benefits derived from a collateral<br />
agency and security agreement, a 6-month debt service<br />
reserve, tighter than average limitations on distributions to<br />
equity holders, limitations on additional debt, and prohibitions<br />
on changes to material agreements. In <strong>Moody's</strong> opinion<br />
the structual enhancements compensate for the variability in<br />
the PPA contract terms that could under certain economic<br />
conditions result in lower coverage ratios. Company officials<br />
have recently renegotiated two contracts, and negotiated a<br />
new contract with a mining company.<br />
Passage of the Ley Corta electrical reform law enacted in<br />
2004 in Chile helps mitigate periodic price volatility to a certain<br />
extent by limiting node price changes within a 5% band<br />
of unregulated prices (previously 10%).<br />
Chile buys 90% of Argentina's gas exports and uses the fuel<br />
to generate around one-third of its electricity. The periodic<br />
gas restrictions implemented since March 2004 forced Chilean<br />
generators and manufacturers to purchase more expensive<br />
fuels like carbon and diesel at the spot market, driving up<br />
energy costs by as much as 40% during periods of high<br />
demand. Argentine gas curtailments effective as early as January<br />
this year due to increased demand in Argentina will likely<br />
continue to drive energy costs higher as demand grows in the<br />
winter months. The gas interruptions depend on a number of<br />
factors, including the amount of rainfall and temperatures in<br />
Chile and Argentina, development of production and transportation<br />
facilities, Argentine gas agreements with Bolivia<br />
and Brazil, and increases in gas and electricity tariffs which<br />
could potentially reduce demand growth in Argentina and<br />
Chile. The periodic reduction in availability of natural gas<br />
and dryer hydrology are likely to drive energy costs higher in<br />
the short to medium term. For Guacolda, this represents an<br />
opportunity for additional long-term fixed contracts based on<br />
current carbon prices.<br />
Third quarter financial statements reflect a moderately<br />
weaker operating profile largely as a result of increases in<br />
operating costs. Year-end results will be published in the coming<br />
weeks. Company officials expect the first half of the coming<br />
year to improve moderately given the 21% increase of the<br />
Pan de Azucar node price, the referential node price for the<br />
plants' service area.<br />
Headquartered in Santiago, Chile, Guacolda is owned 50%<br />
by AES Gener, 25% by Compañías de Petróleos de Chile<br />
S.A., and 25% by Inversiones Ultraterra Limitada.<br />
Rating Outlook<br />
The stable outlook reflects Guacolda's competitive market<br />
position, the stability provided by long-term contracts that<br />
cover almost 90% of its revenues, and structural protections<br />
that benefit certificate holders.<br />
What Could Change the Rating - UP<br />
A substantial and sustainable improvement in the company's<br />
cash flow and in the predictability of the regional electric<br />
market.<br />
What Could Change the Rating - DOWN<br />
A decline in cash flow generation. Inability to renew sales<br />
contracts. Weakening of the Chilean mining sector.<br />
• 52 •
ESI Tractebel Acquisition Corp.<br />
North Palm Beach, Florida, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
ESI Tractebel Acquisition Corp. [1]<br />
2004 2003 2002<br />
CFO[2] 99,396 84,869 84,821<br />
Plus: Interest Expense 48,916 51,950 54,785<br />
Less: Capex 679 753 3,024<br />
CAFDS 147,633 136,066 136,582<br />
Interest Expense 48,916 51,950 54,785<br />
Principal Repayment 37,364 32,618 31,488<br />
Debt Service 86,280 84,568 86,273<br />
DSCR 1.71x 1.61x 1.58x<br />
Debt 517,250 554,614 587,232<br />
CFO % Debt 19.2% 15.3% 14.4%<br />
[1] Financial metrics include the consolidation of ESI Tractebel Funding Corp. [2] CFO excludes cash paid for contract restructurings of $26.2M in 2003 and $23.9M that were funded with<br />
contributions from partners<br />
Opinion<br />
Credit Strengths<br />
ESI Tractebel Acquisition Corp.'s credit strengths include:<br />
1. Long-term power purchase agreements with highly<br />
rated utilities.<br />
2. The projects generate significant cash flows, which are<br />
expected to be enhanced through recent amendments to<br />
power purchase agreements.<br />
3. Recent amendments of power purchase agreements provide<br />
the projects the option to deliver power that it purchases<br />
in the open market to meet its supply obligations, thereby<br />
reducing operating risks.<br />
Credit Challenges<br />
ESI Tractebel Acquisition Corp.'s credit challenges include:<br />
1. Structural subordination to approximately $324 million<br />
of ESI Tractebel Funding Corp. debt.<br />
2. The projects long gas position.<br />
3. Increased near-term debt service obligations.<br />
Rating Rationale<br />
ESI Tractebel Acquisition Corp.’s Ba1 senior debt rating<br />
reflects the fundamental strengths of the Sayreville and Bellingham<br />
projects, whose residual cash flows will be used to<br />
repay the bondholders. Each is well structured; they feature<br />
long-term restructured power purchase agreements with<br />
creditworthy utilities; strong contractual linkages; and standard,<br />
well-proven technology. Recent amendments of power<br />
purchase agreements provide the projects, among other<br />
things, the option to deliver power that it purchases in the<br />
open market to meet its supply obligations, thereby reducing<br />
operating risks.<br />
However, these strengths are partially offset by the fact that<br />
the debt offering is structurally subordinated to the ESI<br />
Tractebel Funding Corp. debt, with repayment derived from<br />
residual project-level cash flow. The rating also reflects the<br />
projects long gas position and increased near-term debt service<br />
obligations.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Limited upside potential in the rating due to contracted<br />
nature of expected cash flows and associated leverage.<br />
What Could Change the Rating - DOWN<br />
Material change in the offtakers’s credit quality.<br />
• 53 •
ESI Tractebel Funding Corporation<br />
Hingham, Massachusetts, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
ESI Tractebel Funding Corporation [1]<br />
2004 2003 2002 2001<br />
CFO[2] 118,203 112,850 102,151 84,013<br />
Plus: Interest Expense 32,933 35,264 37,396 39,300<br />
Less: Capex 679 753 3,024 1,769<br />
CAFDS 150,457 147,361 136,523 121,544<br />
Interest Expense 32,933 35,264 37,396 39,300<br />
Principal Repayment 28,564 23,818 22,688 20,160<br />
Debt Service 61,497 59,082 60,084 59,460<br />
DSCR 2.45x 2.49x 2.27x 2.04x<br />
Debt 323,650 352,214 376,032 398,720<br />
CFO % Debt 36.5% 32.0% 27.2% 21.1%<br />
[1] Reflects results of Northeast Energy Associates and North Jersey Energy Associates [2] CFO excludes cash paid for contract restructurings of $26.2M in 2003 and $23.9M that were funded<br />
with contributions from partners<br />
Opinion<br />
Credit Strengths<br />
ESI Tractebel Funding Corp.'s credit strengths include:<br />
1. Long-term power purchase agreements with highly<br />
rated utilities.<br />
2. The projects generate significant cash flows, which are<br />
expected to be enhanced through recent amendments to<br />
power purchase agreements.<br />
3. Recent amendments of power purchase agreements provide<br />
the projects the option to deliver power that it purchases<br />
in the open market to meet its supply obligations, thereby<br />
reducing operating risks.<br />
Credit Challenges<br />
ESI Tractebel Funding Corp.'s credit challenges include:<br />
1. The projects long gas position.<br />
2. Increased near-term debt service obligations.<br />
Rating Rationale<br />
The Baa2 rating of ESI Tractebel Funding is based on the<br />
projects strong financial performance, sound operating track<br />
record and financially sound utility offtakers. Further supporting<br />
the rating are geographic and regulatory diversification,<br />
debt service reserves and cross-collateralization of assets<br />
and cash flow. Recent amendments of power purchase agreements<br />
provide the projects, among other things, the option to<br />
deliver power that it purchases in the open market to meet its<br />
supply obligations, thereby reducing operating risks.<br />
The rating however reflects the projects long gas position<br />
and increased near-term debt service obligations. Bondholders<br />
benefit from a six month debt service reserve account in<br />
the form of a letter of credit.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Limited upside potential in the rating due to contracted<br />
nature of expected cash flows and associated leverage.<br />
What Could Change the Rating - DOWN<br />
Material change in the off-takers’s credit quality.<br />
• 54 •
Excel Paralubes Funding Corporation<br />
Lake Charles, Louisiana, United States<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Bkd Senior Unsecured<br />
Baa1<br />
Bkd Commercial Paper P-2<br />
Opinion<br />
Credit Strengths<br />
— State of the art low cost lube base oil facility.<br />
— Strategic asset highly integrated on a feedstock supply<br />
and product offtake basis with 50% owner/operator, Conoco-<br />
Phillips.<br />
— Sponsor operational and liquidity supports in the form<br />
of offtake obligations, potential partner rebate deferrals, debt<br />
service reserve, and VGO subordination mechanism.<br />
— Stronger sponsor profile with ConocoPhillips and Flint<br />
Hills Resources.<br />
Credit Challenges<br />
— Margin volatility and periodic margin squeezes, with VGO<br />
feedstock tied to crude oil prices and energy cost pressures.<br />
— High financial leverage in the form of negative book<br />
equity and expected continued distribution of free cash flow.<br />
Rating Rationale<br />
Excel Paralubes (Excel), rated Baa1/Prime-2, is a state-of-theart<br />
lube oil basestocks plant located adjacent to and integrated<br />
with ConocoPhillips's core 252,000 bpd refinery in Lake<br />
Charles, Louisiana. Excel is a 50/50 joint-venture owned by<br />
ConocoPhillips (COP, A3 senior unsecured) and Flint Hills<br />
Resources (FHR, A1 Issuer rating), in turn a wholly-owned<br />
subsidiary of Koch Industries LLC (Aa1 Issuer Rating). The<br />
plant has vacuum gas oil (VGO) input capacity of 31,600 bpd,<br />
which yields 22,200 bpd of high quality Group II lube base<br />
stocks and 12,900 bpd of light co-products. The base oils are<br />
purchased on a pro-rata basis by subsidiaries of the two sponsors,<br />
while the co-product is purchased entirely by COP and<br />
consumed at the Lake Charles refinery.<br />
Excel's project debt is non-recourse to its owner sponsors;<br />
however, both provide important supports in the form of several,<br />
but not joint, performance guarantees and liquidity to<br />
the facility. The guarantees include cash payments to service<br />
debt and operating costs if the offtaker subsidiaries fail to take<br />
specified volumes, and liquidity provisions including funding<br />
of a six month debt service reserve account and the purchase<br />
of up to a total $60 million in subordinated notes (i.e. deferral<br />
of cash payment) for VGO feedstocks in the event Excel experiences<br />
operating cash flow shortfalls. Since completion,<br />
Excel has not had any shortfalls. Excel purchases feedstocks<br />
from COP Company (COP's operating subsidiary) under a<br />
long-term supply agreement, and COP Company guarantees<br />
the long-term contractual performance obligations. (These<br />
currently are also guaranteed by its former parent, duPont,<br />
rated Aa3, a holdover from Conoco's former position as a<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
John C. Cassidy/New York<br />
John Diaz/New York<br />
subsidiary of duPont). FHR, as the other 50% owner, also<br />
guarantees the parallel offtake obligations of its own subsidiary.<br />
Excel's ratings reflect the plant's low cost position, stable<br />
debt service coverage (EBITDA/Debt Service), which has<br />
consistently averaged 2.5 times or better; and its strategic<br />
importance to the owner/sponsors, in particular COP. Excel<br />
remains exposed to periodic margin squeezes caused by rising<br />
feedstock prices, which are tied to crude oil, and by rising natural<br />
gas and hydrogen prices, although base oil contract price<br />
adjustments tend to mitigate rising crude prices over time.<br />
Excel also is highly leveraged with negative book equity,<br />
reflecting relatively nominal capital spending for maintenance<br />
and optimization investments, with ongoing distribution of<br />
free cash flow, a policy that is expected to continue. In addition,<br />
we take the view that FHR's investment in Excel is more<br />
financial rather than strategic in terms of support to the<br />
project, as it does not produce lube oil and its expertise is<br />
more in the area of refining, product trading and marketing,<br />
whereas former owner Pennzoil Quaker State, as one of the<br />
leading lube oil manufacturers, had a consistent internal need<br />
for its full complement of base stock. Nevertheless, Excel's<br />
operating and financial performance has recently reached<br />
record levels, benefiting from full sponsor offtake, higher utilization<br />
and improved high value basestock yields, with current<br />
base oil output of approximately 22,200 bpd and<br />
improved catalyst performance.<br />
Rating Outlook<br />
Excel retains a stable rating outlook based on its solid operating<br />
and financial performance and on the sponsor support<br />
mechanisms.<br />
What Could Change the Rating - UP<br />
The single asset nature of the project and high leverage and<br />
distributions limit rating upside. However, consistent strong<br />
operating and financial performance and a stronger credit<br />
profile for sponsor ConocoPhillips could have a positive ratings<br />
impact in the future.<br />
What Could Change the Rating - DOWN<br />
Deteriorating operating performance trends; sustained<br />
dependence on liquidity supports; or further leveraging due<br />
to increasing debt or a deeper equity deficit could negatively<br />
affect the ratings. These do not currently appear to be a significant<br />
concern.<br />
• 55 •
Exelon Generation Company, LLC<br />
Chicago, Illinois, United States<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Baa1<br />
Senior Unsecured<br />
Baa1<br />
Commercial Paper P-2<br />
Parent: Exelon Corporation<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Baa2<br />
Bkd Sr Unsec Bank Credit Facility<br />
Baa1<br />
Key Indicators<br />
Senior Unsecured<br />
Baa2<br />
Subordinate Shelf<br />
(P)Baa3<br />
Preferred Shelf<br />
(P)Ba1<br />
Commercial Paper P-2<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
Exelon Generation Company, LLC<br />
3Q 05 LTM 2004 2003 2002<br />
Funds from Operation / Adj Total Debt[1] 115.3% 53.4% 49.8% 38.6%<br />
RCF / Adj. Total Debt[1] 53.5% 32.2% 44.3% 37.8%<br />
Com Divs / NIAC (Dividend Payout) 121.1% 98.4% 23.3% 6.8%<br />
FFO / Adj. Interest[2] 12.4 10.5 16.2 12.3<br />
Adj. Total Debt / Adj. Cap.[1][3] 34.5% 50.4% 53.4% 51.9%<br />
NIAC / Common Equity (ROE) 26.9% 22.1% 27.5% 13.8%<br />
[1] Adjusted debt includes 8x next year's operating lease expenses [2] Adjusted interest includes payments operating leases [3] Adjusted capitalization reflects the adjustment made to debt.<br />
Opinion<br />
Credit Strengths<br />
Credit Strengths for Exelon Generation are:<br />
- Exelon Generation’s assets are predominately nuclearfueled<br />
and fossil-fired, which have very low costs.<br />
- Very strong credit metrics<br />
- A significant portion of the company’s supply is under<br />
long-term “all requirements” contracts with its regulated<br />
affiliates.<br />
- Purchased power contracts with ComEd and PECO provide<br />
the company with predictable and stable cash flow and<br />
earnings.<br />
- Exelon Generation continues to operate its nuclear plants<br />
well.<br />
- Low balance sheet leverage<br />
Credit Challenges<br />
Credit Challenages for Exelon Generation are:<br />
- Having a large nuclear power portfolio, Exelon Generation<br />
is exposed to event risk and resulting financial exposure if<br />
the plants have performance issues.<br />
- Full requirements contract exposes Exelon Generation to<br />
POLR supply risk<br />
- As a non-regulated generation company, a portion of<br />
Exelon Generation’s earnings and cash flow are subject to<br />
market volatility.<br />
- Potential capital spending to comply with environmental<br />
requirements associated with the company’s fossil-fired<br />
plants.<br />
- Exelon Generation has substantial off-balance commitments<br />
to purchase capacity and energy from various natural<br />
gas-fired plants.<br />
Rating Rationale<br />
Exelon Generation Company, LLC's (Exelon Generation)<br />
Baa1 senior unsecured rating reflects the strong cash flow<br />
contribution from its generating assets and the financial and<br />
business risks of the merchant power market. Exelon Generation,<br />
a non-regulated subsidiary of Exelon Corp., houses the<br />
nuclear and fossil generating assets that were transferred from<br />
PECO Energy Co. (PECO) and the nuclear generating plants<br />
from Commonwealth Edison Co. (ComEd). Both PECO and<br />
ComEd are regulated transmission and distribution subsidiaries<br />
of Exelon Corp. PECO's supply obligation to serve provider<br />
of last resort (POLR) customers is backed by an "all<br />
requirements" purchased power contract with Exelon Generation<br />
extending through 2010. ComEd's supply needs are also<br />
being met through a contract with Exelon Generation that<br />
expires at year-end <strong>2006</strong>. Uncertainty currently exists concerning<br />
the final framework of the capacity auction that will<br />
be established to meet Illinois utilities power procurement<br />
requirements after <strong>2006</strong>.<br />
In December 2004, Exelon announced that it would<br />
acquire Public Service Enterprise Group Inc. (PSEG) and its<br />
subsidiaries in a stock-for-stock transaction. Final approval is<br />
expected by second quarter <strong>2006</strong>. As part of the merger, it is<br />
anticipated that the operations of PSEG Power, LLC (Baa1<br />
senior unsecured), a generation subsidiary of PSEG, will be<br />
merged into the Exelon Generation’s operations. Also, in January<br />
2005, Exelon Generation entered into a Nuclear Management<br />
Agreement with PSEG Power, in which Exelon<br />
Generation will assist PSEG Power with its nuclear operations.<br />
During 2004, Exelon divested several non-core domestic<br />
holdings including its ownership interest in Boston Generation<br />
and its ownership interest in Sithe Independence.<br />
Rating Outlook<br />
The rating outlook for Exelon Generation is stable, reflecting<br />
our expectations that the company will be able to assume<br />
PSEG Power’s debt and integrate the generating assets into<br />
the Exelon system. Exelon Generation's stable rating outlook<br />
also incorporates the view that the regulatory challenges that<br />
face affiliate, ComEd, will remain largely isolated to the regulated<br />
utility.<br />
Continued strong cash flow generation, sustainable solid<br />
credit metrics, and successful integration of PSEG Power following<br />
the merger could be helpful to the rating.<br />
What Could Change the Rating - DOWN<br />
Event risk associated with a sustained outage at several of the<br />
company's generating plants resulting in substantial increase<br />
in O&M costs and replacement power poses the greatest<br />
near-term threat to credit quality.<br />
• 56 •
Express Pipeline Limited Partnership<br />
Calgary, Alberta, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Bkd Subordinate<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa1<br />
Baa3<br />
Credit Strengths<br />
- Cash flow stability provided by TSAs<br />
- Strong throughput since 2000<br />
- Expanded capacity that is 84% contracted<br />
Credit Challenges<br />
- Possibility of insufficient demand for uncommitted capacity<br />
- Ongoing operating risks<br />
- Duration of contracts relative to debt maturity<br />
Rating Rationale<br />
Express Pipeline Limited Partnership (Express Canada) and<br />
Express Pipeline LLC (Express US) own and operate the<br />
Canadian and US portions respectively of a crude oil pipeline<br />
extending from Hardisty, Alberta to Casper, Wyoming (the<br />
Express Pipeline). Express Pipeline interconnects with the<br />
Platte Pipe Line Company's (Platte) Platte Pipeline, which<br />
runs from Casper, Wyoming to Wood River, Illinois. The<br />
Express Pipeline and the Platte Pipeline together comprise<br />
the Express System.<br />
The Baa1 rating on the US$212.1 million of senior secured<br />
notes (including US$102.1 million of original amortizing<br />
senior secured notes and US$110 million of bullet expansion<br />
notes) and the Baa3 rating of US$234 million of subordinated<br />
secured notes jointly and severally issued by Express Canada<br />
and Express US and guaranteed by Platte, reflect the following<br />
credit strengths: cash flow stability provided by transportation<br />
service agreements (TSAs) for 84% of Express’ 280<br />
mbbl/d capacity; a weighted average contract term of approximately<br />
8 years; a weighted average shipper credit rating that<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Scott Solomon/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
is viewed as being approximately Baa1; strong system<br />
throughput since 2000 and forecasted debt service coverage<br />
ratios that are comfortably in excess of the 1.3x restricted payments<br />
test.<br />
The ratings also reflect certain risks that include the possibility<br />
of insufficient supply for uncommitted capacity, maintaining<br />
an appropriate level of contracting with creditworthy<br />
counterparties, and on-going operating risks. All of Express’<br />
existing TSAs expire by the end of 2015. While the US$102.1<br />
million original senior secured notes are fully amortized by<br />
December 2011 and the US$234 million subordinated<br />
secured notes are fully amortized by December 2017, the<br />
US$110 million senior secured bullet notes do not mature<br />
until January 2020. Accordingly, continued effective management<br />
of Express’ TSA portfolio is more critical for the bullet<br />
bonds.<br />
Rating Outlook<br />
The stable outlook reflects the completion of the 108 mbbl/d<br />
expansion project on time and under budget.<br />
What Could Change the Rating - UP<br />
- Sustained improvement of debt service coverage supported<br />
by increasing levels of long term contracting with creditworthy<br />
counterparties.<br />
What Could Change the Rating - DOWN<br />
- Failure to maintain an appropriate level of contractual support<br />
for capacity and insufficient demand for non-committed<br />
capacity.<br />
• 57 •
Fertinitro <strong>Finance</strong> Inc.<br />
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
B3<br />
Recent Developments<br />
The B3 rating of Ferinitro <strong>Finance</strong> Inc. reflects the application<br />
of Moody’s new rating methodology for governmentrelated<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Fertinitro include:<br />
- low cost feedstock gas<br />
- good location for accessing U.S. markets<br />
- structural support and legal features<br />
- take and pay offtake agreement from two sponsors<br />
Credit Challenges<br />
Credit challenges for Fertinitro include:<br />
- initially poor operating performance has significantly<br />
weakened financial flexibility<br />
- weak cash flow and debt service coverage<br />
- location in Venezuela amid socio-political unrest<br />
- lingering gas supply issues from PDVSA Gas<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Fertinitro <strong>Finance</strong> reflect the combination of the<br />
following inputs:<br />
- Baseline credit assessment of 6 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
Fertinitro’s baseline credit assessment of 6 considers asset<br />
replacements and operational improvements following years<br />
of operational difficulties since the start-up of the facilities<br />
and the national strike in Venezuela in 2003. Production of<br />
ammonia and urea reached 98% and 102% of budgeted levels<br />
for 2004. Moody’s rating also reflects the final resolution of<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
outstanding lawsuits with the EPC contractor over plant<br />
operations and milestones. Operating results, reflecting both<br />
material product price increases and the improvements mentioned,<br />
have buoyed the financial position of the project as<br />
well. The project incurred net realizations of $233/mt for<br />
ammonia and $179/mt for urea for 2004. In April, 2005, Fertinitro<br />
repaid the entire $36.9MM of deferred principal on<br />
the debt agreements, which when amended in 2003 had<br />
moved 2003 principal obligations out to 2007 if necessary.<br />
Additional support for the project includes the deferral of<br />
the Second Reliability Test deadline until at least November<br />
30, 2005 and $44 million of additional sponsor equity commitments,<br />
$30 million for the payment of debt service and<br />
$14 million for the prepayment of debt if required as a consequence<br />
of the Second Reliability Test.<br />
Fertilizantes Nitrogenados de Venezuela ("FertiNitro"), is<br />
a $1 billion project to construct, operate and export product<br />
from two ammonia and urea plants. Koch (35%) and<br />
Pequiven/PdVSA (35%) are primary sponsor/offtakers.<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the government and a default by the<br />
project. While the hydrocarbons industry is important to the<br />
Venezuelan government, the project is neither crucial or significant<br />
to the overall economic picture of Venezuela.<br />
Low support reflects Moody’s opinion that the government<br />
would not step in to support the project should it incur financial<br />
difficulties. Export markets are available to take the 50%<br />
of product currently shipped to PDVSA should it be unable<br />
to do so.<br />
What Could Change the Rating - UP<br />
Continued progress toward more consistent and stable production.<br />
What Could Change the Rating - DOWN<br />
A resumption of the operational problems that have plagued<br />
the project since inception.<br />
• 58 •
Fideicomiso Petacalco<br />
Mexico City, Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for Fideicomiso Petacalco are:<br />
- Unconditional lease payment obligations of Comisión<br />
Federal de Electricidad (CFE)<br />
- Debt obligations rank parri-passu with CFE's senior<br />
unsecured debt<br />
- Strong government support<br />
Credit Challenges<br />
Credit challenges for Fideicomiso Petacalco are:<br />
- National efforts to reform the electric sector<br />
- Considerable level of capital expenditures for CFE<br />
- CFE's reliance on government subsidies<br />
- Large underfunded pension plan at CFE<br />
Rating Rationale<br />
The Baa2 rating of Fideicomiso Petacalco senior secured debt<br />
is based on the unconditional lease payment obligations of<br />
Comisión Federal de Electricidad (CFE), the Mexican<br />
national utility. The lease obligations rank pari-passu with all<br />
CFE unsecured indebtedness.<br />
The Baa2 rating reflects the critical role that CFE plays in<br />
the Mexican electric market, and recognizes CFE's interlocking<br />
relationship with the Mexican government (Local currency<br />
rating of Baa1; Foreign Currency Rating of Baa1) and<br />
the degree of subsidy provided by the Mexican government<br />
for electric service. CFE implemented a rate increase in 2002<br />
in an effort to address the sizeable government subsidy that<br />
exists for electricity. The impact on cash flow resulting from<br />
the rate increase has been moderate and no further rate<br />
increases have been proposed.<br />
The Baa2 rating also incorporates the challenges facing<br />
CFE and the Mexican government as it attempts to entice<br />
third party international capital to support this growth. The<br />
rating further considers the growing amount of debt that will<br />
need to be refinanced by CFE over the next few years and the<br />
marketplace uncertainty that exists around reforming the<br />
electric sector.<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
A key rating consideration remains the progress in approving<br />
electric legislation which is broadly intended to spur<br />
investment in electric generation and infrastructure. Energy<br />
demand is expected to increase by 5.6% on average in the<br />
near to medium term. The current electric reform proposal<br />
remains a key policy objective of the Fox administration and a<br />
primary agenda item at each national assembly. However, it<br />
remains to be approved by governmental representatives of<br />
the divergent political parties. Under the proposal, currently<br />
contested among various public entities, CFE would continue<br />
to provide electricity to small end-users and would continue<br />
to transmit and distribute power throughout the country.<br />
Large end-users would be free to purchase power from independent<br />
private firms.<br />
Fideicomiso Petacalco is a trust established in 1997 to<br />
develop and own a coal receiving & handling terminal which<br />
serves the 2,100-megawatt Petacalco Power Station and is<br />
operated by CFE. The Trust Agreements obligate CFE to pay<br />
debt service on the lease.<br />
CFE is Mexico's principal state electric generation, transmission<br />
and distribution company.<br />
Rating Outlook<br />
The stable outlook incorporates the strong interlocking relationship<br />
between the government of Mexico and CFE balanced<br />
against the need to raise capital to meet demand as well<br />
as the need, at some point, to fund unfunded pension obligations.<br />
What Could Change the Rating - UP<br />
An improvement in CFE's credit metrics. Clarity around the<br />
plans to restructure the electric sector. Solid, satisfactory<br />
progress in the country's economic progress and credit profile.<br />
What Could Change the Rating - DOWN<br />
Deterioration in CFE's credit metrics. Changes in the electric<br />
sector that negatively impact CFE's credit quality.<br />
• 59 •
FPL Energy American Wind, LLC<br />
Juno Beach, Florida, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit Strengths for FPL American Wind are:<br />
• Predictable cash flows expected to be generated from a<br />
portfolio of wind projects spread out over four diverse and<br />
independent wind regions<br />
• Investment grade average rating for the portfolio of<br />
power off-takers, all of which have long-term contracts with<br />
the wind projects<br />
• Involvement and financial support from FPL Group<br />
• Low operating risk<br />
• Wind generation has become an important resource for<br />
electric generation in the US<br />
• Strong covenant package and liquidity provisions including<br />
a one-year debt service reserve<br />
Credit Challenges<br />
Credit Challenges for FPL American Wind are:<br />
• Wind assessment risk is critical to the FPL American<br />
Wind's financial performance as cash flows are entirely<br />
dependent upon wind volumes experienced<br />
• Concentration risk exists as 50% of the expected cash<br />
flows come from two projects<br />
• Limited operating performance and wind history for this<br />
portfolio<br />
• Given the dependency on wind volumes as the sole<br />
source of revenues and the regular requirement for ongoing<br />
fleet maintenance, the project may experience more volatility<br />
in its year-to-year cash flows<br />
• One of the projects has a PPA with an unrated affiliate of<br />
an investment grade utility. Payments under the PPA are<br />
guaranteed on a limited basis by the utility's parent<br />
Rating Rationale<br />
The Baa3 rating for FPL Energy American Wind, LLC (FPL<br />
American Wind) reflects the relatively predictable cash flows<br />
expected to be generated from a portfolio of 685 wind turbines<br />
spread out over four diverse and independent wind<br />
regions, the Midwest, Northern California, West Texas and<br />
New Mexico. The rating incorporates the solid investment<br />
grade average rating for the portfolio of power off-takers, all<br />
of which have signed long-term power purchase agreements<br />
with the individual projects having maturities of 10 to 25<br />
years. The rating further reflects the strong financial metrics,<br />
including base case debt service coverage ratios of 1.86 (avg.)<br />
and 1.74 (min).<br />
The rating considers the involvement of FPL Group, Inc.,<br />
(FPL Group: A2 Issuer rating; negative outlook) which has<br />
substantial experience in wind energy. FPL Group Capital<br />
(A2 sr. unsecured; negative outlook) guarantees the project's<br />
receipt of Production Tax Credits (PTCs) over the ten-year<br />
life of the tax benefit. PTC payments represent 36% of FPL<br />
American Wind's projected annual cash flow for the first ten<br />
years of the deal. FPL Group Capital is obligated to make<br />
these payments irrespective on any change in tax law that<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Michael G. Haggarty/New York<br />
Daniel Gates/New York<br />
could affect the availability of PTC's on a historical or prospective<br />
basis and regardless of its consolidated tax position.<br />
Operating risk is expected to be relatively low particularly<br />
given the experience of FPL Group. Moreover, to the extent<br />
that poorer operating performance surfaces, the impact to the<br />
portfolio is likely to be modest given the number of turbines<br />
in the portfolio and the modest cost for most turbine repairs.<br />
The rating also considers the wind assessment risk, which<br />
<strong>Moody's</strong> believes to be among the most significant risks with<br />
this technology. While each of the PPA's requires that the<br />
utility take and pay for the output produced, FPL American<br />
Wind is only paid the kWh tariff and the PTC when energy is<br />
produced and sold (i.e., when the wind blows). The wind consultant's<br />
report indicates a high degree of independence<br />
among the four regions, which mitigates the wind assessment<br />
risk to some degree and gives the project a certain degree of<br />
diversity. While numerous forms of diversification exist in the<br />
portfolio, elements of concentration exist. About 50% of the<br />
cash flows come from two projects, the High Winds project<br />
in California and the New Mexico project.<br />
The rating also incorporates other technological and operating<br />
risk that exists within this portfolio. While there have<br />
been a number of advances in wind technology in the last ten<br />
years, <strong>Moody's</strong> has some concerns over the long-term operating<br />
effectiveness of the fleet given the limited number of<br />
operational hours that exists for most of the portfolio.<br />
The rating additionally reflects the December 2003 issuance<br />
of $125 million of 6.876% senior secured bonds due<br />
2017 by FPL Energy Wind Funding, LLC (Wind Funding),<br />
the parent of FPL American Wind. The majority of the proceeds<br />
were used to return to FPL Energy a portion of the<br />
capital used to built these wind assets. The Wind Funding<br />
bonds, which carry a senior secured debt rating of Ba2, are<br />
structurally subordinate to debt service under the FPL American<br />
Wind bonds, and its debt service is completely reliant on<br />
cash dividends from FPL American Wind.<br />
Rating Outlook<br />
The rating outlook is stable reflecting the anticipated predictability<br />
of FPL American Wind's cash flows, the diversity of<br />
the wind projects, FPL Group's considerable involvement,<br />
and the structural enhancements that support the underlying<br />
financing.<br />
What Could Change the Rating - UP<br />
Little near-term upward rating potential exists for FPL<br />
American Wind, due in large part, to the newness of the New<br />
Mexico and California projects, along with the limited number<br />
of operating hours on most of the remaining portfolio.<br />
What Could Change the Rating - DOWN<br />
Issues that could negatively impact the FPL American Wind<br />
rating is weak operating performance of the portfolio caused<br />
by either lower than anticipated wind volumes or poor operating<br />
turbine performance, along with credit deterioration at<br />
either of the largest off-takers or at FPL Group Capital.<br />
• 60 •
FPL Energy National Wind, LLC<br />
Delaware, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Parent: FPL Energy National Wind Portfolio, LLC<br />
Outlook<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Stable<br />
Credit Strengths<br />
Credit Strengths for FPL National Wind:<br />
• Relative predictability of cash flows expected to be generated<br />
from a portfolio of wind projects spread out over 5 independent<br />
wind regions among 9 different wind farms<br />
• Investment grade average rating for the portfolio among<br />
8 different off-takers, all of which have long-term contracts<br />
with the wind projects<br />
• Receipt of Production Tax Credits (PTC's) from FPL<br />
Group Capital Inc (A2 senior unsecured; negative outlook) is<br />
expected to provide a meaningful proportion of the total revenues<br />
over the life of the bonds<br />
• Wind generation continues to be a strategic business for<br />
FPL Group, Inc. (FPL: A2 Issuer rating; negative outlook)<br />
• Reasonably low operating risk<br />
• Strong covenant package and liquidity provisions including<br />
a one-year debt service reserve<br />
• Wind generation has become an important resource for<br />
electric generation in the US<br />
Credit Challenges<br />
Credit Challenges for FPL National Wind:<br />
• Wind assessment risk is critical to financial performance<br />
as cash flows are entirely dependent upon wind volumes experienced<br />
• Given the dependency on wind volumes as the sole<br />
source of revenues and the regular requirement for ongoing<br />
fleet maintenance, the project may experience more volatility<br />
in its year-to-year cash flows<br />
• Concentration risk exists as 22% of the cash flows come<br />
from one project, FPL Energy Wyoming (FPL Wyoming)<br />
• Most of the projects remain exposed to differing degrees<br />
of modest curtailment risk<br />
• Two of the projects have PPA's with unrated affiliates of<br />
investment grade utilities. Payments under their respective<br />
PPAs are guaranteed on a limited basis by the utility's parent<br />
Rating Rationale<br />
The Baa3 rating for FPL Energy National Wind, LLC (FPL<br />
National Wind) reflects the relatively predictable cash flows<br />
expected to be generated from a portfolio of 361 wind turbines<br />
spread out over 5 diverse wind regions. The rating<br />
incorporates the solid investment grade average rating for the<br />
portfolio of power off-takers, all of which have signed longterm<br />
PPA's with the individual projects. The rating considers<br />
the involvement of FPL, which has substantial experience in<br />
wind energy, owning about 41% of the country's installed<br />
wind capacity. Also, FPL Group Capital will guarantee the<br />
project's receipt of PTC's, and such payments provide about<br />
38% of FPL National Wind's projected annual cash flow<br />
through 2013. Importantly, FPL Group Capital is obligated<br />
to make these payments regardless of FPL's tax position and<br />
irrespective on any change in tax law that could affect the<br />
availability of PTC's on a historical or prospective basis.<br />
While most of FPL National Wind's projects have limited<br />
operating history ranging from 12 to 18 months, operating<br />
risk is expected to be relatively low. FPL, which plans to operate<br />
the entire portfolio by year-end 2005, has a demonstrated<br />
track record of strong operating performance at its sizeable<br />
Senior Secured<br />
Ba2<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
wind fleet. Moreover, to the extent that poor operating performance<br />
surfaces at a particular site, the impact to the portfolio<br />
is likely to be modest given the number of turbines in<br />
the portfolio and the modest cost for most turbine repairs.<br />
The project features strong liquidity provisions, including a<br />
12-month debt service reserve, a $15 million operating<br />
reserve and a major maintenance reserve that grows over time<br />
from $1 million at inception to $3.5 million by 2020. The 12-<br />
month debt service reserve could be reduced to 6 months<br />
beginning in 2010, with rating agency affirmation.<br />
The rating also considers the wind assessment risk, which<br />
<strong>Moody's</strong> believes is among the most significant risks with this<br />
technology. While each of the PPA's requires that the utility<br />
take and pay for the output produced, FPL National Wind is<br />
only paid the kWh tariff and the PTC when energy is produced<br />
and sold (i.e., when the wind blows). <strong>Moody's</strong> also recognizes<br />
the low degree of wind correlation among the five<br />
regions, which helps to mitigate the wind assessment risk to<br />
some degree.<br />
Although there is substantial diversity in the portfolio,<br />
about 22% of the cash flows come from FPL Wyoming, a<br />
project that also has the greatest near-term technical and<br />
operating risk due to the use of a fairly new turbine, which has<br />
experienced some operational problems during its first full<br />
year of operation.<br />
The rating also considers the issuance of $100 million of<br />
6.125% senior secured bonds due 2019 by FPL Energy Wind<br />
National Portfolio, LLC (National Wind Portfolio), the parent<br />
of FPL National Wind. The National Wind Portfolio<br />
bonds, which are rated Ba2, are structurally subordinated to<br />
FPL National Wind and rely solely on dividends received<br />
from FPL National Wind for debt service. The Ba2 rating<br />
considers National Wind Portfolio's consolidated leverage by<br />
assessing National Wind Portfolio's debt service coverage<br />
ratio (DSCR) on a consolidated basis. (avg. 1.33x/min. 1.30x<br />
over the life of the holding company transaction).<br />
Rating Outlook<br />
The rating outlook for FPL National Wind and National<br />
Wind Portfolio is stable, reflecting the anticipated predictability<br />
of cash flow, the project's geographic and operating<br />
diversification, FPL's considerable involvement, and the<br />
structural enhancements that support the underlying ratings.<br />
What Could Change the Rating - UP<br />
An upgrade of the ratings would be unlikely in the near term,<br />
given the limited operating history of the portfolio. An<br />
upgrade could occur over the longer term if year-over-year<br />
wind volumes prove to have lower than expected volatility and<br />
this also results in consistent and robust DSCRs.<br />
What Could Change the Rating - DOWN<br />
Conversely, the ratings could be downgraded if the credit<br />
quality of the off-taker pool or FPL Group Capital were to<br />
deteriorate, if the operating performance of the projects, particularly<br />
the FPL Wyoming project, were to substantially<br />
decline, or if the wind volumes throughout the portfolio were<br />
materially lower than forecasted on a consistent basis, resulting<br />
in substantially lower than expected cash flow and<br />
DSCRs.<br />
• 61 •
FPL Energy Virginia Funding Corporation<br />
Delaware, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for FPL Energy Virginia:<br />
- Power purchase agreement (PPA) with Virginia Electric<br />
and Power Company (Vepco) that expires in 2017<br />
- Good operating performance at the plant<br />
- Stable debt service coverages anticipated over the life of<br />
the transaction.<br />
- Amortization is front-end loaded as 42% of the total debt<br />
matures by <strong>2006</strong>, and matches the size of the Vepco capacity<br />
payments<br />
- Structural enhancement that increases the debt service<br />
reserve mitigates the short merchant risk<br />
Credit Challenges<br />
Credit challenges for FPL Energy Virginia:<br />
- Capacity payments under the PPA through 2007 are high<br />
relative to the market<br />
- Leverage is very high<br />
- <strong>Project</strong> is exposed to merchant risk beginning in 2017.<br />
Rating Rationale<br />
FPL Energy Virginia Funding Corporation's (FPL Energy<br />
Virginia) Baa3 senior secured rating reflects the strength of<br />
power-purchase agreements with highly-rated Vepco (Issuer<br />
rating of A3), a subsidiary of Dominion Resources, for capacity<br />
and energy derived from the project's combined-cycle and<br />
recently completed gas-fired simple cycle power facilities.<br />
The purchase power agreements, which are set to mature<br />
May 5, 2017, and December 31, 2005, respectively, could be<br />
extended beyond their stated maturity. The purchase power<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
agreements have been structured to pass-through incurred<br />
energy costs to Vepco.<br />
The transaction has been structured to amortize 90% of<br />
the debt during the term of the purchase-power agreement<br />
that matures on May 5, 2017. Absent extension of the purchase-power<br />
agreements or other contractual arrangements,<br />
the remaining bond principal and interest will be repaid from<br />
cash flow generated from sales into the competitive wholesale<br />
energy marketplace. Break-even analysis indicate that revenues<br />
could drop by 65% in each year during the two-year<br />
merchant period and debt service could be paid. Further support<br />
for the rating is gained through a structural enhancement,<br />
requiring the size of the debt service reserve account to<br />
increase to 1 year of debt service payments if, after May 5,<br />
2017, less than 75% of the project's combined capacity is not<br />
under contract at terms that provide 1.40 times coverage of<br />
debt service.<br />
Rating Outlook<br />
The stable rating outlook reflects the predictability of cash<br />
flows and resulting debt service coverage ratios anticipated<br />
over the remaining term of this financing.<br />
What Could Change the Rating - UP<br />
Limited upside potential in the rating due to contracted<br />
nature of expected cash flows and associated leverage.<br />
What Could Change the Rating - DOWN<br />
Material change in the off-taker's issuer rating; poor operating<br />
performance at the plant causing capacity payments to<br />
decline and opearting costs to increase.<br />
• 62 •
GH Water Supply (Holdings) Limited<br />
China<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Bkd Sr Sec Bank Credit Facility<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Ba3<br />
Recent Developments<br />
The ratings of GH Water reflect the application of Moody’s<br />
new rating methodology for government-related issuers<br />
(“GRIs”). Please refer to Moody’s Rating Methodology entitled<br />
“The Application of Joint Default Analysis to Government-Related<br />
Issuers”, published in April 2005, and its<br />
accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled<br />
“Rating Government-Related Entities in Asia Pacific” for a<br />
detailed discussion of the application of the GRI rating methodology<br />
to corporate issuers in Asia Pacific.<br />
Credit Strengths<br />
• Monopoly position of Yue Gang Water Supply Co Ltd (Yue<br />
Gang), GH Water Holding's operating subsidiary, as the primary<br />
source of water supply in Hong Kong<br />
• Relatively predictable cash flows, which are generated by<br />
a take-or-pay contract with the Hong Kong Government<br />
(rated A1), and low business risk<br />
• Importance of the project to both the Hong Kong and<br />
Guangdong governments<br />
• Strong covenant package, which offers additional protection<br />
to creditors<br />
Credit Challenges<br />
• Uncertainties stemming from ongoing renegotiation of<br />
Hong Kong water supply contract<br />
• Subordinated nature of Tranche B debt behind the Hong<br />
Kong Government loan<br />
• Absence of any direct contractual relationship between<br />
Yue Gang and the Hong Kong Government<br />
• High leverage limits financial flexibility<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
Ba2 corporate family rating of GH Water reflects the combination<br />
of the following inputs:<br />
- Baseline credit assessment of 5 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- A2 foreign currency rating of the Chinese government<br />
- Medium dependence<br />
- Low support<br />
Analyst<br />
Phone<br />
Kaven Tsang/Hong Kong 852.2916.1104<br />
Ken Chan/Hong Kong 852.2916.1162<br />
Brian Cahill/Sydney 612.9270.8105<br />
The baseline credit assessment of 5 reflects the monopoly<br />
position of Yue Gang, GH Water's operating subsidiary, as<br />
the primary source of water supply in Hong Kong. It also<br />
reflects the relatively predictable cash flows generated by a<br />
take-or-pay contract with the Hong Kong Government and<br />
over 35 years of proven track record of providing uninterrupted<br />
water supply to Hong Kong.<br />
However, the baseline credit assessment reflects uncertainties<br />
stemming from renegotiation of Hong Kong water supply<br />
contract in 2004, which is still ongoing, and the high leverage<br />
which limits its financial flexibility. It also reflects the uncertainty<br />
created by the fact that there is no direct contractual<br />
relationship between Yue Gang and the Hong Kong government,<br />
although the relationship exists at a government-togovernment<br />
level.<br />
Medium dependence reflects the close economic interlink<br />
between China and Hong Kong, which offtakes the majority<br />
of GH Water’s water supply.<br />
Low support reflects our expectation that the Guangdong<br />
Provincial Government or the Chinese government is<br />
unlikely to provide any support to GH Water if the latter runs<br />
into financial difficulty, despite the strategic importance of<br />
the project to Hong Kong.<br />
The Ba3 rating on GH Water's Tranche B debt reflects its<br />
legal subordinated status to the Provincial Government debt<br />
and permitted hedging transactions, which are ranked in priority<br />
in right of payment of the Remaining Tranche B debt,<br />
Refinancing Facilities and bank Phase IV project debt.<br />
Rating Outlook<br />
Outlook for the ratings is stable.<br />
What Could Change the Rating - UP<br />
Rating could be upgraded in the event that the ongoing renegotiation<br />
of the HK water supply contract resulted in the<br />
removal of the uncertainties surrounding future cash flow and<br />
improvement in the overall credit profile of the company,<br />
such that DSCR > 1.5x.<br />
What Could Change the Rating - DOWN<br />
Ratings could be downgraded in the event the renegotiation<br />
of the HK water supply contract adversely affects the project's<br />
cash flow and debt servicing ability, such that DSCR < 1.25x.<br />
• 63 •
Golden State Petroleum Transport Corporation<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
First Mortgage Bonds<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
— Major oil companies have long-term need for well-maintained<br />
OPA compliant VLCCs.<br />
— Bareboat charters structured at sufficiently low rates to<br />
remain competitive with spot market rates and current market<br />
suggests the existing charters will remain competitive.<br />
— Staggered termination schedule and cash termination<br />
payments provide liquidity for debt service and time to<br />
arrange replacement charters in event of termination.<br />
— Frontline Ltd. as ultimate vessel owner provides marketing<br />
expertise in event of charter termination.<br />
Credit Challenges<br />
— VLCCs operate in commodity shipping markets subject to<br />
highly volatile day rates and shifting vessel values.<br />
— Termination option is entirely the charterer’s for any<br />
reason, including changing vessel needs, market day rates,<br />
supply and demand, etc.<br />
— Unknown counterparty risk in the event of a replacement<br />
charter.<br />
— Termination risk could increase as the vessels age, possibly<br />
due to environmental issues or ready availability of newer<br />
replacement vessels.<br />
Rating Rationale<br />
Golden State Petroleum Transport Corporation is a special<br />
purpose vehicle that originally funded the construction and<br />
leasing of two very large crude oil carriers (VLCCs) under<br />
long-term charter to affiliates of Chevron Corporation. The<br />
VLCCs are state-of-the-art double-hulled tankers that provide<br />
safe and cost effective transport of large crude volumes,<br />
including in U.S. waters. The financing was structured using<br />
serial notes, rated Aa2, and term notes, rated Baa2. The serial<br />
notes are rated equal to Chevron's senior unsecured debt<br />
obligations, based on its unconditional guarantee of bareboat<br />
charters entered into by Chevron Transport, its wholly owned<br />
subsidiary. The 18-year leases are non-cancelable for an initial<br />
eight year period, during which time the serial notes are fully<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
Michael Doss/New York<br />
John Diaz/New York<br />
amortized. Under the bareboat charters, Chevron Transport<br />
provides crew, maintenance, and insurance; absorbs operating<br />
cost variances; and is responsible for safe operation of the vessels.<br />
The Baa2 rating of the term notes reflects re-chartering<br />
risk: Chevron Transport, in its sole discretion, can elect not to<br />
renew the charters at the end of eight years. Weak VLCC<br />
markets and charter rates could prompt Chevron not to<br />
renew, with the risk that market rates upon rechartering could<br />
also prove insufficient for debt service. These risks are mitigated<br />
by a number of factors: Chevron's continued need for<br />
attractive state-of-the-art vessels in its core operations; low<br />
charter rate breakevens that indicate economics favorable to<br />
charter renewal; required pre-notification of non-renewal to<br />
provide time to re-charter the vessels; and staggered charter<br />
terminations.<br />
Rating Outlook<br />
Golden State's serial notes have a stable outlook and will continue<br />
to be rated equal to Chevron’s senior debt rating. The<br />
Baa2 term notes have a first termination option in February<br />
2007. The term note rating could be affected by re-charter<br />
risk in the longer term and will track developments in world<br />
tanker markets, Chevron usage, and other factors as the vessel<br />
charter termination dates approach.<br />
What Could Change the Rating - UP<br />
The term notes reflect fundamental charter termination risk<br />
and we would not expect to upgrade them except in the event<br />
that the charterer relinquished the termination option.<br />
What Could Change the Rating - DOWN<br />
In the event of a charter break, we would expect to review the<br />
term notes for downgrade, focusing on Frontline’s remarketing<br />
efforts and success in finding acceptable replacement<br />
charters, counterparty risk of the charterer, and spot market<br />
conditions, including replacement day rates, supply/demand<br />
and vessel market values.<br />
• 64 •
Greater Toronto Airports Authority<br />
Toronto, Ontario, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
Greater Toronto Airports Authority<br />
2004 2003 2002 2001<br />
Enplaned Passengers[1] 14,307,855 12,369,656 12,957,908 14,021,346<br />
O&D Passengers as a % of Total Passengers[2] 70.0% 70.0% 68.0% 70.0%<br />
Revenue per enplaned Passenger $58.15 $52.29 $44.60 $36.90<br />
Airline Derived Revenue per Enplaned Passenger $33.79 $29.14 $23.63 $20.43<br />
Debt per enplaned Passenger $438.04 $450.43 $343.54 $242.30<br />
Rate Covenant #2 as per Trust Indenture 1.25x 1.25x 1.25x 1.25x<br />
[1] Enplaned passengers estimated as half of total passengers [2] Origin and Destination passengers<br />
Opinion<br />
Recent Developments<br />
The A2 ratings of Greater Toronto Airports Authority<br />
(“GTAA”) reflect the application of Moody’s new rating<br />
methodology for government-related issuers (“GRIs”). Please<br />
refer to Moody’s Rating Methodology entitled “The Application<br />
of Joint Default Analysis to Government-Related Issuers”,<br />
published in April 2005, and its accompanying press<br />
release.<br />
Please also refer to Moody’s Special Comment entitled<br />
“Rating Government-Related Issuers in the Americas Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of<br />
the GRI rating methodology to corporate issuers in the<br />
Americas.<br />
Credit Strengths<br />
- Virtual monopoly provider of an essential service<br />
- Independent authority with unfettered ability to set airline<br />
charges and impose AIF<br />
- Traffic dominated by O&D passengers<br />
- Canada’s major international gateway airport serving its<br />
largest metropolitan and commercial centre<br />
- No significant competition from nearby airports<br />
Credit Challenges<br />
- Significant outstanding debt of approximately $6.5 billion<br />
expected to rise to about $8 billion by 2009 on completion of<br />
ADP Phase I implying further significant increases in aeronautical<br />
rates<br />
- Significant carrier concentration partially mitigated by<br />
predominantly O&D nature of traffic<br />
- Strained relations between GTAA and airline community<br />
due to rising aeronautical rates<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the A2<br />
ratings of GTAA reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 3 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- Aaa local currency rating of the Government of Canada<br />
- Low dependence<br />
- Low support<br />
The baseline credit assessment of 3 is underpinned by<br />
GTAA’s independence and rate-setting autonomy as well as its<br />
virtual monopoly in providing an essential service to the largest<br />
commercial and population centre in Canada. GTAA’s<br />
debt structure and projected financials reflect the aggressive<br />
capital expenditures associated with its Airport Development<br />
Program (ADP) and other capital programs. GTAA’s estimated<br />
costs to complete ADP Phase I are about $1.2 billion<br />
with substantial completion expected in 2007 and final completion<br />
by 2009. Moody’s anticipates that from 2004 to 2009<br />
inclusive, GTAA will spend about $3.0 billion on ADP Phase<br />
I, other capital programs and capitalized interest, resulting in<br />
total debt outstanding of approximately $8 billion. Even with<br />
meaningful passenger volume increases, this implies further<br />
significant increases in aeronautical rates. While the scope<br />
and cost of the ADP and GTAA’s other capital plans have<br />
been known for some time, the combined impact of these<br />
costs and weak passenger volumes on aeronautical rates has<br />
garnered considerable attention of late. Moody’s believes<br />
GTAA’s traffic patterns will continue to be robust due to the<br />
importance of Toronto as a commercial centre, tourist destination<br />
and international gateway to Canada. In addition,<br />
GTAA benefits from about 70% origination and destination<br />
(O&D) traffic that provides a stable passenger base. GTAA’s<br />
near term challenge is to manage the expenditures associated<br />
with the ADP Phase I and its other capital programs against<br />
the backdrop of financial stress in the airline industry.<br />
Low dependence reflects the airport authorities’ operational<br />
and financial independence from the Government of<br />
Canada.<br />
Low support reflects Moody’s view that while the Federal<br />
Government has an interest in the continued operation of the<br />
country’s transportation infrastructure, it neither owns the<br />
airport authorities nor has any obligation to provide financial<br />
assistance to them. Furthermore, it is unlikely that a default<br />
by an airport authority would cause a significant disruption in<br />
service that might prompt some form of Federal Government<br />
response.<br />
Rating Outlook<br />
The rating outlook is stable based on Moody’s expectations of<br />
continued strong O&D base and an unfettered ability to set<br />
rates to fully recover costs.<br />
What Could Change the Rating - UP<br />
- Significant and sustained growth in passenger volumes<br />
What Could Change the Rating - DOWN<br />
- Any limitations placed on rate setting autonomy<br />
- Sustained declines in passenger volumes<br />
- Any significant reduction in airline service due to rising<br />
airport costs, airline restructuring or other factors<br />
- Any material decrease in O&D traffic<br />
- Development of a Windsor/Quebec high speed rail link -<br />
not expected to be a near-term issue<br />
• 65 •
Hamaca Holding LLC<br />
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Sr Sec Bank Credit Facility<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Recent Developments<br />
The Ba3 rating of Hamaca Holding LLC. reflects the application<br />
of Moody’s new rating methodology for governmentrelated<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Hamaca include:<br />
- initial 30% debt leverage<br />
- sponsor offtake agreements for unsold syncrude under a<br />
price support mechanism<br />
- significantly higher than projected pre-completion<br />
blended oil revenues<br />
- joint and several sponsor obligations for equity cash calls<br />
pre-completion<br />
Credit Challenges<br />
Credit challenges for Hamaca include:<br />
- location in Venezuela amid socio-political unrest<br />
- unilateral imposition of a 1600% increase in royalty tax<br />
claims by the Chavez administration<br />
- ongoing contractual disputes and arbitration with general<br />
contractor<br />
- greater risk of future sovereign actions which could affect<br />
the creditworthiness of the project<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Hamaca reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 6 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
Similar to the other three Venezuelan heavy oil projects,<br />
the baseline credit assessment of 6 primarily reflects the operating<br />
environment in Venezuela amid lingering volatility,<br />
political uncertainties and recent actions taken by the Chavez<br />
administration against the oil/gas industry. These factors are<br />
balanced against strong fundamental economics, continued<br />
operational improvements and increased financial flexibility<br />
at the project. <strong>Project</strong>-to-date December, 2004 Hamaca has<br />
achieved higher levels of production and revenues than in<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
original plan, and upstream reservoirs and fields have performed<br />
better than planned. Hamaca is working with another<br />
of the heavy oil projects on developing shared services as a<br />
cost saving measure.<br />
The operating environment in Venezuela encompasses lingering<br />
socio-political unrest and its resultant impact on the<br />
operating capacity and financial condition of entities operating<br />
within Venezuela including the unilateral imposition of a<br />
16.67% royalty tax in place of the 1% tax documented in the<br />
project's agreements. This change reduces cash flow coverage<br />
of debt service on an on-going basis. At current oil prices and<br />
production levels, the increase in royalty taxes has not prevented<br />
the project from achieving strong cash flow coverages.<br />
However, the royalty increase would become more significant<br />
to cash flow coverage if oil prices were to decline to more historic<br />
norms. In addition, the unilateral nature of the change<br />
suggests that there might be a greater risk of future sovereign<br />
actions which could affect the creditworthiness of the project.<br />
Hamaca Holding LLC Corpoguanipa S.A. ("Hamaca") is<br />
an unincorporated joint venture established under the laws of<br />
Venezuela to develop, produce, transport and upgrade extraheavy<br />
oil from dedicated reserves in the Orinoco oil belt. The<br />
project's sponsors, through wholly-owned affiliates are: 40%<br />
ConocoPhillips, 30% ChevronTexaco and 30% PDVSA.<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the government and a default by the<br />
project. While the hydrocarbons industry is important to the<br />
Venezuelan government, the project is majority-owned by<br />
ConocoPhillips and ChevronTexaco. All of its product is sold<br />
for U.S. Dollars into the export markets into offshore trustee<br />
accounts.<br />
Low support reflects Moody’s opinion that the government<br />
would not be likely to step in to support the project should it<br />
incur financial difficulties.<br />
What Could Change the Rating - UP<br />
Resolution of the simmering socio-political turmoil in Venezuela,<br />
greater long term predictability of legal and tax<br />
regimes.<br />
What Could Change the Rating - DOWN<br />
Resumption of strikes, social upheaval or increased interference<br />
with the operating capacity and financial condition of<br />
PDVSA.<br />
• 66 •
Homer City Funding LLC<br />
Irvine, California, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Ult Parent: Edison International<br />
Outlook<br />
Senior Unsecured Shelf<br />
Subordinate Shelf<br />
Preferred Shelf<br />
Parent: Mission Energy Holding Company<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Stable<br />
(P)Baa3<br />
(P)Ba1<br />
(P)Ba1<br />
Stable<br />
B2<br />
Credit Strengths<br />
Credit Strengths for Homer City Funding:<br />
-Low cost coal-fired generation<br />
-Principally serves the PJM market but has transmission<br />
access into New York Power Pool<br />
-Good operating history<br />
-Structural enhancements protect senior debt holders<br />
Credit Challenges<br />
Credit Challenges for Homer CityFunding:<br />
-Exclusively reliant on merchant energy sales for source of<br />
repayment<br />
-Potential for environmental expenditures<br />
-Single facility asset<br />
Rating Rationale<br />
The Ba2 senior secured rating for Homer City Funding LLC<br />
(formerly known as Edison Mission Holdings Co.) reflects<br />
the low-cost, coal-fired generation of the three unit 1,884<br />
megawatt unit asset operating in PJM. The rating reflects the<br />
project’s heavy reliance on merchant energy sales to generate<br />
revenues and cash flows. While the plant's low operating cost<br />
and base load characteristics position it reasonably well to<br />
operate, revenues and cash flows are less predictable given the<br />
plants' reliance on the merchant energy market. <strong>Moody's</strong><br />
acknowledges Homer City's solid long-term competitive<br />
position within the region, which is not likely to be challenged<br />
for some time given the significant barriers to entry<br />
for other new plants in this region.<br />
The rating also considers the financial position of Edison<br />
Mission Energy (EME: B1, Senior Unsecured Debt; Stable<br />
Outlook), which along with subsidiary, Edison Mission Marketing<br />
and Trading, actively markets the electric output generated<br />
at Homer City. EME's rating considers its improved<br />
liquidity profile following the successful completion of the<br />
sale of its international assets and certain non-core domestic<br />
assets. EME's enhanced liquidity is balanced by the continuing<br />
high financial leverage at EME and at its parent, Mission<br />
Energy Holding Company (MEHC: B2 senior secured debt).<br />
Parent: Edison Mission Energy<br />
Outlook<br />
Stable<br />
Corporate Family Rating<br />
B1<br />
Senior Unsecured<br />
B1<br />
Jr Subordinate Shelf<br />
(P)B3<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
EME has consolidated cash of around $1.6 billion at September<br />
30, 2005, and expects to utilitize its cash balances to further<br />
reduce debt at EME and MEHC over the next few years<br />
and to provide liquidity for hedging programs in support of<br />
Homer City and Midwest Generation, an EME subsidiary.<br />
The Ba2 rating further considers some of the structural<br />
enhancements afforded to senior noteholders including the<br />
subordination that exists between senior noteholders and<br />
lease equity holders in the transaction, specifically the<br />
requirement that cash flow cover senior debt by 1.7 times, in<br />
order for payments to flow to lease equity. Senior debt also<br />
benefits from the existence of a six month debt service<br />
reserve.<br />
For the 12 months period ending 12/31/03 and 12/31/04<br />
and 09/30/05, Homer City Funding's senior rent coverage<br />
ratio was 2.73x, 2.33x and 3.03x, respectively.<br />
Rating Outlook<br />
The stable rating outlook for Homer City Funding reflects<br />
the project’s competitive position as a low-cost baseload<br />
project operating in the well-developed PJM power pool. The<br />
project's cash flow has been positively affected by higher natural<br />
gas prices which has improved spark spreads for coalfired<br />
units in the region.<br />
What Could Change the Rating - UP<br />
Improvement in the credit quality of 100% owner and operator,<br />
EME, could enhance credit quality for Homer City<br />
Funding.<br />
Additionally, a higher degree of predictability around the<br />
operating cash flows, which could be achieved by having<br />
higher portions of electric output under contract, can help to<br />
support a higher rating.<br />
What Could Change the Rating - DOWN<br />
Weak operating performance at the plant, substantially<br />
increased environmental requirements, and credit deterioration<br />
at EME could potentially place downward pressure on<br />
Homer City Funding's rating.<br />
• 67 •
Hospital Company (Dartford) Issuer Plc (The)<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
- Bonds benefit from an unconditional, irrevocable financial<br />
guarantee from MBIA Assurance S.A. (Aaa)<br />
- the hospital has been in operation since July 2000<br />
- the underlying credit benefits from the stable cash flows<br />
that should be produced under the concession agreement<br />
with the Dartford & Gravesham NHS Trust. Performance<br />
deductions have been very minor (and passed down to subcontractors);<br />
third party revenue has also met expectations<br />
- the concession agreement is generally favourable to the<br />
project company, in matters including pass-through of insurance<br />
and utilities costs, the impact of a force majeure event,<br />
termination rights and compensation following termination<br />
- soft FM is benchmarked on a five-yearly basis; the Trust<br />
carries 100% of the risk<br />
- RPI-indexed revenues provide good match with RPIindexed<br />
debt and the services subcontract<br />
- the National Audit Office report from February 2005<br />
confirmed that the quality of facilities and services has been<br />
satisfactory<br />
Credit Challenges<br />
- the underlying credit is exposed to the lack of diversity of<br />
revenues and tight financial structuring typical for a PFI<br />
financing. Minimum debt service cover ratios of 1.18x are the<br />
lowest of <strong>Moody's</strong> UK PFI accommodation projects.<br />
- about 4% of the effective revenues are based on car parking<br />
and retail services in the hospital; there is a minimum fee<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
Stuart Lawton/London<br />
arrangement with the Trust, although this is dependent on<br />
occupancy levels<br />
- the project company has retained life cycle cost risk; a<br />
Maintenance Reserve Account will be funded on a three-year<br />
look forward basis<br />
- no change in law reserve account, although in practice<br />
the project company is only exposed to changes in corporate<br />
tax legislation<br />
Rating Rationale<br />
The Aaa rating on the £152.53 million secured bonds reflects<br />
the unconditional and irrevocable guarantee provided by<br />
MBIA Assurance S.A. (Aaa). The underlying rating of the<br />
bonds is Baa2.<br />
The company is a UK PFI Hospital project, maintaining<br />
and providing certain non-clinical services for a general hospital<br />
at Darenth Park. The underlying credit is based on a<br />
long term concession agreement with the Dartford & Gravesham<br />
NHS Trust.<br />
Rating Outlook<br />
The stable outlooks on the bonds reflects the stable outlook<br />
on the guarantor, MBIA Assurance S.A. The stable outlook<br />
on the underlying rating reflects the stable operations of the<br />
project since construction completion four years ago.<br />
Recent Developments<br />
Negotiations following the first benchmarking/market testing<br />
exercise for soft services are almost complete. <strong>Moody's</strong><br />
expects that Carillion will continue to provide all soft services,<br />
with a small increase in price.<br />
• 68 •
HOVENSA L.L.C.<br />
Christiansted, St. Croix, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Sr Unsec Bank Credit Facility<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Baa3<br />
Recent Developments<br />
The Baa3 rating of HOVENSA L.L.C. reflects the application<br />
of Moody’s new rating methodology for governmentrelated<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for HOVENSA include:<br />
- long operating history with original builder of facility<br />
- above average competitive position due to large refinery<br />
size and logistics<br />
- strong covenant structure and asset security<br />
- two long term crude supply contracts with fixed competitive<br />
allowances<br />
Credit Challenges<br />
Credit challenges for HOVENSA include:<br />
- significant low-sulfur capital expenditure requirements in<br />
the next few years<br />
- sharp margin swings in historically volatile refining sector<br />
- increased operating costs since original financing<br />
- non-investment-grade ratings of both project owners<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of HOVENSA reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 4 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
HOVENSA's baseline credit assessment of 4 primarily<br />
reflects <strong>Moody's</strong> assessment that the fundamental strength of<br />
the project and the level of structural insulation from the<br />
owners are supportive factors that outweigh the continued<br />
decline in the ratings of HOVENSA'S two owners. The rating<br />
also reflects the start-up of coking facilities that facilitate<br />
better refining margins, and expectations that the owners will<br />
continue to manage HOVENSA with moderate leverage and<br />
sufficient liquidity. This includes the expectation that dividends<br />
to the owners will continue to be limited to a level that<br />
allows HOVENSA to maintain moderate financial leverage.<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
John C. Cassidy/New York<br />
Daniel Gates/New York<br />
Also reflected in the rating is that HOVENSA faces significant<br />
capital expenditures over the next few years to meet lowsulfur<br />
environmental regulations that have been put into<br />
effect. In an effort to address those obligations, HOVENSA<br />
has successfully extended the maturities of its long term debt,<br />
improving its overall liquidity profile. Additional support<br />
exists in the form of a nine-month, fully funded debt service<br />
reserve account, an undrawn revolving credit of $400 million,<br />
and sponsor supports totaling $80 million throughout the<br />
period of capital spending for the low-sulfur project. Continued<br />
access to significant liquidity is a critical underlying<br />
assumption for the rating. Distributions to the shareholders<br />
are restricted by two coverage ratio tests designed to ensure<br />
that cash remains in the project during the period of 2003-<br />
<strong>2006</strong>, when required low-sulfur capital expenditures are at<br />
peak levels.<br />
HOVENSA made its first distribution from the joint venture<br />
since 1998, distributing $175.3 million during 2004, representing<br />
double the amount required for PDVSA to meet its<br />
debt service obligations against a note held by Amerada Hess<br />
for PDVSA's original purchase of its share of the refinery.<br />
The project has additionally distributed $225 million in the<br />
first quarter 2005 out of $450 million expected to be distributed<br />
for the year.<br />
HOVENSA L.L.C. is a joint venture, limited liability company<br />
formed to own and operate a 495,000 bpd refinery in St.<br />
Croix. It is 50% jointly-owned by Amerada Hess Corporation<br />
and PDVSA.<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the Venezuelan government and a<br />
default by the project, which is located in St. Croix.<br />
Low support reflects Moody’s opinion that the government<br />
would not be likely to step in to support the project should it<br />
incur financial difficulties.<br />
What Could Change the Rating - UP<br />
Successful execution of the upcoming large capital spending<br />
program, followed by a reduction of debt or increase in operating<br />
cash flow, on a sustained basis.<br />
What Could Change the Rating - DOWN<br />
A change in the current dividend policy of the partners or a<br />
significant, unexpected cost overrun for low sulfur capital<br />
expenditures.<br />
• 69 •
Husky Terra Nova <strong>Finance</strong> Ltd.<br />
Calgary, Alberta, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
• Continued strong financial performance of the project<br />
due to higher commodity prices<br />
• Significant de-levering of project’s balance sheet<br />
• Operational involvement of large and experienced oil<br />
companies<br />
• Support provided by Husky Energy Inc.<br />
Credit Challenges<br />
• Sensitivity to oil price volatility.<br />
• Uncertainties regarding the volume of proved reserves<br />
Rating Rationale<br />
The Baa2 rating of Husky Terra Nova <strong>Finance</strong> Ltd. (HTNF)<br />
reflects the underlying cash flows of the Husky Terra Nova<br />
Partnership (HTNP). HTNF was formed to project finance<br />
Husky Energy's share of development costs in the Terra Nova<br />
offshore oil project.<br />
HTNP’s credit quality reflects the strong project economics<br />
which is driven in part by recent high commodity prices,<br />
the operational involvement of large oil companies experienced<br />
in developing oil projects and the strategic importance<br />
of the project to the governments of Canada and the Province<br />
Analyst<br />
Phone<br />
M. Sanjeeva Senanayake/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
of Newfoundland. The rating, however, also considers uncertainties<br />
regarding the volume of proved reserves and the<br />
related production profile, the project’s vulnerability to the<br />
volatility of oil prices and the bondholder’s third priority lien<br />
position on the project assets. The rating also reflects the support<br />
provided by Husky Energy Inc. (senior unsecured: Baa2,<br />
stable) to fund various expenses and capital outlays.<br />
Rating Outlook<br />
The rating outlook remains stable given substantial paydown<br />
of the project debt and continued improving cash flows due to<br />
higher commodity prices.<br />
What Could Change the Rating - UP<br />
The rating relies somewhat on the support provided by<br />
Husky Energy to fund various expenses and capital outlays<br />
and therefore likely to closely track Husky Energy’s rating.<br />
What Could Change the Rating - DOWN<br />
Downward pressure on the rating remains limited in the near<br />
term given the substantial de-levering of the project and the<br />
current high commodity price environment.<br />
• 70 •
Hutchison Ports (UK) Limited<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Hutchison Ports (UK) <strong>Finance</strong> plc<br />
Outlook<br />
Bkd Senior Unsecured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1<br />
Analyst<br />
Phone<br />
Johan Verhaeghe/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
Hutchison Ports (UK) Limited<br />
2004 2003 2002 2001<br />
EBIT Margin (before G'will Amort'n)[1] 24.3% 22.8% 28.0% 20.9%<br />
Adj RCF/ Net Adj Debt[2] 18.5% 12.7% 10.3% 9.0%<br />
Adj FFO Interest Coverage[3] 3.8 3.8 3.4 3.1<br />
Adj RCF/Capex + Investments (net of disposals)[4] 1.9 1.8 1.2 2.5<br />
(EBIT + /Int. Income) / Interest Expense 2.7 2.2 2.7 2.0<br />
Adjusted FFO/ Net Adjusted Debt[5] 18.5% 16.4% 13.5% 12.4%<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4]<br />
Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Gross CF pre Working Capital+ Working Capital Cash Flow+ 2/3 Operating<br />
Lease Expense)/ (Total Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt-(Cash+Marketable Securities))<br />
Opinion<br />
Credit Strengths<br />
- Ownership of the largest container port serving the<br />
United Kingdom with strong business fundamentals.<br />
- Diversified shipping customer base and likely resistance<br />
to significant falls in port charges.<br />
- Membership of wider ports group gives some protections<br />
against consolidating customer base.<br />
Credit Challenges<br />
- Relatively high debt leverage for the Baa1 rating category.<br />
- Large capex programme needed to accommodate growth.<br />
Rating Rationale<br />
The rating reflects (1) Hutchison Ports (UK) Limited<br />
(HPUK)'s strong business franchise, (2) its membership of a<br />
wider ports business and the Hutchison Whampoa Limited<br />
(“HWL”) group, (3) its large capital expenditure programme,<br />
(4) relatively high debt leverage for its rating category, and (5)<br />
its current strong liquidity.<br />
HPUK has a dominant market position accounting for<br />
approximately 40% of the UK's container traffic, which provides<br />
a solid and reliable business base. Furthermore,<br />
HPUK's well-diversified customer base should help to underpin<br />
its revenues over the longer term. HPUK is a subsidiary<br />
of HWL (A3, stable), which regards HPUK as a strategic part<br />
of the HWL group and exercises tight management control.<br />
Membership of one of the largest port companies in the world<br />
gives some protection against a consolidating customer base<br />
and allows HPUK to benefit from economies of scale from<br />
global initiatives. Given the absence of explicit financial commitments<br />
by HWL, <strong>Moody's</strong> assessment of HPUK is predominantly<br />
a stand-alone analysis. Nevertheless, given its<br />
status as an integral part of the HWL group and the fact that<br />
its finances are largely a function of HWL group policy,<br />
HWL's rating is effectively a constraining factor on the rating.<br />
Assuming HPUK obtains planning permission, which<br />
Moody’s considers likely, HPUK has a large capital expenditure<br />
programme. This expenditure will be required to meet<br />
the increased container volumes and larger ships that HPUK<br />
will need to accommodate to maintain its competitive position,<br />
although it can be undertaken in phases. HPUK has a<br />
significant debt burden, although it does not become due<br />
until 2015, and generally moderate debt coverage measures<br />
for the Baa1 rating category. HPUK’s liquidity is currently<br />
very strong, given its large cash balances.<br />
If the capex programme proceeds, at some stage over the<br />
medium term, HPUK will need additional funding. Options<br />
for this include additional funding from HWL. As cash balances<br />
are used and higher capital expenditure is incurred it<br />
will be important for HPUK to maintain sufficient liquidity<br />
to deal with any short term losses of revenue.<br />
Rating Outlook<br />
The outlook reflects HPUK’s recent and expected performance<br />
over the next 1 to 2 years, which suggests that financial<br />
metrics are likely to stay within the band that Moody’s would<br />
expect for a Baa1 rating. HPUK’s Retained Cash Flow has<br />
improved materially by HPUK’s decision not to pay dividends<br />
over the previous 2 years and this has helped HPUK’s rating<br />
positioning.<br />
Funding requirements will rise over the coming few years,<br />
assuming that capital expenditure is incurred as anticipated,<br />
which could be accommodated within the existing rating category<br />
provided that revenues grow as expected. Nevertheless,<br />
given its ownership, there is less visibility as to the longer<br />
term strategy and future capital structure of HPUK than<br />
would be the case for a listed company.<br />
What Could Change the Rating - UP<br />
An improvement in debt metrics to levels consistently higher<br />
than currently anticipated, namely Adj FFO interest Cover of<br />
over 4.5x and Adj RCF/ Net Adjusted Debt in the high teens,<br />
could warrant a rating uplift.<br />
What Could Change the Rating - DOWN<br />
A fall in debt metrics to a level consistently below the current<br />
anticipated range, namely Adj FFO interest Cover less than<br />
3.5x and Adj RCF/ Net Adjusted Debt in the low teens or<br />
high single digit range. This might arise if HPUK embarks<br />
on a debt financed capex programme in a declining revenue<br />
environment. Furthermore, a downwards move in Hutchison<br />
Whampoa's rating may pressure the rating.<br />
• 71 •
Indiantown Cogeneration, L.P.<br />
Indiantown, Florida, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Credit Strengths<br />
Credit Strengths for Indiantown are:<br />
-Long-term power purchase agreement (PPA) with Florida<br />
Power and Light (FPL) provides the majority of cash flows<br />
-Continuing need for the output from the plant to meet<br />
load growth of FPL<br />
-Sale of NEGT's ownership interest to Cogentrix has<br />
strengthened the credit quality of the sponsors<br />
Credit Challenges<br />
Credit Challenges for Indiantown are:<br />
-Continued possibility for margin compression exists due<br />
to the mismatch between actual fuel costs and the index used<br />
to calculate fuel related revenues<br />
-Financial coverages have underperformed the original<br />
expectations<br />
-Single asset concentration<br />
-High leverage<br />
Rating Rationale<br />
The Bal senior secured rating of Indiantown Cogeneration<br />
LP (Indiantown) reflects a 30-year PPA with Florida Power &<br />
Light (FPL: issuer rating of A1), which provides the basis for<br />
predictable cash flow through the life of the financing.<br />
The rating also considers the linkage that exists between<br />
plant fuel costs and power contract revenues, and the continuing<br />
dispute between FPL and Indiantown over the method by<br />
which the unit energy payment cost (UEPC) will adjust under<br />
the PPA. Financial results through 2005 have been negatively<br />
affected, in part, by the parties' inability to reach an agreement<br />
concerning the UEPC adjustment as FPL continues to<br />
compensate Indiantown based upon an unadjusted UEPC.<br />
The rating incorporates an expectation that favorable resolution<br />
of this issue will occur in a reasonable timeframe.<br />
The rating further reflects the project’s recent financial<br />
profile, in part impacted by operating performance issues.<br />
While Indiantown has been able to fortify availability factors<br />
in recent times, financial results for 2005 have been negatively<br />
impacted by reduced capacity payments from FPL caused in<br />
part by outages incurred during the hurricanes in September<br />
2004. Prospectively, capacity payments should return to historical<br />
levels beginning in late 2005. While Indiantown's<br />
operating performance and financial results have improved,<br />
<strong>Moody's</strong> expects that with a favorable resolution of the dispute<br />
with FPL prospective debt service coverage ratios will<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
remain closer to the 1.30x-1.40x range, which are consistent<br />
with a Ba1 rating, particularly for a coal-fired asset.<br />
The current rating considers the regulatory-out clause in<br />
the power contract that allows FPL reduce payments to<br />
Indiantown if the Florida Public Service Commission disallows<br />
recovery of these payments from rate payers. <strong>Moody's</strong><br />
views the regulatory-out risk as being low.<br />
The rating acknowledges the January 2005 sale of National<br />
Energy and Gas Transmission, Inc.'s (NEGT) indirect 50%<br />
interest in Indiantown to a subsidiary of Cogentrix Energy,<br />
Inc. (Ba2 Corporate Family Rating), which had previously<br />
had a ownership interest in Indiantown. With the completion<br />
of the acquisition, a subsidiary of Cogentrix now acts as the<br />
operator for Indiantown, replacing a subsidiary of NEGT,<br />
and Cogentrix has a controlling interest in the management<br />
of the partnership. <strong>Moody's</strong> views the change in sale of<br />
NEGT's ownership to Cogentrix as being constructive to<br />
Indiantown's credit quality.<br />
Indiantown is a special purpose Delaware limited partnership<br />
formed to develop construct, own and operate a 330<br />
megawatt coal-fired cogeneration facility located in southwestern<br />
Martin County, Florida. The facility supplies electricity<br />
to FPL under a long-term PPA and supplies steam to<br />
Louis Dreyfus Citrus.<br />
Rating Outlook<br />
The stable rating outlook factors in an expectation of<br />
improved financial and operating performance beginning in<br />
<strong>2006</strong> and incorporates a view that the dispute between FPL<br />
and Indiantown concerning UEPC under the PPA will be<br />
resolved in a manner that is favorable to Indiantown in a reasonable<br />
timeframe.<br />
What Could Change the Rating - UP<br />
In light of the dispute between FPL and Indiantown and its<br />
impact on the project's financial performance, limited prospects<br />
exists for the rating to be upgraded in the foreseeable<br />
future.<br />
What Could Change the Rating - DOWN<br />
Extended weak operating performance which reduces coverages<br />
and cash flow. A failure of FPL and Indiantown to reach<br />
a favorable resolution of the UEPC dispute in a reasonable<br />
timeframe, causing an extended impact to Indiantown's debt<br />
service coverage ratios.<br />
• 72 •
Inmobiliaria Fumisa, S.A. de C.V.<br />
Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Mexico City Airport Trust<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Stable<br />
Baa3<br />
Inmobiliaria Fumisa, S.A. de C.V.<br />
2005<br />
Outstanding debt MXN 225,000,000<br />
Debt Service Coverage (2004) 2.1x<br />
Passenger traffic growth 2000-2004 2.3%<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Fumisa are:<br />
- Diverse revenue stream<br />
- The International Airport of México City is the most<br />
active airport in México and in Latin America<br />
- Final maturity in one year coupled with a sizeable debt<br />
service reserve minimizes repayment risk<br />
Credit Challenges<br />
Credit challenges for Fumisa are:<br />
- Adverse economic and financial conditions for the global<br />
travel industry<br />
Rating Rationale<br />
The Baa3 (global local currency) and Aa2.mx (Mexican<br />
national scale) ratings of the Certificados de Participación<br />
Amortizables of Inmobiliaria Fumisa, S.A. de C.V. (Fumisa)<br />
reflect Fumisa's diversified revenue stream consisting of<br />
income generated through commercial leases, airbridges and<br />
parking garages at the International Airport of México City.<br />
The ratings also recognize the Airport's underlying fundamentals<br />
including market position, passenger projections and<br />
airline diversity. Additionally, the final date of Certificate<br />
maturity in <strong>2006</strong> and a debt service reserve of 2.5 times the<br />
next debt service payment affords significant financial flexibility<br />
and liquidity.<br />
Fumisa was awarded a 20-year contract for the construction<br />
and operation of the new International Terminal at the<br />
Airport in exchange for building and renewing the installations.<br />
Fumisa acquired the rights to sublease commercial<br />
space and to operate and collect revenue from a parking<br />
garage and eleven airbridges.<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
The contracts and the trust agreement provide significant<br />
bondholder security. Rental contracts and commercial contracts<br />
may be renewed continuously throughout the life of the<br />
Certificates, although no certainty exists that the contracts<br />
will always be in compliance. In such a circumstance, Fumisa<br />
and the Technical Committee could rely upon several contract<br />
options and legal arbitration to help mitigate repayment<br />
risk.<br />
Government plans to build a new international airport have<br />
been halted, limiting the competition for Fumisa. Alternative<br />
options, including infrastructure projects to reduce traffic saturation<br />
at AICM, continue to be considered. Government<br />
officials estimate that additional capacity for AICM will not<br />
be needed until 2009; which is after the <strong>2006</strong> maturity of the<br />
Certificates.<br />
The International Airport of México City (AICM) is México's<br />
most active airport. Financial operations remain adequate<br />
and 2004 passenger traffic increased by approximately<br />
6% from the previous year.<br />
Rating Outlook<br />
The stable outlook reflects <strong>Moody's</strong> expectations that operating<br />
profile will remain sustainable for the duration of the Certificados.<br />
What Could Change the Rating - UP<br />
Substantially higher than forecasted improvement in passenger<br />
traffic and revenues.<br />
What Could Change the Rating - DOWN<br />
Significant declines in passenger traffic, especially international<br />
travel.<br />
• 73 •
Interlink Roads Pty Ltd<br />
Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A2<br />
Credit Strengths<br />
Interlink Roads Pty Ltd's (Interlink) key credit strengths are<br />
– Strong and predictable cash flow generated from the M5<br />
Motorway<br />
– The M5 Motorway has been fully operational since 1992<br />
with established traffic demand and stable operating profile<br />
– Certainty of toll increases, coupled with projected traffic<br />
increases, ensure steady and predictable revenue growth<br />
– Some contractual support, albeit limited, from the Roads<br />
and Traffic Authority in respect of the imposition of tolls and<br />
the establishment of competing routes<br />
– Relatively strong financial profile compared to other<br />
rated Australian toll roads<br />
– Covenants that provide some protection to financiers<br />
Credit Challenges<br />
Interlink's credit challenges are<br />
– Single-asset exposure, mitigated by the road’s relatively<br />
young age, track record of satisfactory operation, and adequate<br />
liquidity to accommodate reasonable downside events<br />
– Relatively high leverage, but consistent with other Australian<br />
infrastructure assets<br />
Rating Rationale<br />
The A2 rating on the A$540 million senior secured bank<br />
facilities of Interlink Roads Pty. Ltd. (“Interlink”) reflects the<br />
strong and predictable cash flow generated by the company,<br />
which owns the M5 Motorway (“M5”). The M5 has an established<br />
traffic history and stable operating profile. The toll<br />
road has been operational since 1992. Since this time, traffic<br />
on the road has experienced steady growth, on average, of<br />
more than 10%, and has demonstrated resilience to economic<br />
downturn.<br />
Continued increases in traffic are supported by population<br />
and employment growth, and congestion on roads in the M5<br />
corridor, especially during peak periods. Moody’s expects the<br />
traffic level to grow by 2% - 6% over the next 10 years.<br />
The company’s exposure to a single toll road asset is manageable<br />
at the A2 rating level because of the road asset’s relatively<br />
young age, and its track record of satisfactory operation.<br />
Analyst<br />
Phone<br />
Clement K. Chong/Sydney 612.9270.8108<br />
David Howell/Sydney 612.9270.8167<br />
Brian Cahill/Sydney 612.9270.8105<br />
The company will have available to it a A$13 million<br />
liquidity facility and a A$2 million overdraft facility which will<br />
alleviate any liquidity concerns at the A2 rating level. Moody’s<br />
considers the size of these facilities to be adequate to deal with<br />
reasonable potential downside events, such as the collapse of a<br />
structure. Access to these facilities is subject to satisfaction of<br />
drawdown conditions, including compliance with a “no material<br />
adverse effect” clause.<br />
Over the next five years, Moody’s expects FFO/Interest to<br />
average about 3.0 times, and Debt/EBITDA to average<br />
around 4.4 times. Interlink will be prohibited from additional<br />
borrowing without RTA consent, and as a result, its financial<br />
profile should improve further over time. These metrics position<br />
the company strongly compared to other rated Australian<br />
toll roads.<br />
Rating Outlook<br />
The Outlook on the rating is stable.<br />
What Could Change the Rating - UP<br />
Interlink’s A2 rating could come under positive rating pressure<br />
if stronger-than-expected performance resulted in a<br />
materially-improved financial profile, as indicated by the following<br />
metrics:<br />
– FFO/Interest reaching 3.5 times by <strong>2006</strong>; and<br />
– Debt/EBITDA falling to 3.5 times by the same year.<br />
In addition, Interlink must improve its liquidity profile<br />
through the retention of more available cash, thereby reducing<br />
reliance on bank liquidity facilities.<br />
What Could Change the Rating - DOWN<br />
Interlink’s A2 rating could be downgraded upon evidence of a<br />
sustained reduction in traffic – likely to be caused by the<br />
removal of the “Cash Back” policy (an event which Moody’s<br />
considers is unlikely over the medium term) and/or improvements<br />
to competing free roads not compensated by the RTA –<br />
which result in lower financial metrics as indicated by FFO/<br />
Interest of about 2 times, and Debt/EBITDA rising above 5.5<br />
times.<br />
• 74 •
International Power plc<br />
London, United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Corporate Family Rating<br />
Issuer Rating<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
B2<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
International Power plc<br />
2004 2003 2002 2001 2000<br />
EBIT Margin[1] 14.3% 14.7% 28.9% 29.4% 10.1%<br />
Adj RCF/ Net Adj Debt[2] 5.1% 15.1% 25.7% 16.4% -38.8%<br />
Adj FFO Interest Coverage[3] 2.4 2.4 3.5 2.9 -1.3<br />
Adj RCF/Capex + Investments (net of disposals)[4] 0.1 2.0 1.0 2.6 -0.6<br />
(EBIT + Associate Income + Int.Income) / Interest Expense[5] 2.2 1.8 2.6 2.2 1.9<br />
Adjusted FFO/ Net Adjusted Debt[6] 5.2% 15.2% 25.9% 16.4% -29.4%<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4]<br />
Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (EBIT + Share in Profits from Associates&JV (post interest and post tax) +<br />
Interest Income)/(Interest Expense) [6] (Funds From Operations post Working Capital + 2/3 Operating Lease Expense)/(Total Debt+ 8*OpLease Expense+Guarantees+Pension liabilities-<br />
(Cash+Marketable Securities))<br />
Opinion<br />
Credit Strengths<br />
- diverse asset base<br />
- non recourse debt financing strategy limits risk from any<br />
single project<br />
- low parent level debt<br />
Credit Challenges<br />
- significant exposure to merchant risk in the US and Australia,<br />
with the US environment currently particularly difficult<br />
- company has opportunistic business profile typical of IPP<br />
developers<br />
- parent reliant on distributions from projects to service<br />
corporate debt, subject to various tests being met<br />
- some exposure to emerging market country risk<br />
Rating Rationale<br />
International Power's Ba3 corporate family rating reflect its<br />
risk profile as an international power project developer and<br />
operator, and its financial profile with high consolidated cashflow<br />
leverage.<br />
The group has significant merchant exposure, and is also<br />
exposed to non-investment grade emerging markets. Group<br />
consolidated debt capitalisation is about 55%, whilst consolidated<br />
debt:ebitda is over 7x. Whilst consolidated debt is<br />
mostly non-recourse project finance debt, consolidated leverage<br />
remains the most meaningful measure given that future<br />
support to important projects that enter difficulties cannot be<br />
wholly discounted.<br />
The rating also incorporates some lack of clarity regarding<br />
the limits of the group’s appetite for further growth. Moody’s<br />
remains concerned about potential overstretch if the company<br />
embarks on further major acquisitions.<br />
The two notch distinction between the corporate family<br />
rating and the B2 senior unsecured ratings reflects subordination<br />
of the parent's creditors to those at the projects. Cash<br />
flows to the parent from individual projects remain speculative,<br />
as they can only be made after project debt (and in the<br />
case of the EME assets, the associated acquisition debt) is serviced<br />
and various distribution tests are met. This subordination<br />
increases default risk and reduces recovery for parent<br />
creditors, although there is some benefit from the diversity of<br />
projects.<br />
Rating Outlook<br />
The stable outlook assumes that International Power will<br />
continue a process of organic growth through investments in<br />
individual projects over time; it does not accommodate the<br />
financial impact of any significant additional acquisition.<br />
Drivers of Rating Change<br />
<strong>Moody's</strong> published a detailed analysis in September 2005<br />
indicating financial parameters that could lead to a change in<br />
rating. A ratings downgrade could follow additional acquisitions<br />
or other events that led to a material increase in consolidated<br />
debt to cash flow. A ratings upgrade could follow<br />
improvement in such ratios, together with maintenance of an<br />
appropriate balance of merchant and non-investment grade<br />
sovereign risk.<br />
Recent Developments<br />
International Power acquired, in a 70:30 partnership with<br />
Mitsui, the 1,200 MW Saltend merchant CCGT in the UK<br />
for a total consideration of £500 million. The acquisition will<br />
be funded with 55% non-recourse debt. In Australia, International<br />
Power has announced that it will enter the retail energy<br />
business in a partnership with EnergyAustralia. International<br />
Power has also announced interest in the acquisition of the<br />
merchant Drax power station in England, which currently has<br />
an enterprise value of over £2 billion.<br />
• 75 •
Iroquois Gas Transmission System, L.P.<br />
Shelton, Connecticut, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1<br />
Analyst<br />
Phone<br />
Michael G. Haggarty/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
Iroquois Gas Transmission System, L.P.<br />
2Q05 2004 2003 2002<br />
Adjusted Funds from Operations / Adjusted Debt[1] 19.7% 16.4% 13.9% 12.8%<br />
Retained Cash Flow / Adjusted Debt[1] 15.2% 13.2% 13.9% 12.8%<br />
Common Dividends / Net Income Available for Common 58.5% 56.1% 0.0% 0.0%<br />
Funds from Operations + Adjusted Interest / Adjusted Interest[2] 3.59 3.26 3.01 2.88<br />
Adjusted Debt / Adjusted Capitalization[1][3] 54.4% 57.5% 60.9% 64.2%<br />
Net Income Available for Common / Common Equity 9.2% 7.8% 11.5% 11.2%<br />
[1] Adjusted Debt reflects 8x adjustment for operating leases and preferred stock [2] Interest is adjusted to reflect the inclusion of capitalized interest, preferred dividends and 1/3x operating<br />
leases [3] Adjusted Capitalization reflects Adjusted Debt<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of Iroquois Gas Transmission are:<br />
- Strategic position providing gas to the New York City<br />
market<br />
- Adequate debt service coverage ratios on senior notes<br />
- Financially strong partners including TransCanada Pipelines,<br />
Keyspan, and Dominion<br />
- Majority of long-term firm service contracts are in place<br />
until at least 2011<br />
- Firm service contracts represent virtually 100% of capacity<br />
Credit Challenges<br />
The credit challenges of Iroquois Gas Transmission are:<br />
- Eastchester extension project was delayed and over budget,<br />
although is now fully operational<br />
- Iroquois made a $20 MM cash call on its partners in 2003<br />
to cover project cost overruns, although dividends to partners<br />
are again being paid<br />
- Contingent liabilities and litigation relating to undersea<br />
cable damage<br />
- Material weaknesses in internal control disclosed in financial<br />
statement reporting<br />
Rating Rationale<br />
Iroquois Gas Transmission System, L.P. (“Iroquois”) is a 412-<br />
mile interstate natural gas pipeline running from upstate New<br />
York to Long Island, and recently extended to the Bronx. The<br />
pipeline is owned by subsidiaries of TransCanada Pipelines<br />
(44.5%), Dominion Resources (24.7%), Keyspan (20.4%),<br />
New Jersey Resources (5.5%), and Energy East (4.9%). The<br />
pipeline system provides firm transportation service of 1,237<br />
MDth/d and has operated since 1992. At 12/31/04, approximately<br />
49% of Iroquois' existing pipeline firm reserved capacity<br />
was contracted to affiliates of the five owning partners.<br />
Iroquois is rated Baa1 (senior unsecured, stable outlook).<br />
The Eastchester extension from Long Island to the Bronx<br />
was placed into service on February 5, 2004, with five shippers<br />
contracting for service on the expansion for all of the 230<br />
MDth/d available. It has among the lowest gas delivery costs<br />
to NYC, a high percentage of firm service under long-term<br />
contract, and a solid shipper profile with most rated investment<br />
grade, although a few shippers have had their credit ratings<br />
lowered in recent years. Potential long-term challenges<br />
could come from high-voltage lines fed by low-cost coal-fired<br />
plants outside NYC that could affect future demand for gasfired<br />
electric generation.<br />
Because of delays in obtaining construction authorizations<br />
and permits and additional delays caused by a number of incidents<br />
that occurred during construction of the Eastchester<br />
extension, costs increased from an estimated $210 million to<br />
$334 million, although the final total could be reduced by<br />
insurance proceeds. The increase was financed by withholding<br />
dividends to its partners in 2002 and 2003, a $20 million<br />
cash call on the partners made in 2003, and postponement of<br />
capex related to the Athens plant in upstate New York.<br />
The construction incidents caused damage to undersea<br />
cables owned by LIPA, CL&P, and NYPA. The LIPA/CL&P<br />
incident was settled earlier this year with insurance proceeds.<br />
Iroquois is still involved in potential litigation with NYPA,<br />
with NYPA asserting a claim for approximately $25.4 million,<br />
although Iroquois believes there is adequate insurance available<br />
to cover this claim as well.<br />
Iroquois maintains a $10 million, 364-day revolving credit<br />
to support working capital requirements and, as of June 30,<br />
2005, there were no outstandings under this facility.<br />
Iroquois disclosed two material weaknesses in internal controls<br />
in its 2005 financial statements, one related to the presentation<br />
of income taxes and the other related to a change in<br />
accounting principle related to municipal property taxes. As a<br />
result, financial statements for 2002, 2003, and 2004 have<br />
been restated.<br />
Rating Outlook<br />
The stable outlook reflects the pipeline's strategic position in<br />
providing gas to the New York City market, the expectation<br />
that shipper quality will be stable going forward, and the<br />
anticipated continued strong support provided by the Iroquois<br />
partners. The outlook also considers that the Eastchester<br />
Expansion project has been completed and has 74% of its<br />
capacity contracted through 2013.<br />
What Could Change the Rating - UP<br />
An improvement in the credit quality of the pipeline's shippers<br />
or partners, favorable resolution of pending litigation,<br />
the successful and profitable operation of the Eastchester<br />
extension, improved cash flow.<br />
What Could Change the Rating - DOWN<br />
Deterioration in the credit quality of either the pipeline’s<br />
shippers or partners, the incurrence of additional debt to<br />
finance pipeline expansions, a significant increase in competitive,<br />
low cost power in the region, or if Iroquois incurs any<br />
significant liability from the remaining litigation which is not<br />
covered by insurance.<br />
• 76 •
Juniper Generation, L.L.C.<br />
Houston, Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit Strengths for Juniper are:<br />
-Cash flows are sourced from revenues derived from longterm<br />
contracts with two investment grade utilities at 9 different<br />
QFs<br />
-While Juniper is a holding company, structural subordination<br />
is mitigated as virtually all of the debt is at the Juniper<br />
level and there is a prohibition on additional subsidiary debt<br />
-All plants have a seasoned track record with good operating<br />
performance<br />
-Debt amortization is front-end loaded, thereby improving<br />
Juniper's financial profile in the last few years of this 10 year<br />
financing when SRAC related risk may be higher;<br />
-QFs represent a core component of California's electric<br />
supply;<br />
Credit Challenges<br />
Credit Challenges for Juniper are:<br />
-Concentration counterpart risk exists as 8 of the power<br />
plants sell power under long-term contract to PacGas<br />
-Potential for energy margin compression due to the<br />
uncertainty surrounding the CPUC's determination of<br />
SRAC. California regulatory decisions surrounding SRAC are<br />
likely to be highly contentious<br />
-Consolidated leverage is high, particularly when factoring<br />
in Juniper's incurrence of $60 million of subordinated debt.<br />
-Collateral package is somewhat weakened by the fact that<br />
Juniper has a controlling interest in 4 of the 9 facilities;<br />
-While the debt has been sized to produce higher than normal<br />
base case coverages for an investment grade project, cash<br />
flow volatility could occur depending upon the outcome of<br />
the SRAC proceedings<br />
-Each of the facilities must maintain its QF status in order<br />
for the PPA's to remain intact. Three of the steam hosts have<br />
the ability to unilaterally terminate their steam contract<br />
before the expiration of their respective PPA.<br />
Rating Rationale<br />
The Baa3 rating for Juniper Generation, LLC (Juniper)<br />
reflects the predictable source of cash flow expected to be<br />
generated from energy and capacity payments received from 9<br />
separate PPAs with investment grade off-takers, Pacific Gas<br />
and Electric Company (PacGas: Baa1 Issuer Rating; Stable<br />
Outlook) and Southern California Edison Company (SCE:<br />
Baa1 Issuer Rating; Stable Outlook).<br />
The rating also considers the importance of these Qualifying<br />
Facilities (QFs) to the current and future power supply in<br />
California. QFs currently provide more than 20% of the electricity<br />
generated in California. In light of the relatively tight<br />
electric supply in the state, the challenges that companies face<br />
in building in-state generation and transmission, the year-toyear<br />
volatility associated with the region's reliance on hydro<br />
resources, and the expectation for higher than normal<br />
demand growth, <strong>Moody's</strong> believes that the QFs will remain<br />
an integral part of the state's electric supply over the life of<br />
this financing.<br />
The Baa3 rating also incorporates that structural subordination<br />
related risks are mitigated as virtually all of the debt<br />
issued at the underlying projects have been paid off. Of the<br />
nine projects wholly-owned or partially owned by Juniper,<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
only $11.6 million of debt at the Badger Creek project, owned<br />
50% by Juniper, is outstanding and it is scheduled to be<br />
repaid in June <strong>2006</strong>. The rating considers the strong and predictable<br />
historical operating and financial performance of<br />
these projects, the highly tested and proven technology of this<br />
fleet, and the track record of Delta Power, the operator.<br />
The Baa3 rating considers the potential for energy margin<br />
compression beginning after July <strong>2006</strong> that could follow the<br />
California Public Utilities Commission's determination of<br />
short-run avoided costs (SRAC). <strong>Moody's</strong> expects the SRAC<br />
process to be contentious with the utilities seeking to lower<br />
the compensation paid for energy under these contracts to the<br />
lowest possible level and the QFs seeking to have an energy<br />
price mechanism that minimizes any margin compression. An<br />
overriding theme that should benefit the QFs position is the<br />
importance of these assets to the overall resource supply mix<br />
in California given the relatively tight regional supply and the<br />
challenges to build additional energy infrastructure in the<br />
state. Notwithstanding this core strength, <strong>Moody's</strong> believes<br />
that the compensation scheme that ultimately results from the<br />
SRAC negotiations will likely be set at a level that is lower<br />
than the current energy margin enjoyed by Juniper, and that<br />
QFs owners will likely see their energy margins gradually<br />
compress over time as more efficient generating units are<br />
brought on-line in the region. <strong>Moody's</strong> believes that the debt<br />
has been sized and the amortization has been shaped to reflect<br />
this uncertainty as base case debt service coverage ratios of<br />
senior debt average 1.68 times after <strong>2006</strong>.<br />
Juniper is a holding company for 9 gas-fired cogeneration<br />
projects in California with a net equity interest of 298 MWs, a<br />
related O&M service company, WCAC Operating Company<br />
California LLC and a related fuel supply services company,<br />
WCAC Gas Services, LLC. ArcLight Energy Partners Fund<br />
II, a fund managed by ArcLight Capital Partners, owns 90%<br />
of the equity interests in Juniper and the remaining 10% is<br />
held by Delta Power Company, LLC (Delta Power).<br />
Rating Outlook<br />
The rating outlook is stable reflecting the predictability of<br />
cash flows anticipated from the projects, particularly through<br />
<strong>2006</strong>, as the projects have largely locked in their energy margin<br />
with the utilities under the transition formula.<br />
What Could Change the Rating - UP<br />
Limited rating upside potential exists given the uncertainty<br />
surrounding the outcome of SRAC and the high degree of<br />
leverage that exists at Juniper. However, over the longer term,<br />
the rating of Juniper could be upgraded if the issuer were able<br />
to demonstrate sustainable coverages that are significantly<br />
higher than projected in its base case and there is less uncertainty<br />
about the potential for lower pricing under SRAC.<br />
What Could Change the Rating - DOWN<br />
The rating of Juniper could be lowered if substantial debt<br />
were to be added at the project level causing the Juniper debt<br />
to become structurally subordinated, if the outcome of SRAC<br />
severely compresses Juniper's energy margin, if the operating<br />
performance of more than one of the projects materially deteriorates,<br />
or if one of the projects were to lose its QF status.<br />
• 77 •
Kern River Funding Corporation<br />
Houston, Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Bkd Senior Unsecured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A3<br />
A3<br />
Credit Strengths<br />
• Firm long-term gas transportation service agreements and<br />
levelized rates throughout the contract period underpin a stable<br />
cash flow profile.<br />
• Significant portion of transportation rates (comprised of<br />
reservation and commodity fees) represent fixed demand<br />
charges, which shippers must pay regardless of monthly<br />
throughput; however, Kern River has historically operated at<br />
a very high load factor, assuring recovery of commodity<br />
related revenues also.<br />
• Access to low-cost gas supply, principally from the Rockies,<br />
with growing gas demand in the Southwest.<br />
• Strong and growing demand in end markets.<br />
• Strong projected debt service coverages, even under<br />
stressed conditions.<br />
Credit Challenges<br />
• Average shipper profile ratings (for both existing and expansion<br />
shippers) has declined.<br />
• Debt is supported by a single asset pipeline.<br />
• Declining level of shipper contracts in the later years of<br />
the project.<br />
Rating Rationale<br />
<strong>Moody's</strong> rates the Series A and Series B Senior Notes of Kern<br />
River Funding Corporation (KRFC) A3. The notes are guaranteed<br />
by Kern River Gas Transmission Company (KRGT), a<br />
Texas general partnership held indirectly by MidAmerican<br />
Energy Holdings Company (Baa3 sr. unsec.). The A3 rating<br />
reflects improved post-expansion project economics and the<br />
pipeline’s highly competitive position and strong market fundamentals.<br />
KRGT’s capacity is over 90% subscribed through<br />
2012 and 85% subscribed through 2018, providing a predictable<br />
revenue stream that largely supports the notes through<br />
maturity. As the capacity charges are ship-or-pay, debt service<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
coverage ratios remain at around 1.5x assuming that no volumes<br />
are shipped.<br />
Kern River's rating also considers the deterioration in the<br />
underlying average shipper credit rating. About 43% of its<br />
shippers are non-investment grade (on a weighted average<br />
capacity basis) compared to 17% at the time of the bank loan<br />
financing for the expansion. If some or all of the shippers<br />
were to default, their contracted capacity potentially could be<br />
exposed to market pricing and resale. However, <strong>Moody's</strong><br />
believes that because of the pipeline's strategic location and<br />
its competitive supply to market transportation cost, even if it<br />
were to lose one or more shippers, these volumes could be<br />
replaced with other shippers. Furthermore, all shippers with<br />
non-investment grade ratings have re-established credit with<br />
one-year letters of credit or cash collateral to protect capacity<br />
positions.<br />
The pipeline has access to several growing supply regions<br />
in Southwestern Wyoming, Western Colorado and Utah and<br />
is one of the most economic and cost-effective means of<br />
transporting gas to growing demand areas including Las<br />
Vegas, Salt Lake City and Southern California.<br />
Rating Outlook<br />
The stable rating outlook reflects the firm shipper agreements<br />
and the pipeline’s favorable strategic and competitive<br />
position.<br />
What Could Change the Rating - UP<br />
Improving debt service coverages and higher contracted levels<br />
in the latter years could potentially support a higher credit<br />
profile.<br />
What Could Change the Rating - DOWN<br />
Ratings could be negatively pressured if the pipeline is unable<br />
to recontract or replace shipper contracts due to defaulted<br />
shipper profiles or increased competition from other interstate<br />
pipelines.<br />
• 78 •
Kincaid Generation, L.L.C.<br />
Richmond, Virginia, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
The credit strengths for Kincaid include:<br />
• Long-term PPA and coal supply agreement in effect with<br />
investment grade counterparty<br />
• <strong>Project</strong> appears to be performing well both operationally<br />
and financially<br />
• Operating costs appear under control and within annual<br />
budget forecasts<br />
• Consistency in maintaining coverage metrics<br />
Credit Challenges<br />
The credit challenges for Kincaid include:<br />
• Debt Service Reserve account funded with equity subscription<br />
agreement from Dominion Energy with a backstop<br />
from Dominion Resources<br />
• Majority of environmental expenditures complete, but<br />
uncertainty over additional compliance mandates may create<br />
incremental cost pressures<br />
• Merchant exposure subject to longer-term uncertainties,<br />
post 2013<br />
Rating Rationale<br />
Kincaid Generation, LLC's debt rating (Baa3 senior secured)<br />
reflects the stability provided by a 15-year power purchase<br />
agreement (PPA, which has another 8-years remaining) and<br />
coal supply agreement (CSA) with Exelon Generation (Baa1<br />
senior unsecured) and the solid investment grade characteristics<br />
of the project developer - Dominion Energy, Inc., a subsidiary<br />
of Dominion Resources, Inc. (Baa1 senior unsecured)<br />
The rating also incorporates the reliance on cash flow generated<br />
by a single asset to service its debt obligations and the<br />
exposure to fluctuations in the market price of power following<br />
expiration of the 1998 PPA in 2013.<br />
Analyst<br />
Phone<br />
James Hempstead/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
The PPA passes all fuel risk onto Exelon, as well as recovery<br />
of future environmental-related costs. Approximately<br />
50% of the bonds are expected to amortize over the life of the<br />
PPA and debt service coverage ratios should average 1.5<br />
times. After the PPA expires, the project will operate on a<br />
merchant basis selling electricity into the PJM regional grid.<br />
Rating Outlook<br />
The stable rating outlook reflects the strong economics of the<br />
project, primarily attributable to the 15-year PPA with Exelon<br />
Generation. In addition, the project appears to be operating<br />
more efficiently than its historical performance, based on the<br />
average heat rate and availability factors, which produces<br />
incremental revenues related to a heat rate guarantee. The<br />
Kincaid facility has been operating ahead of plan, but will<br />
experience some near-term pressures associated with a<br />
planned outage for maintenance. The facility is in full compliance<br />
with all EPA air quality standards regarding its NOX,<br />
SOX and other emissions.<br />
What Could Change the Rating - UP<br />
The financing around the Kincaid project was structured in a<br />
manner to provide some downside protection while maintaining<br />
approximately 1.5x debt service coverage. Although financial<br />
adjustments that increase the coverage metrics would be<br />
viewed positively, given the structure of the transaction, a rating<br />
upgrade appears unlikely over the near term.<br />
What Could Change the Rating - DOWN<br />
Financial or operational stress associated with the generation<br />
facility, unexpected environmental mandates or fuel supply<br />
problems and negative counterparty credit issues could pressure<br />
the ratings.<br />
• 79 •
Lane Cove Tunnel <strong>Finance</strong> Company<br />
Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
Lane Cove Tunnel <strong>Finance</strong> Company (LCT)'s credit<br />
strengths are:<br />
• LCT's strong position as the only potential non-congested<br />
transport link between the two existing motorway<br />
standard roads connecting the fast growing suburbs of North<br />
Western Sydney to the Sydney CBD.<br />
• Free flow of traffic assisted by collection of tolls at highway<br />
speeds.<br />
• Low patronage risk and manageable construction risk.<br />
• Certainty of toll increases - tolls may increase in line with<br />
CPI.<br />
• Low business risk with predictable and well-contained<br />
operating costs.<br />
• Strong covenants and significant reserve accounts provide<br />
protection to bond holders.<br />
Credit Challenges<br />
LCT's credit challenges are:<br />
• Bondholders are exposed to the risk of performance by<br />
the construction contractors.<br />
• Bondholders are exposed to construction risk<br />
• Complex corporate structure.<br />
• Relatively low debt service coverage ratios (DSCR) forecast<br />
in the early years.<br />
• Highly aggressive financial structure with substantial<br />
equity distributions made during the project life, subject to<br />
meeting DSCR covenants.<br />
Rating Rationale<br />
The Aaa rating of the bonds reflects the guarantee from<br />
MBIA (which is rated Aaa for its claims paying ability) in<br />
favour of the holders of those bonds. The underlying Baa3<br />
senior secured rating reflects LCT's low traffic risk as the<br />
tunnel will connect two motorways and relieve traffic congestions<br />
on present roads. In addition operating risk is expected<br />
to be low once the project has completed construction, and<br />
bond holders will benefit from a tight covenant package.<br />
Analyst<br />
Phone<br />
Clement K. Chong/Sydney 612.9270.8108<br />
David Howell/Sydney 612.9270.8167<br />
Brian Cahill/Sydney 612.9270.8105<br />
The Baa3 rating also takes into account that bondholders<br />
will bear construction risk. This is mitigated by the experience<br />
of the construction consortium (Thiess and Transfield),<br />
financial support form Leighton Holdings, sufficient financial<br />
reserves and coupon payments pre funded for the first 38<br />
months.<br />
The construction of the LCT is currently underway. Key<br />
construction milestones – including design and excavation<br />
work – are progressing as anticipated in all material aspects.<br />
The construction is also on budget. The tunnel remains on<br />
track for completion on time by end-<strong>2006</strong>.<br />
Rating Outlook<br />
The outlook for both ratings is stable<br />
What Could Change the Rating - UP<br />
<strong>Moody's</strong> does not expect an opportunity will arise for the rating<br />
to be upgraded prior to the completion of construction.<br />
Post-completion, a faster-than-expected ramp-up in traffic –<br />
leading to better financial ratios – could lead to an upward<br />
reassessment of the rating. However, <strong>Moody's</strong> would likely<br />
wait to see at least 12-18 months of traffic performance and,<br />
at the same time, no material construction defect emerges.<br />
What Could Change the Rating - DOWN<br />
A downgrade of MBIA's Aaa rating would result in a downgrade<br />
of the Aaa rating on the wrapped debt. LCT's underlyig<br />
rating could come under pressure during the construction<br />
period if the project experienced significant delays in construction<br />
or construction cost overruns – due to weather,<br />
industrial action, geological or technical issues, or any other<br />
problems which adversely impact the design and construction<br />
contractors’ ability to complete construction within the contract<br />
price and on time.<br />
Post-construction, a significantly slower ramp-up in traffic<br />
volumes, or the emergence of material construction defects<br />
which impact traffic flow or require more funding to be<br />
raised, could exert downward pressure on the underlying rating.<br />
• 80 •
LS Power Funding Corporation<br />
Charlotte, North Carolina, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Negative<br />
Baa3<br />
Credit Strengths<br />
Credit strengths of LS Power are:<br />
1. Highly reliable fixed capacity payments cover debt service<br />
regardless of dispatch.<br />
2. Contractual offtakers are investment grade rated utilities.<br />
3. Adequate liquidity provided by letter of credit facilities<br />
that provide for working capital loans.<br />
Credit Challenges<br />
Credit challenges of LS Power are:<br />
1. Operating performance and debt service coverage ratios<br />
are below expectation.<br />
2. Financial condition of gas suppliers has deteriorated.<br />
3. <strong>Project</strong>s have experienced recurring forced outages due<br />
to turbine-related problems.<br />
Rating Rationale<br />
The Baa3 senior secured rating of LS Power Funding Corporation<br />
(LSP) reflects the competitive power costs of the company’s<br />
projects, market-based gas contracts that are tightly<br />
linked to the fuel index in the power contracts, and reliable<br />
fixed capacity payments.<br />
The rating also recognizes debt service coverage ratios that<br />
are below forecast.<br />
The rating for LSP considers the weakened financial condition<br />
of the project’s gas suppliers, Dynegy Marketing and<br />
Trade, a wholly-owned subsidiary of Dynegy Holdings, Inc.<br />
and Aquila Energy & Marketing, a wholly-owned subsidiary<br />
of Aquila, Inc. Moody’s notes however that the cost of gas to<br />
the project is primarily index-based and recovered through<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Laura Schumacher/New York<br />
Daniel Gates/New York<br />
rates paid by the utility offtakers. Therefore, the risks relating<br />
to failure by either supplier to provide gas services are not<br />
severe as long as the projects are able to obtain new fuel supply<br />
at commercially equivalent terms.<br />
Cottage Grove and Whitewater both had debt service coverage<br />
ratios of approximately 1.6 times in 2003 compared to<br />
1.4 times in 2002. Cottage Grove's debt service coverage<br />
ration for the twelve-month period ended September 30,<br />
2004 however was below the minimum 1.2 times required for<br />
distributions. Its lower-than-expected financial performance<br />
was driven by expenses associated with a 2Q'04 planned outage,<br />
lower dispatch levels and an increased use of cash associated<br />
with changes in working capital. This financial metric is<br />
expected to improve to approximately 1.4 times by year-end<br />
2005.<br />
Rating Outlook<br />
The rating outlook is negative reflecting Cottage Grove's relatively<br />
weak financial performance for its rating category.<br />
Continuing shortfalls in financial performance could have<br />
negative rating implications.<br />
What Could Change the Rating - UP<br />
Strong financial performance over the near term would likely<br />
lead to a revision in the rating outlook.<br />
What Could Change the Rating - DOWN<br />
LSP’s rating could be downgraded if the projects continue to<br />
experience poor financial results. The rating could also be<br />
pressured if the projects were required to obtain new fuel supply<br />
and commercially equivalent terms were unavailable.<br />
• 81 •
LSP Energy Limited Partnership<br />
Batesville, Mississippi, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
B1<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
Credit Strengths<br />
Credit strengths of LSP Energy include:<br />
• Off-taker credit quality is strong<br />
• Contracted revenues provide cash flows for debt repayment<br />
through 2015<br />
• Cash funded debt service reserve<br />
Credit Challenges<br />
Credit challenges of LSP Energy include:<br />
• Chronic weak operating performance at the plant has<br />
lowered LSP Energy’s Debt Service Coverage Ratio (DSCR)<br />
from the original expectations<br />
• Plant operates in the overbuilt SERC market<br />
• Bondholders are exposed to merchant risk after 2015<br />
• Limited track record of Complete, the new owner.<br />
Rating Rationale<br />
The B1 senior secured rating for LSP Energy Limited Partnership's<br />
(LSP Energy) and LSP Batesville Funding Corporation<br />
(LSP Batesville) incorporates the historically weak<br />
operating performance at the plant, an expectation of better<br />
financial performance beginning in mid-2005, and the<br />
improvement in credit quality following the assignment of all<br />
of Aquila Inc.'s contractual obligations to South Mississippi<br />
Electric Power Association (SMEPA), a rural electric generation<br />
and transmission (G&T) cooperative.<br />
Under the terms of this assignment, which became effective<br />
on February 28th, SMEPA assumed all of Aquila's<br />
responsibilities under this power purchase agreement (PPA)<br />
with LSP Energy through the current expiry date of the PPA<br />
in 2015. SMEPA has an all-requirements contract to deliver<br />
power to its distribution cooperative members and the output<br />
from LSP Energy is an integral component of SMEPA's<br />
owned and contracted generating resources. While <strong>Moody's</strong><br />
does not rate SMEPA's debt, based upon a review of information<br />
that includes SMEPA's historical and projected financials,<br />
and the low business risk associated with G&T<br />
cooperatives, we believe that LSP Energy will benefit from a<br />
substantially stronger credit counterparty following the<br />
assignment of the contract.<br />
The rating also considers the May 18th assignment and<br />
novation of Virginia Electric Power Company's (VEPCO: A3<br />
senior unsecured) rights under its PPA with LSP Energy to J.<br />
Aron & Company (J. Aron), a subsidiary of The Goldman<br />
Sachs Group, Inc. (Goldman Sachs). J. Aron's payment obligation<br />
under the PPA is unconditionally guaranteed by Goldman<br />
Sachs (Aa3 sr uns debt).<br />
While the rating recognizes the credit strength of the two<br />
off-takers through 2015, J.Aron (guaranteed by Goldman<br />
Sachs) for 65% of the capacity and SMEPA for the remaining<br />
35%, the rating is principally capped by the weak operating<br />
performace that has persisted at LSP Energy during 2002,<br />
2003 and, to a lesser extent, during 2004. Expected improvements<br />
in operating performance and a higher contracted tariff<br />
under the J. Aron PPA should begin to show up in financial<br />
results during 2005 and <strong>2006</strong>, but financial results will remain<br />
below original project expectations. <strong>Moody's</strong> expects the<br />
DSCR for LSP Energy to remain below 1.2x for the foreseeable<br />
future.<br />
The rating also considers the ownership and day-to-day<br />
operation of LSP Energy and LSP Batesville by affiliates of<br />
Complete Energy Holdings, LLC (Complete), a newly<br />
formed private company. While the operating performance of<br />
LSP Energy is showing slow but steady improvement, Complete<br />
has owned LSP Energy for about a year.<br />
LSP Energy is limited partnership that owns and operates a<br />
837 megawatt natural gas-fired plant located in Batesville,<br />
Mississippi. LSP Batesville is a funding corporation whose<br />
sole purpose was to act as a co-issuer of the bonds. Liquidity<br />
for the bonds is provided by a six-month cash funded debt<br />
service reserve.<br />
Rating Outlook<br />
The stable rating outlook for LSP Energy and LSP Batesville<br />
reflects the expected improvement in operating and financial<br />
results during 2005 and <strong>2006</strong> due to better plant performance<br />
and the higher capacity payment under the PPA with J.Aron.<br />
What Could Change the Rating - UP<br />
A upgrade could occur if the operating and financial performance<br />
at LSP Energy improves on a sustained basis, including<br />
the maintenance of an annual DSCR that exceeds 1.20x<br />
on a consistent basis. Uncertainties to be considered in any<br />
rating action include the limited operating record of Complete,<br />
LSP Energy's indirect owner, and the longer-term merchant<br />
risk challenges that the project faces after 2015 when all<br />
three PPAs with LSP Energy expire.<br />
What Could Change the Rating - DOWN<br />
The rating on LSP Energy could fall if the operating performance<br />
of the project should weaken causing DSCR's to fall<br />
below 1.10x on a consistent basis.<br />
• 82 •
Machadinho Energética S.A. - MAESA<br />
Florianopolis, Brazil<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Subordinate -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Analyst<br />
Phone<br />
Richard Sippli/Sao Paulo 55.11.3443.7444<br />
Benedito Oliveira/Sao Paulo<br />
Daniel Gates/New York 1.212.553.1653<br />
Credit Challenges<br />
The credit challenges for Machadinho Energética S.A.<br />
("Maesa") are:<br />
• The indenture that documents the guarantees to the<br />
debenture issue does not have sufficient provisions to ensure<br />
that the guarantors make the payment on the day that Maesa<br />
is obligated to make payment, in case it defaults.<br />
• The cyclical nature of the aluminum and cement business,<br />
which concentrate the activities of the principal guarantors<br />
and shareholders.<br />
• The limited disclosure provided by the most important<br />
guarantors. Audited financial statements are available on an<br />
annual basis.<br />
Credit Strengths<br />
The credit strengths for MAESA are:<br />
• The collective credit strength of the most important<br />
guarantors of Maesa's debenture issue.<br />
• The Machadinho hydroelectric facility is part of the vertical<br />
production process of the major shareholders. It concentrates<br />
the long-term supply of power, a strategic raw material<br />
to aluminum producers (54% of the energy off-take) and to<br />
cement producers (9.5%).<br />
• The energy from Machadinho has a very competitive cost<br />
for its shareholders.<br />
• The lease contracts are valid at least until the total payment<br />
of the obligations relative to the debenture issue and<br />
ensure regular lease payments to Maesa even if one or more<br />
of the lessees do not meet its lease payment obligations.<br />
• The debenture holders have a put option against the<br />
BNDES (rated A3 local currency), with effective sale on Feb.<br />
01, 2005.<br />
Rating Rationale<br />
Maesa is a special purpose company (SPC) which was created<br />
to construct the Machadinho Hydroelectric Plant (Machadinho).<br />
The Machadinho plant is located between the states of<br />
Santa Catarina and Rio Grande do Sul (southern region),<br />
with installed capacity of 1,140MW. Its last turbine (out of<br />
three) became operational in July 2002, eight months ahead<br />
of the original schedule. MAESA is controlled by eight shareholders,<br />
that, together with Tractebel (Gerasul before privatization)<br />
were granted a 35-year renewable concession for the<br />
project in 1997. The assets of the Machadinho plant are<br />
83.06% owned by MAESA and 16.94% owned by Tractebel.<br />
Maesa's shareholders and their respective participation in the<br />
company's capital are: Alcoa Alumínio, 27.2%; Cia. Brasileira<br />
de Alumínio - Votorantim Group, 29.1%; Cimento Rio<br />
Branco - Votorantim Group, 5.9%; Valesul Alumínio, 8.8%;<br />
Camargo Corrêa Cimentos, 5.6%; Departamento Municipal<br />
de Eletricidade, 2.9%; Celesc, 14..6% and CEEE, 5.9%.<br />
MAESA´s portion of the Machadinho plant is leased to its<br />
eight shareholders/lessees, who are entitled to a portion of the<br />
assured energy, in the same proportion of their participation<br />
in the Machadinho plant.<br />
Rating Outlook<br />
The stable rating outlook reflects the sustained credit<br />
strength of the industrial company lessees in a weak economic<br />
environment, due to local market pricing power and increased<br />
exports.<br />
What Could Change the Rating - UP<br />
Less uncertainty with regard to the collective credit strength<br />
of the lessees and the regulatory model for the Brazilian electricity<br />
sector.<br />
What Could Change the Rating - DOWN<br />
The deterioration in the collective credit strength of the lessees<br />
or conditions in the electricity market that decrease the<br />
economic attractiveness of the project off take to the lessees.<br />
Recent Developments<br />
During the first quarter of 2004, operations at the Machadinho<br />
plant were substantially affected by one of the most serious<br />
droughts in the history of Brazil’s southern region, which<br />
caused Maesa’s reservoir to drop to a record-low level. However,<br />
according to information provided by the company, the<br />
reservoir level has recovered and currently stands at approximately<br />
46% of its capacity. Moody’s notes that the energy offtake<br />
of Maesa’s shareholders’ is contractually guaranteed even<br />
in the event of less than full capacity operation at the<br />
Machadinho plant, in which case the company buys electricity<br />
in the spot market to make up the difference.<br />
• 83 •
Merey Sweeny Coker <strong>Project</strong><br />
Bartlesville, Oklahoma, United States<br />
Ratings and Contacts<br />
Category<br />
Merey Sweeny, L.P.<br />
Outlook<br />
Bkd Senior Unsecured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
John Diaz/New York<br />
Credit Strengths<br />
— Strategically important project to ConocoPhillips as part<br />
of the integrated economics of the Sweeny refinery.<br />
— Beneficiary of growing heavier sour crudes and longterm<br />
widening of light/heavy differentials.<br />
— Structural supports including payment waterfall and several<br />
pro-rata cash calls on partners.<br />
— Relatively low ongoing capital requirements beyond<br />
maintenance spending.<br />
Credit Challenges<br />
— Relatively high financial leverage and high payout of distributable<br />
cash.<br />
— Crude supply disruptions highlight Venezuelan delivery<br />
and political risk.<br />
— Risk of supply disruptions and the several, not joint,<br />
nature of support obligations exert a negative impact on the<br />
rating.<br />
Rating Rationale<br />
<strong>Moody's</strong> upgraded MSLP's senior note rating to Baa2 from<br />
Baa3 on November 7, 2005, concurrently with the upgrade of<br />
the senior long-term debt of 50%-owner ConocoPhillips to<br />
A1 from A3. MSLP's debt is not guaranteed by COP, but it is<br />
strongly linked to COP as a 50%-owned project joint venture<br />
operated by COP and sited at its flagship refinery at Sweeny,<br />
Texas. MSLP's Baa2 rating upgrade reflects its linkage to<br />
COP, both operationally and financially, but also the single<br />
asset nature of the project, its elevated financial leverage, and<br />
the political and financial risks associated with MSLP's 50%<br />
indirect owner, Petroleos de Venezuela (PDVSA, rated B2<br />
foreign currency).<br />
COP's Sweeny refinery is a complex refinery with crude<br />
processing capacity of about 275,000 bpd. COP, under a longterm<br />
supply agreement with PDVSA, purchases up to<br />
165,000 bpd of heavy sour Merey crude and processes it to<br />
produce long-residue. MSLP's principal assets are a 58,000<br />
bpd delayed coker and a 110,000 bpd vacuum unit. The<br />
MSLP project is optimized to run Merey crude and derives a<br />
fee (paid by COP) to process the long residue into lighter<br />
high value products. The processing fee, which is structured<br />
to provide a floor support to cover project debt service and<br />
operating expenses, shifts market price risk on the crude to<br />
PDVSA, but only for Venezuelan volumes delivered.<br />
The rating factors in favorably MSLP's strategic importance<br />
to COP and the unit's physical/economic integration<br />
with the Sweeny refinery. The project also benefits from<br />
structural features that help mitigate high financial leverage,<br />
high expected ongoing distributions, and the impact of shifting<br />
light/heavy differentials on the processing fee. Structural<br />
features include a payment waterfall that covers operating<br />
expenses and debt service before distributions; a several prorata<br />
obligation of each partner to make mandatory cash calls<br />
to cover operating expenses to the extent there is a cash shortfall<br />
below the specified floor level; and a put/call option to/by<br />
COP upon default by either sponsor. That option triggers a<br />
pledge of COP's equity in the project to secure project debt.<br />
MSLP is experiencing markedly stronger earnings and cash<br />
flow in 2005 as light/heavy crude differentials affecting the<br />
processing fees have widened. Its book equity has also been<br />
somewhat bolstered, despite high levels of partner distribution.<br />
Utilization and Merey crude deliveries are also at high<br />
levels. While Merey crude deliveries have returned to full<br />
rates since the PDVSA strike of late 2002-early 2003 and<br />
there is little economic motivation to interfere with the deliveries,<br />
the strike and President Chavez's threats to cut off<br />
crude supplies to the U.S. highlight continuing project exposure<br />
to Venezuelan supply risk as well as to PDVSA's several,<br />
but not joint, financial obligations. MSLP achieved financial<br />
completion in May 2004, releasing COP and PDVSA from<br />
pre-completion joint and several guarantees of project debt<br />
service.<br />
What Could Change the Rating - UP<br />
The single asset nature of the project and high leverage and<br />
distributions limit ratings upside.<br />
What Could Change the Rating - DOWN<br />
Sustained supply disruptions in Merey crude or continued<br />
decapitalization arising from poor operating performance and<br />
high distributions could be factors in future ratings downgrades.<br />
Recent Developments<br />
<strong>Moody's</strong> has applied its new rating methodology for government<br />
related issuers (GRIs) to Merey Sweeny, L.P. to assess<br />
the potential impact of PDVSA's 50% ownership in the joint<br />
venture. (Please refer to <strong>Moody's</strong> Rating Methodology entitled<br />
"The Application of Joint Default Analysis to Government-Related<br />
Issuers," dated April 2005, and its<br />
accompanying press release.) Our analysis considered Merey<br />
Sweeny's baseline credit assessment combined with PDVSA's<br />
B1 local currency issuer rating. Application of the GRI methodology<br />
does not change Merey Sweeny's debt rating, primarily<br />
because while there are low levels of dependence between<br />
MSLP and PDVSA, we also imputed a low level of support<br />
from PDVSA in the event of a default by MSLP.<br />
• 84 •
Metronet Rail BCV <strong>Finance</strong> Plc<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Bkd Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Aaa<br />
Metronet Rail BCV Holdings Limited<br />
31-Mar-04<br />
EBIT Margin (before G'will Amort'n)[1] 15.4%<br />
Adjusted RCF/ Net Adjusted Debt[2] 55.5%<br />
Adjusted FFO Interest Coverage[3] 4.0<br />
Adjusted RCF/Capex + Investments (net of disposals)[4] 30.0%<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Chetan Modi/London<br />
Stuart Lawton/London<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) - No adjustment for underfunded pension liabilities included<br />
pending outcome of regulatory price review [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex<br />
- Sale of Tangible Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Credit Strengths<br />
1. Fixed index linked revenue from a UK local authority<br />
2. Terms of the senior debt provides protection in a downside<br />
scenario<br />
3. Financial underpinning of senior debt in a Service Contract<br />
termination scenario<br />
Credit Challenges<br />
1. Complex contractual interface with LUL which is taking<br />
time to settle down<br />
2. Challenging asset upgrade programme in a complicated<br />
operating environment<br />
3. Complex sub contracting framework<br />
Rating Rationale<br />
The Baa3 rating reflects (1) the fixed indexed revenue paid by<br />
a UK local authority to Metronet Rail BCV Limited<br />
(“BCV”), (2) the complexities of the LUL public private partnership,<br />
(3) the challenging asset upgrade and renewal programme<br />
which is experiencing some problems, (4) BCV’s<br />
moderate debt leverage which will increase over the next 6<br />
years, and (5) the Service Contract termination provisions<br />
which underpin senior debt and the senior debt structural<br />
enhancements.<br />
BCV's revenue is sized to cover its operating costs and a<br />
significant percentage of its capital expenditure over the next<br />
6 years. The revenue is provided by London Underground<br />
Limited (guaranteed by Transport for London - unrated)<br />
which benefits from a supportive legal and financial framework.<br />
However, the revenue can be reduced materially if<br />
BCV fails to deliver pre agreed asset upgrades, and more<br />
moderately if BCV fails to provide the Central, Bakerloo,<br />
Victoria, and Waterloo & City line infrastructure on an ongoing<br />
basis.<br />
BCV is to perform services in accordance with a complex<br />
contractual framework and deliver a substantial asset upgrade<br />
programme on a live operating railway in accordance with<br />
demanding codes. Although the Service Contract should provide<br />
certain protections through the concept of an Economic<br />
and Efficient Infraco and the Periodic Reviews, the quasi regulatory<br />
framework is novel and the PPP Arbiter’s role is yet to<br />
be tested.<br />
BCV has a challenging asset upgrade programme. To date,<br />
the task of getting all programmes running to their demanding<br />
timetables has proved a challenge. The re-railing programme<br />
is currently behind schedule, as is the station upgrade<br />
programme, which remains the subject of certain disagreements<br />
with LUL. The Victoria Line Upgrade programme<br />
which is in its early stages is proceeding largely to plan, but<br />
remains dependent on the performance of Bombardier (Ba2,<br />
negative outlook) to deliver this.<br />
BCV currently has low debt leverage which will increase<br />
materially prior to the first Periodic Review as the capital<br />
expenditure programme ramps up. However, given its revenue,<br />
BCV will remain less leveraged than a more typical UK<br />
PFI/PPP transaction, but by the time of the first Periodic<br />
Review, will have more leverage than usual for an investment<br />
grade infrastructure borrower rated by Moody’s.<br />
The senior debt benefits from a number of structural features<br />
including restrictions on distributions to shareholders, a<br />
prohibition on non core activities, and a requirement to keep<br />
cash in a number of reserve accounts. Furthermore, in the<br />
event of termination of the Service Contract for BCV default,<br />
LUL would need to make a payment to BCV in an amount at<br />
least equivalent to 95% of the senior debt amounts outstanding.<br />
Without this later underpinning, BCV’s business and<br />
financial profile would merit a high speculative grade rating.<br />
Rating Outlook<br />
This reflects BCV’s current financial position and solid<br />
liquidity, and the lack of near term factors that could result in<br />
serious financial difficulties. While BCV is currently slipping<br />
behind its targets for upgrading assets, these delays are not yet<br />
at a stage, nor are they sufficiently large, that they could result<br />
in significant deductions to revenue or give rise to circumstances<br />
that could result in termination of the Service Contract.<br />
However, failure of management to address the current<br />
shortcomings would eventually see BCV incur significant revenue<br />
deductions and risk punitive action by LUL under the<br />
Service Contract.<br />
What Could Change the Rating - UP<br />
Substantial delivery of the Victoria Line Upgrade on time and<br />
to budget and a proven record of delivering the station<br />
upgrade programme without significant deductions to revenue<br />
would warrant a ratings uplift.<br />
What Could Change the Rating - DOWN<br />
Any developments that made it probable that the Victoria<br />
Line Upgrade was likely to be substantially late or not meet<br />
specification, or the incurrence of substantial revenue deductions<br />
through the failure to deliver the stations upgrade programme.<br />
• 85 •
Metronet Rail SSL <strong>Finance</strong> Plc<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Bkd Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Aaa<br />
Metronet Rail SSL Holdings Limited<br />
31-Mar-04<br />
EBIT Margin (before G'will Amort'n)[1] 15.1%<br />
Adjusted RCF/ Net Adjusted Debt[2] 166.4%<br />
Adjusted FFO Interest Coverage[3] 5.3<br />
Adjusted RCF/Capex + Investments (net of disposals)[4] 56.6%<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Chetan Modi/London<br />
Stuart Lawton/London<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) - No adjustment for underfunded pension liabilities included<br />
pending outcome of regulatory price review [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex<br />
- Sale of Tangible Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Credit Strengths<br />
1. Fixed index linked revenue from a UK local authority<br />
2. Terms of the senior debt provides protection in a downside<br />
scenario<br />
3. Financial underpinning of senior debt in a Service Contract<br />
termination scenario<br />
Credit Challenges<br />
1. Complex contractual interface with LUL which is taking<br />
time to settle down<br />
2. Challenging asset upgrade programme in a complicated<br />
operating environment<br />
3. Complex sub contracting framework<br />
Rating Rationale<br />
The Baa3 rating reflects (1) the fixed indexed revenue paid by<br />
a UK local authority to Metronet Rail SSL Limited (“SSL”),<br />
(2) the complexities of the LUL public private partnership,<br />
(3) the challenging asset upgrade and renewal programme<br />
which is experiencing some problems, (4) SSL’s moderate debt<br />
leverage which will increase over the next 6 years, and (5) the<br />
Service Contract termination provisions which underpin<br />
senior debt and the senior debt structural enhancements.<br />
SSL's revenue is sized to cover its operating costs and a significant<br />
percentage of its capital expenditure over the next 6<br />
years. The revenue is provided by London Underground<br />
Limited (guaranteed by Transport for London - unrated)<br />
which benefits from a supportive legal and financial framework.<br />
However, the revenue can be reduced materially if SSL<br />
fails to deliver pre agreed asset upgrades, and more moderately<br />
if SSL fails to provide the Metropolitan, District or Circle<br />
line infrastructure on an ongoing basis.<br />
SSL is to perform services in accordance with a complex<br />
contractual framework and deliver a substantial asset upgrade<br />
programme on a live operating railway in accordance with<br />
demanding codes. Although the Service Contract should provide<br />
certain protections through the concept of an Economic<br />
and Efficient Infraco and the Periodic Reviews, the quasi regulatory<br />
framework is novel and the PPP Arbiter’s role is yet to<br />
be tested.<br />
SSL has a challenging asset upgrade programme. To date,<br />
the task of getting all programmes running to their demanding<br />
timetables has proved a challenge. The station upgrade<br />
programme, which remains the subject of certain disagreements<br />
with LUL, is materially behind programme. Although<br />
significant work on upgrading the train and signaling systems<br />
has not yet commenced, SSL remains dependent on the performance<br />
and strength of Bombardier (Ba2, negative outlook)<br />
to deliver this significant capital programme.<br />
SSL currently has low debt leverage which will increase<br />
materially prior to the first Periodic Review as the capital<br />
expenditure programme ramps up. However, given its revenue,<br />
SSL will remain less leveraged than a more typical UK<br />
PFI/PPP transaction, but by the time of the first Periodic<br />
Review, will have more leverage than usual for an investment<br />
grade infrastructure borrower rated by Moody’s.<br />
The senior debt benefits from a number of structural features<br />
including restrictions on distributions to shareholders, a<br />
prohibition on non core activities, and a requirement to keep<br />
cash in a number of reserve accounts. Furthermore, in the<br />
event of termination of the Service Contract for SSL default,<br />
LUL would need to make a payment to SSL in an amount at<br />
least equivalent to 95% of the senior debt amounts outstanding.<br />
Without this later underpinning, SSL’s business and<br />
financial profile would merit a high speculative grade rating.<br />
Rating Outlook<br />
The stable outlook reflects SSL’s current financial position<br />
and solid liquidity, and the lack of near term factors that could<br />
result in serious financial difficulties. While SSL is currently<br />
slipping behind its targets for upgrading assets, these delays<br />
are not yet at a stage, nor are they sufficiently large, that they<br />
could result in significant deductions to revenue or give rise<br />
to circumstances that could result in termination of the Service<br />
Contract. However, failure of management to address the<br />
current shortcomings would eventually see SSL incur significant<br />
revenue deductions and risk punitive action by LUL<br />
under the Service Contract.<br />
What Could Change the Rating - UP<br />
The rating will not be eligible for up-lift until the Metropolitan<br />
Line and District Line Upgrades are advanced and progressing<br />
towards delivery and the Stations upgrade<br />
programme is being delivered without significant deductions<br />
to revenue or substantial cost overrun.<br />
What Could Change the Rating - DOWN<br />
Any developments that made it probable that the Metropolitan<br />
Line and District Line Upgrades were likely to be substantially<br />
late or not meet specification, or the incurrence of<br />
substantial revenue deductions through the failure to deliver<br />
the stations upgrade programme.<br />
• 86 •
MidAmerican Energy Holding Co.<br />
Des Moines, Iowa, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Preferred Shelf<br />
Northern Electric Distribution Ltd<br />
Outlook<br />
Issuer Rating<br />
Northern Electric plc<br />
Outlook<br />
Issuer Rating<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
Baa3<br />
(P)Ba2<br />
Stable<br />
A3<br />
Stable<br />
Baa1<br />
MidAmerican Energy Company<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
A3<br />
Senior Unsecured<br />
A3<br />
Subordinate Shelf<br />
(P)Baa1<br />
Preferred Stock<br />
Baa2<br />
Commercial Paper P-1<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
MidAmerican Energy Holding Co.<br />
2004 2003 2002 2001<br />
Adj. FFO / Debt[1][2] 10.3% 10.5% 7.2% 8.4%<br />
Adj. RCF / Debt[2] 10.3% 10.5% 7.2% 8.4%<br />
Adj. Div / NI (Payout) 0.0% 0.0% 0.0% 0.0%<br />
Adj. FFO / Interest[1][3] 2.36 2.30 2.03 1.99<br />
Adj. Debt / Cap[2][4] 80.3% 81.1% 83.9% 81.6%<br />
Adj. NI / Equity (ROE) 5.7% 15.0% 16.6% 8.4%<br />
[1] Adjusted FFO deducts all annual payments for preferred securities [2] Adjusted debt includes trust preferred securities, 8x next year's operating lease expenses (excluding railcar leases),<br />
and synthetic leases [3] Adjusted interest includes all payments for preferred securities and synthetic lease payments [4] Adjusted capitalization includes adjusted debt, preferred securities<br />
and equity, but excludes deferred taxes<br />
Opinion<br />
Credit Strengths<br />
• Diversified geographic and business operations provide a<br />
varied cash flow stream.<br />
• Large bulk of debt levels consists of non-recourse debt<br />
and also includes $1.5 billion of trust preferred securities<br />
issued to Berkshire Hathaway, which are subordinate to<br />
senior debt, have deferral provisions and are non-transferable<br />
by Berkshire.<br />
• Ownership and business organizational structure provides<br />
degree of financial and operational flexibility.<br />
• US utility operates in a constructive regulatory environment<br />
in Iowa and Illinois.<br />
Credit Challenges<br />
• High consolidated leverage as a result of acquisition activity.<br />
• Large capital expenditure requirements at MEC in the<br />
next several years for generation construction.<br />
Rating Rationale<br />
The Baa3 senior unsecured long term debt rating of<br />
MidAmerican Energy Holdings Company (MEHC) is supported<br />
by the quality of cash flows from its regulated and<br />
non-regulated platforms. However, the rating also considers<br />
the large parent debt burden resulting from debt-financed<br />
acquisitions.<br />
Regulated subsidiaries, including MEC, the UK distribution<br />
companies (Northern Electric and Yorkshire Electricity)<br />
and the pipeline businesses Kern River Gas Transmission<br />
Company (KRGT) and Northern Natural Gas (NNG), provide<br />
for lower business risk and more stable cash flow. In<br />
addition, MEHC owns CE Generation LLC, which holds a<br />
portfolio of US geothermal and gas generation projects, and<br />
also owns geothermal projects and a hydroelectric facility in<br />
the Philippines. MEHC’s main shareholder is Berkshire<br />
Hathaway.<br />
On May 26, 2005, Moody’s affirmed the ratings of MEHC<br />
and the rating outlook remained positive. This action followed<br />
the announcement that MEHC plans to acquire Pacifi-<br />
Corp (PacifiCorp, Baa1 senior unsecured) from Scottish<br />
Power plc (SP, Baa1 senior unsecured) for $9.4 billion, including<br />
$5.1 billion in cash and the assumption of about $4.3 billion<br />
of net debt of PacifiCorp.<br />
This affirmation considers <strong>Moody's</strong> expectation that a significant<br />
portion of the $5.1 billion in cash will be funded<br />
through a substantial equity contribution to MEHC from its<br />
major shareholder Berkshire Hathaway Inc. While the precise<br />
amount and terms of the equity contribution from Berkshire<br />
Hathaway are not known at this stage, the rating affirmation<br />
incorporates <strong>Moody's</strong> expectation that it will be sufficient to<br />
at least support the current ratings.<br />
Rating Outlook<br />
The positive rating outlook on MEHC was maintained post<br />
the announcement of the company’s plans to acquire Pacifi-<br />
Corp because it reflects <strong>Moody's</strong> view that the acquisition will<br />
have long-term positive benefits for MEHC. The transaction<br />
has the potential for increased diversification and stability of<br />
MEHC's sources of earnings and cash flow from regulated<br />
utility operations. The transaction is also expected to result in<br />
an organization with a more diversified customer base, service<br />
territory and generation portfolio. The positive outlook also<br />
considers MEHC's successful track record in operating other<br />
regulated utility businesses.<br />
What Could Change the Rating - UP<br />
The ratings could go up one notch if the credit metrics as calculated<br />
by <strong>Moody's</strong> were to improve to those consistent with<br />
utility companies in the Baa2 (senior unsecured) ratings category.<br />
For example, the ratio of funds from operations (FFO)<br />
to debt, on an adjusted basis, would need to improve from the<br />
current 12-13% range to the 15-16% range; and the ratio of<br />
FFO to interest, as adjusted, would need to improve from the<br />
current 2.4-2.8x range to about the 3.5x level on a sustainable<br />
basis, while maintaining a relatively low risk business profile.<br />
What Could Change the Rating - DOWN<br />
It is unlikely that the ratings of MEHC would be downgraded,<br />
under the assumption that the acquisition will be predominantly<br />
funded with equity.<br />
• 87 •
Monterrey Power, S.A. de C.V.<br />
Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for Monterrey Power are:<br />
- Unconditional lease payment obligations of Comisión<br />
Federal de Electricidad (CFE)<br />
- Debt obligations rank parri-passu with CFE's senior<br />
unsecured debt<br />
- Strong government support<br />
Credit Challenges<br />
Credit challenges for Monterrey Power are:<br />
- National efforts to reform the electric sector<br />
- Considerable level of capital expenditures for CFE<br />
- CFE's reliance on government subsidies<br />
- Large underfunded pension plan<br />
Rating Rationale<br />
The Baa2 senior secured debt rating of Monterrey Power,<br />
S.A. de C.V.'s (Monterrey Power) is based on the unconditional<br />
lease payment obligations of Comisión Federal de<br />
Electricidad (CFE), the Mexican national utility. The lease<br />
obligations rank pari-passu with all CFE unsecured indebtedness.<br />
The Baa2 rating reflects the importance of Monterrey<br />
Power as a generating resource and the critical role that CFE<br />
plays in the Mexican electric market. The rating recognizes<br />
CFE's interlocking relationship with the Mexican government<br />
(Local currency rating of Baa1; Foreign Currency Rating<br />
of Baa1) and the degree of subsidy provided by the<br />
Mexican government for electric service. CFE implemented a<br />
rate increase in 2002 in an effort to address the sizeable government<br />
subsidy that exists for electricity. The impact on cash<br />
flow resulting from the rate increase has been moderate and<br />
no further rate increases have been proposed.<br />
The Baa2 rating also incorporates the challenges facing<br />
CFE and the Mexican government as it attempts to entice<br />
third party international capital to support this growth. The<br />
rating further considers the growing amount of debt that will<br />
need to be refinanced by CFE over the next few years and the<br />
marketplace uncertainty that exists around reforming the<br />
electric sector.<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
A key rating consideration remains the progress in approving<br />
electric legislation which is broadly intended to spur<br />
investment in electric generation and infrastructure. Energy<br />
demand is expected to increase by 5.6% on average in the<br />
near to medium term. The current electric reform proposal<br />
remains a key policy objective of the Fox administration and a<br />
primary agenda item at each national assembly. However, it<br />
remains to be approved by governmental representatives of<br />
the divergent political parties. Under the proposal, currently<br />
contested among various public entities, CFE would continue<br />
to provide electricity to small end-users and would continue<br />
to transmit and distribute power throughout the country.<br />
Large end-users would be free to purchase power from independent<br />
private firms.<br />
Monterrey Power is a special purpose corporation established<br />
under Mexican law to arrange the design, construction,<br />
and financing of a combined cycle, dual fuel capable GT-24<br />
power plant. The plant is operated by CFE through a lease<br />
arrangement. With provisional acceptance attained, CFE is<br />
required to make quarterly debt service payments to the trust<br />
covering interest and principal at maturity.<br />
CFE is Mexico's principal state electric generation, transmission<br />
and distribution company.<br />
Rating Outlook<br />
The stable outlook incorporates the strong interlocking relationship<br />
between the government of Mexico and CFE balanced<br />
against the need to raise capital to meet demand as well<br />
as the need, at some point, to fund unfunded pension obligations.<br />
What Could Change the Rating - UP<br />
An improvement in CFE's credit metrics. Clarity around the<br />
plans to restructure the electric sector. Solid, satisfactory<br />
progress in the country's economic progress and credit profile.<br />
What Could Change the Rating - DOWN<br />
Deterioration in CFE's credit metrics. Changes in the electric<br />
sector that negatively impact CFE's credit quality.<br />
• 88 •
NAV CANADA<br />
Ottawa, Ontario, Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa3<br />
• 89 •<br />
Analyst<br />
Phone<br />
Allan McLean/Toronto 1.416.214.1635<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
NAV CANADA<br />
[1]LTM 2004 2003 2002<br />
Revenues (excluding transfers from Rate Stabilization Reserve)[2] $1,068,799 $1,004,612 $899,295 $874,688<br />
Rate Stabilization Account[2] $6,095 ($32,513) ($116,046) ($19,000)<br />
Funds from Operation/Adjusted Debt[3] 7.7% 6.2% -0.4% -0.7%<br />
(Funds from Operation+Interest)/Interest 2.44x 2.00x 0.93x 0.87x<br />
Adjusted Debt/Capitalization 99.8% 98.8% 98.8% 98.6%<br />
[1] Twelve months ended February 28, 2005 [2] In thousands [3] Debt excludes defeased QTE capital lease obligations and includes debt equivalent of operating leases<br />
Opinion<br />
Recent Developments<br />
The Aa3 ratings of NAV CANADA (NAV) reflect the application<br />
of Moody’s new rating methodology for governmentrelated<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled<br />
“Rating Government-Related Issuers in the Americas Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of<br />
the GRI rating methodology to corporate issuers in the<br />
Americas.<br />
Credit Strengths<br />
-Virtual monopoly/legislated ability to set and charge rates<br />
-Return to positive balance in Rate Stabilization Account<br />
(RSA) with commitment to re-establish $50 million RSA by<br />
August 2008<br />
-Increase in service charges in September 2004<br />
-Gradual recovery in air traffic<br />
-Effective cost-control and strong collection history (with<br />
the exception of a $1.6 million receivable from Jetsgo)<br />
-Rate covenant, amortization requirements & additional<br />
indebtedness test<br />
-Strong liquidity including cash funded reserves<br />
Credit Challenges<br />
-Increased pension funding – likely mitigated by strong<br />
liquidity/access to capital markets<br />
-Continued success in cost reduction constrained by largely<br />
fixed cost nature of air navigational services<br />
-Continuing high fuel cost could restrain pace of air traffic<br />
recovery<br />
-Potential acts of terrorism/SARs-like epidemics could hurt<br />
global air passenger growth<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
Aa3 ratings of NAV reflect the combination of the following<br />
inputs:<br />
-Baseline credit assessment of 2 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
-Aaa local currency rating of the Government of Canada<br />
-Low dependence<br />
-Low support<br />
The baseline credit assessment is underpinned by NAV’s<br />
status as a not-for-profit, non-share capital corporation established<br />
under the Civil Air Navigation Services Commercialization<br />
Act (“ANS Act”). Under the ANS Act, NAV<br />
CANADA owns and operates the Canadian civilian air navigation<br />
infrastructure with the exclusive right to provide civil<br />
air navigation services. NAV CANADA’s debt is secured and<br />
supported solely by the revenue stream generated by the company<br />
through the provision of air navigation services in Canada<br />
and the security interest in the reserve funds required<br />
under the Master Trust Indenture (MTI); there is no implicit<br />
or explicit support from the Government of Canada.<br />
The baseline credit assessment also reflects i) NAV CANADA’s<br />
virtual monopoly in providing civil air navigation services; ii) its<br />
legislated ability to establish and levy rates and charges to meet its<br />
financial requirements; iii) the protections provided by the MTI<br />
including the rate covenant as well as the debt amortization and<br />
reserve fund requirements; iv) NAV CANADA’s strong liquidity<br />
including $693 million committed credit facilities ($610 million<br />
available at end of H1/05), cash balance of approximately $80 million<br />
and $349 million of cash funded reserves as at February 28,<br />
2005; v) management’s commitment to re-establish the RSA to a<br />
$50 million liability by 2008; and vi) the rate increase implemented<br />
during 2004 in part to offset the expected closure of the QTE window.<br />
The company applied a combination of credit exposure caps,<br />
shorter payment terms and service denial to record a near 100%<br />
collection rate in FYE 2004. The baseline credit assessment also<br />
reflects the risk that continuing high aviation fuel cost and/or<br />
potential acts of terrorism could dampen the air travel market.<br />
Going forward, Moody’s considers it unlikely that the company<br />
will be able to replicate its past success in reducing costs on the<br />
same scale given the largely fixed cost nature of NAV CANADA’s<br />
operating expense structure.<br />
Low dependence reflects NAV’s operational and financial<br />
independence from the Government of Canada.<br />
Low support reflects Moody’s view that while the Federal<br />
Government has a keen interest in the continued operation of<br />
the country’s air navigation system, it neither owns NAV nor<br />
has any obligation to provide financial assistance to it. Furthermore,<br />
it is unlikely that a default by NAV would cause a<br />
significant disruption in service that might prompt some form<br />
of Federal Government response.<br />
Rating Outlook<br />
The rating outlook is stable based on Moody’s expectations of<br />
NAV’s willingness and ability to set rates as required to cover<br />
its costs<br />
What Could Change the Rating - UP<br />
-Substantial and sustained improvement in air traffic volumes<br />
combined with the recovery of cumulative operating shortfalls<br />
and the rebuilding of the RSA to $50 million by 2008<br />
What Could Change the Rating - DOWN<br />
-Any sustained deterioration in air traffic<br />
-Failure to progress toward stated goal of rebuilding the<br />
RSA to $50 million by 2008<br />
-Any inability to renew “war and allied risks” coverage currently<br />
provided by the Government of Canada
NATS (En Route) PLC<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Johan Verhaeghe/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
NATS (En Route) PLC<br />
Mar-2004 Mar-2003 Mar-2002<br />
EBIT Margin[1] 24.5% 16.4% 5.2%<br />
Adj RCF / Net Adj Debt[2] 13.6% 8.8% 3.8%<br />
Adj FFO Interest Coverage[3] 2.6 2.0 1.6<br />
Adj RCF / Capex + Investments (net of disposals)[4] 1.1 1.6 0.7<br />
(EBIT + Int.Income) / Interest Expense[5] 2.1 1.1 0.2<br />
Adjusted FFO / Net Adjusted Debt[6] 13.6% 8.8% 3.8%<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) - No adjustment for underfunded pension liabilities included<br />
pending outcome of regulatory price review [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex<br />
- Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (EBIT + Interest Income)/(Interest Expense) [6] (Funds From Operations post Working Capital + 2/3 Operating Lease Expense)/<br />
(Total Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities))<br />
Opinion<br />
Recent Developments<br />
The Underlying Rating of NATS (En Route) plc (“NERL”)<br />
reflects the application of Moody’s new rating methodology<br />
for government-related issuers (“GRIs”). Please refer to<br />
Moody’s Rating Methodology entitled “The Application of<br />
Joint Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release.<br />
Please also refer to Moody’s Special Comment entitled “Rating<br />
Government-Related Issuers in European Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of the<br />
GRI rating methodology to corporate issuers in Europe.<br />
Credit Strengths<br />
• Monopoly provider of UK en-route air traffic control<br />
• Nature of ownership should provide strategic stability<br />
• Financial covenant package mitigates event risk<br />
Credit Challenges<br />
• Relatively young regulatory framework<br />
• Material capital upgrade programme involving new technologies<br />
and software system development<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> GRI methodology, the rating of<br />
NERL reflects the combination of the following inputs, (a) a<br />
Baseline Credit Assessment of 4, (b) the Aaa local currency<br />
rating of the Government of the United Kingdom, (c) low<br />
Dependence, and (d) low Support. The Baseline Credit<br />
Assessment of NERL reflects (1) NERL' role as the monopoly<br />
provider of en-route air traffic control in the UK, (2) the<br />
potential revenue variability and relatively new regulatory<br />
framework, (3) its challenging asset upgrade programme, and<br />
(4) its relatively high debt leverage, which is somewhat mitigated<br />
by the financial indenture protections. NERL has a particular<br />
exposure to North America / Europe air travel and so<br />
significantly more revenue volatility than most UK regulated<br />
utilities. However, revenue volatility has been mitigated by<br />
the current regulatory charging framework which allows<br />
NERL to charge more for services on a risk sharing basis if<br />
volumes fall. Nevertheless, the regulatory framework is relatively<br />
new. The recently published CAA proposals for the 5<br />
year regulatory period from Jan <strong>2006</strong> suggests a continuation<br />
of the current supportive regulatory features. One of NERL's<br />
key tasks will be upgrading systems to deal with significantly<br />
higher traffic volumes in a safe environment. This will require<br />
new technologies, creating challenging project management<br />
and cost overrun risks. NERL bears a significant degree of<br />
debt leverage, which is generally higher than most UK regulated<br />
utilities rated by Moody’s. However, the impact of this<br />
debt burden is somewhat mitigated by the terms of NERL’s<br />
debt documentation, which, among other things, restricts the<br />
payment of dividends and requires the maintenance of certain<br />
cash reserve accounts. Low Dependence recognises that nondomestic<br />
factors have a material impact on NERL, e.g. propensity<br />
for international travelers to visit the UK by air and<br />
the substantial amount of air traffic that transits trough<br />
NERL controlled airspace. Low Support reflects the modest<br />
likelihood that the Government of the United Kingdom<br />
would step in to meet NERL payments on a timely basis, but<br />
does reflect Government's 49% ownership of NERL's parent,<br />
NERL's strategic role, and Government's track record of<br />
contributing to a financial restructuring of NERL. Nevertheless,<br />
NERL is financed and regulated as a stand-alone company<br />
with the expectation that shareholders and creditors<br />
bear the risks and rewards of investing in the business.<br />
Rating Outlook<br />
The outlook is stable. Given low Dependence and low Support,<br />
the primary driver of the Underlying Rating is the Baseline<br />
Credit Assessment. The stable outlook reflects Moody’s<br />
expectation that the regulatory settlement for the 5 year<br />
period commencing Jan <strong>2006</strong> will be at least as supportive as<br />
the current framework and will not result in increased financial<br />
risk. Moody’s will review the CAA’s proposals in conjunction<br />
with NERL’s financial plans as they evolve throughout<br />
2005.<br />
What Could Change the Rating - UP<br />
A successful implementation of the capex programme and<br />
expectations of faster than anticipated de-leveraging over the<br />
next regulatory period would warrant a ratings uplift.<br />
What Could Change the Rating - DOWN<br />
A more aggressive regulatory settlement that created more<br />
revenue risk or reduced base revenues would put downwards<br />
pressure on the rating. Furthermore, any refinancing that<br />
materially reduced the current financial protections would<br />
have a downwards impact on the rating.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 90 •
N.V. Luchthaven Schiphol<br />
Amsterdam, Netherlands<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured MTN -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa3<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Johan Verhaeghe/London<br />
Stuart Lawton/London<br />
N.V. Luchthaven Schiphol<br />
2004 2003 2002 2001<br />
EBIT Margin (before G'will Amort'n)[1] 28.3% 29.3% 29.1% 31.6%<br />
Adj RCF/ Net Adj Debt[2] 35.4% 32.4% 33.9% 28.7%<br />
Adj FFO Interest Coverage[3] 9.1 6.2 7.2 6.2<br />
Adj RCF/Capex + Investments (net of disposals)[4] 1.0 0.8 0.8 0.6<br />
Adjusted Debt / Enplaned Passenger (in currency amount)[5] € 46.9 € 51.2 € 36.0 € 36.2<br />
Total Airport Revenues / Enplaned Passenger (in currency amount) € 40.0 € 41.9 € 37.1 € 34.3<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover [2] (Retained Cash Flow post Working Capital + 2/3 Operating Lease Expense)/(Total<br />
Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt-(Cash+Marketable Securities)) [3] (Funds From Operation post Working Capital + Cash Interest Expense)/Interest Expense [4]<br />
Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments) [5] (Total Debt+ 8*OpLease Expense+Guarantees+Off-balance sheet debt-<br />
(Cash+Marketable Securities))/(Total passengers*0.5)<br />
Opinion<br />
Recent Developments<br />
The rating of N.V. Luchthaven Schiphol ("Schiphol") reflects<br />
the application of Moody’s new rating methodology for government-related<br />
issuers (“GRIs”). Please refer to Moody’s<br />
Rating Methodology entitled “The Application of Joint<br />
Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release. Please also<br />
refer to Moody’s Special Comment entitled “Rating Government-Related<br />
Issuers in European Corporate <strong>Finance</strong>” for a<br />
detailed discussion of the application of the GRI rating methodology<br />
to corporate issuers in Europe.<br />
Credit Strengths<br />
• Ownership of substantially all of the airport capacity in<br />
the Netherlands<br />
• Relatively low debt levels and good debt coverage metrics<br />
• Moderate capital expenditure programme<br />
Credit Challenges<br />
• Exposure to Air France KLM and future route development<br />
of the combination<br />
• Relatively high exposure to transfer traffic<br />
• Certain operational constraints limit ability to exploit<br />
physical capacity<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> GRI methodology, the rating of<br />
Aa3 reflects the combination of the following inputs, (a) a<br />
Baseline Credit Assessment of 3, (b) the Aaa local currency<br />
rating of the Government of the Kingdom of the Netherlands,<br />
(c) low Dependence, and (d) medium Support.<br />
The Baseline Credit Assessment of 3 reflects (1) Schiphol's<br />
ownership of the fourth largest airport in Europe (Amsterdam<br />
Airport) and other Netherlands airports, (2) its good debt<br />
coverage and reasonable financial flexibility, (3) its relatively<br />
high exposure to transfer traffic and reliance on Air France<br />
KLM, and (4) its moderate capital expenditure programme,<br />
which is somewhat counteracted by certain operational constraints<br />
which may constrain the pace of volume growth.<br />
Schiphol's Baseline Credit Assessment is considered well<br />
positioned in the 3 category. The low Dependence recognises<br />
that factors other than domestic economic performance have<br />
a material impact on Schiphol, e.g. propensity for international<br />
travelers to visit the Netherlands, the propensity for<br />
passengers to spend at the airports, and the success of airlines<br />
attracting transfer traffic to Amsterdam Airport. The medium<br />
Support reflects the 100% ownership by the Dutch Government<br />
and Amsterdam and Rotterdam Municipalities, which is<br />
expected to be reduced to a minimum of 51% over the<br />
medium term, and Schiphol's role as a critical component of<br />
the Netherlands' international transport network. The Dutch<br />
Government was focused on ensuring that Schiphol's position<br />
as a major aviation hub was preserved during the negotiations<br />
between Air France and KLM which evidences the importance<br />
it attaches to Schiphol. In 2004 the Dutch Government<br />
announced its intention to partially privatise Schiphol.<br />
Assuming this is approved by Parliament and enacted into<br />
law, a partial sale will occur, possibly within the next 12-18<br />
months. Nevertheless, Schiphol has been earmarked for partial<br />
privatisation for some years now, and there is a history of<br />
postponement.<br />
Rating Outlook<br />
The stable outlook recognises that Schiphol is well positioned<br />
within the 3 Baseline Credit Assessment category with a reasonable<br />
level of financial headroom for the category. This<br />
position is expected to be underpinned by the prospects of<br />
reasonable revenue growth over the medium term, a moderate<br />
capital expenditure programme which is not expected to<br />
result in substantial increases in debt, and an expectation that<br />
Schiphol will maintain a cautious approach to non core<br />
investment. Furthermore, the medium Support factor is not<br />
expected to be reduced following a sell down in Government<br />
ownership to 51%.<br />
What Could Change the Rating - UP<br />
Given that Schiphol is positioned towards the top end of the<br />
rating range for major airport companies, a material de-leveraging<br />
of Schiphol would be required to see an upwards move<br />
in the rating. This is not considered likely in the short to<br />
medium term given Schiphol's likely financial commitments.<br />
What Could Change the Rating - DOWN<br />
A reduction in FFO Interest Cover materially below 5.5 times<br />
or Adjusted RCF to Net Adjusted Debt substantially below<br />
20%, could result in a downwards move in the rating. Alternatively<br />
a debt financed significant acquisition could see<br />
downward rating pressure.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 91 •
Octagon Healthcare Funding plc<br />
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured -Dom Curr<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
- Bonds benefit from an unconditional and irrevocable financial<br />
guarantee from FSA (UK) Ltd (Aaa)<br />
- the hospital has been in operation since August 2002.<br />
- the underlying credit benefits from the stable cash flows<br />
under the <strong>Project</strong> Agreement with the Norfolk and Norwich<br />
University NHS Trust. The <strong>Project</strong> Agreement is generally<br />
more favourable to the project company than current ones<br />
- the independent technical adviser reports that performance<br />
by the project company and the FM service providers<br />
is satisfactory, with no material financial deductions<br />
Credit Challenges<br />
- the underlying credit is exposed to the lack of diversity of<br />
revenues and highly leveraged capital structure typical for a<br />
PFI financing. The minimum DSCR is projected at 1.20x<br />
- all debt issued is fixed-rate. Revenue swaps convert a portion<br />
of the index-linked revenue stream from the Trust into<br />
fixed amounts; however, about £100 million of debt remains<br />
exposed to indexation risk (essentially in a deflationary scenario)<br />
Analyst<br />
Phone<br />
Johan Verhaeghe/London 44.20.7772.5454<br />
Chetan Modi/London<br />
Stuart Lawton/London<br />
- the liability cap in the sub-contract with Serco (who provides<br />
most services) is relatively low<br />
- the project company retains responsibility for lifecycle<br />
costs; a Maintenance Reserve Account is funded on a three<br />
year look forward basis, with potentially a five year mechanism<br />
if lifecycle cost forecasts increase materially<br />
Rating Rationale<br />
The company is a UK PFI Hospital project, maintaining and<br />
providing certain non-clinical services for a general hospital<br />
in Norwich. The Aaa rating on the £306 million secured<br />
bonds reflects the unconditional and irrevocable guarantee<br />
provided by FSA (UK) Ltd (Aaa).<br />
The underlying credit is based on a long term <strong>Project</strong><br />
Agreement with the Norfolk and Norwich University NHS<br />
Trust, and the underlying rating is Baa3.<br />
Rating Outlook<br />
The stable outlook on the bonds reflects the stable outlook on<br />
the guarantor, FSA (UK) Ltd.<br />
• 92 •
Orange Cogen Funding Corporation<br />
Bartow, Florida, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
• Strong operating and financial performance.<br />
• Long-term power contracts with two highly rated Floridian<br />
utilities provide stable cash flow.<br />
Credit Challenges<br />
• Debt is supported by a single asset generating facility.<br />
• High cost of power under long-term power contracts<br />
could reduce the attractiveness of the contract if competition<br />
were to be introduced in the Florida market.<br />
• Potential variance between PPA energy revenues and fuel<br />
costs resulting from a scheduled contract gas price recalculation<br />
in 2009.<br />
Rating Rationale<br />
The Baa3 senior secured rating of Orange Cogeneration<br />
Funding Corporation (Orange Cogen), a 103 megawatt natural<br />
gas-fired cogeneration facility in Florida, reflects the<br />
project's attractive long-term power sales agreements with<br />
two Florida utilities, Florida Power Corporation (sr.sec. A2)<br />
and Tampa Electric Company (sr.sec. Baa1.); its strong operating<br />
record since its start-up in June 1995; its consistently<br />
strong financial performance; and its conventional gas-fired<br />
combined cycle technology.<br />
However, the rating also incorporates the project's singleasset<br />
risk and the relatively high cost of power under the<br />
project's power sales arrangements, which <strong>Moody's</strong> believes<br />
could be pressured should competition be introduced in the<br />
Florida market. The rating also reflects the potential variance<br />
between the project's PPA energy revenues and its fuel costs,<br />
the result of a scheduled contract gas price recalculation in<br />
2009. However, risks associated with the project's high power<br />
costs and potential fuel cost mismatch are mitigated by its<br />
strong economic profile, reflected in an average debt service<br />
coverage ratio of approximately 1.7 times since 1997.<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
The rating also recognizes the existence of regulatory out<br />
provisions in both of the project's power contracts. This risk<br />
is, however, significantly offset by a 1992 Florida Public Service<br />
Commission ruling that substantially limits the conditions<br />
under which payments to qualifying facilities may be<br />
disallowed.<br />
The project has been able to maintain QF status in 2001<br />
and 2002 after the loss of the original steam host in 2000 by<br />
installing water distillation equipment at the site during 2001.<br />
In May 2004, <strong>Moody's</strong> affirmed the Baa3 rating of Orange<br />
Cogen's senior secured notes due 2022. El Paso had<br />
announced the sale of its indirect 50% ownership interest in<br />
Orange Cogen to Northern Star Generation LLC, a joint<br />
venture of AIG Global Investment Group and Ontario<br />
Teacher's Pension Plan Board. AEP had also announced the<br />
sale of its indirect 50% ownership interest in Orange Cogen<br />
to Orange Power Holdings LP, an affiliate of The Bear<br />
Stearns Companies, Inc. As a condition of the sale as per the<br />
Indenture, the current owners must obtain either a majority<br />
of the bondholders' consent to the sale transactions or receive<br />
ratings affirmation at the current ratings level. <strong>Moody's</strong> provided<br />
such a ratings affirmation in May 2004. These sales<br />
transactions closed in July 2004.<br />
Rating Outlook<br />
The rating outlook for Orange Cogen is stable, reflecting<br />
healthy cash flow measures.<br />
What Could Change the Rating - UP<br />
An unconditional and irrevocable guarantee of debt repayment<br />
provided by a creditworthy sponsor could positively<br />
impact the rating.<br />
What Could Change the Rating - DOWN<br />
Weak operating performance at the plant, loss of QF status<br />
and/or the deterioration in the credit profiles of the two Floridian<br />
power offtakers could potentially pressure the rating.<br />
• 93 •
Petrozuata <strong>Finance</strong> Inc.<br />
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Thomas S. Coleman/New York<br />
Daniel Gates/New York<br />
Recent Developments<br />
The Ba3 rating of Petrozuata <strong>Finance</strong> Inc. reflects the application<br />
of Moody’s new rating methodology for governmentrelated<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Petrozuata include:<br />
- vast, committed heavy oil reserves<br />
- U.S. $, offshore, trustee-controlled accounts, dividend<br />
restrictions and waiver of sovereign immunity<br />
- 35-year ConocoPhillips offtake agreement if required<br />
- strong operating history<br />
Credit Challenges<br />
Credit challenges for Petrozuata include:<br />
- location in Venezuela amid socio-political unrest<br />
- operations and financial independence of PDVSA, a<br />
sponsor and supplier<br />
- unilateral imposition of a 1600% increase in royalty tax<br />
claims by the Chavez administration<br />
- greater risk of future sovereign actions which could affect<br />
the creditworthiness of the project<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Petrozuata <strong>Finance</strong> reflect the combination of the<br />
following inputs:<br />
- Baseline credit assessment of 6 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
Similar to the other three Venezuelan heavy oil projects,<br />
the baseline credit assessment of 6 primarily reflects the operating<br />
environment in Venezuela amid lingering volatility,<br />
political uncertainties and recent actions by the Chavez<br />
administration against the oil/gas industry. These factors are<br />
balanced against strong fundamental economics, continued<br />
operational improvements and increased financial flexibility<br />
at the project. During 2004 Petrozuata achieved record production<br />
and earnings levels and achieved mechanical completion<br />
on its upgrader restoration project.<br />
The operating environment in Venezuela encompasses lingering<br />
socio-political unrest and its resultant impact on the<br />
operating capacity and financial condition of entities operating<br />
within Venezuela including the unilateral imposition of a<br />
16.67% royalty tax in place of the 1% tax documented in the<br />
project's agreements. This change reduces cash flow coverage<br />
of debt service on an on-going basis. At current oil prices and<br />
production levels, the increase in royalty taxes has not prevented<br />
the project from achieving strong cash flow coverages.<br />
However, the royalty increase would become more significant<br />
to cash flow coverage if oil prices were to decline to more historic<br />
norms. In addition, the unilateral nature of the change<br />
suggests that there might be a greater risk of future sovereign<br />
actions which could affect the creditworthiness of the project.<br />
Petrozuata <strong>Finance</strong> Inc. is a financing vehicle guaranteed<br />
by parent Petrozuata C.A.. Petrozuata is a $2.4 billion integrated<br />
project in Venezuela constructed to produce, transport<br />
and upgrade heavy crude from the Orinoco belt, for export to<br />
the U.S. The project is 50.1%-owned by ConocoPhillips and<br />
49.9%-owned by PDVSA.<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the government and a default by the<br />
project. While the hydrocarbons industry is important to the<br />
Venezuelan government, the project is majority-owned by<br />
ConocoPhillips. All of its product is sold for U.S. dollars into<br />
the export markets and proceeds are paid into offshore trustee<br />
accounts.<br />
Low support reflects Moody’s opinion that the government<br />
would not be likely to step in to support the project should it<br />
incur financial difficulties.<br />
What Could Change the Rating - UP<br />
Resolution of the simmering socio-political turmoil in Venezuela,<br />
greater long term predictability of legal and tax<br />
regimes.<br />
What Could Change the Rating - DOWN<br />
A resumption of strikes, social upheaval or increased interference<br />
with the operating capacity and financial condition of<br />
PDVSA.<br />
• 94 •
Phoenix Park Gas Processors Limited<br />
Trinidad & Tobago<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A3<br />
Recent Developments<br />
The A3 rating of Phoenix Park Gas Processors Limited and<br />
Phoenix Park Funding Limited (“Phoenix Park”) reflect the<br />
application of Moody’s new rating methodology for government-related<br />
issuers (“GRIs”). Please refer to Moody’s Rating<br />
Methodology entitled “The Application of Joint Default<br />
Analysis to Government-Related Issuers”, published in April<br />
2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Phoenix Park include:<br />
- dominant market position<br />
- expansion to accommodate more NGL's from Atlantic<br />
LNG<br />
- growing margin protection from fee-based, supply-or-pay<br />
contracts<br />
- 51%-ownership by National Gas Company of Trinidad &<br />
Tobago<br />
Credit Challenges<br />
Credit challenges for Phoenix Park include:<br />
- increased leverage to fund expansions<br />
- recent problems with the Fractionation 3 expansion<br />
project; although the credit impact is unlikely to be material<br />
- significant dividends taken by the owners<br />
- dependence on fluctuating market prices<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of [issuer] reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 4 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- Baa1 local currency rating of the Trinidad & Tobago government<br />
- low dependence<br />
- high support<br />
The baseline credit assessment of 4 is underpinned by<br />
Phoenix Park’s dominant market position, proven operating<br />
efficiencies, good economics and guaranteed Conoco offtake<br />
if required. The bonds are secured by all of the stock, assets,<br />
accounts and contracts of Phoenix Park. The project is the<br />
only facility of its kind in Trinidad, processing all the natural<br />
gas of the National Gas Company of Trinidad and Tobago<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Thomas S. Coleman/New York<br />
Daniel Gates/New York<br />
("NGC") and certain NGL's from the Atlantic LNG<br />
("ALNG") facility. It is significant to Trinidad's downstream<br />
expansion plans in the petrochemical sector and other growth<br />
areas requiring natural gas ("residue gas") for either feedstock<br />
or power generation.<br />
The rating is also supported by increasing margin protection<br />
from fixed-margin, supply-or-pay contracts, continued<br />
growth in downstream dry gas demand by export industries,<br />
and adequate downside protection under stress scenarios. The<br />
Fractionation 3 expansion project undertaken to handle additional<br />
NGL volumes from ALNG trains 2 and 3 was completed<br />
recently. It increased fractionation capabilities by 37%<br />
to 46,000 bpd and storage capacity by 33%. This increases the<br />
fixed-margin, supply-or-pay component of PPGPL's revenue<br />
stream. A further expansion is already in planning stages, and<br />
would handle all the NGL’s from ALNG train 4.<br />
Phoenix Park recovers and fractionates liquids from natural<br />
gas streams to produce propane, butane and natural gasoline<br />
for export. The sponsors are NGC (51%), Conoco Phillips<br />
(39%) and Pan West Engineers and Constructors (10%).<br />
Low dependence reflects the small scale of the project relative<br />
to the overall economy of T&T, the export-oriented<br />
focus of the output products and the likelihood the plant<br />
would continue to generate significant cash flow under a scenario<br />
in which the government defaulted on its sovereign debt<br />
obligations.<br />
High support reflects Moody’s assessment of the strategic<br />
positioning of the project, the importance of the hydrocarbons<br />
industry to the T&T economy, and the 51% ownership<br />
of the project by the National Gas Company of T&T.<br />
What Could Change the Rating - UP<br />
A sustained increase in revenue and cash flow from the expansion<br />
projects, reduced dependence upon fluctuating market<br />
prices.<br />
What Could Change the Rating - DOWN<br />
The imposition of a significantly unfavorable tax regime (the<br />
tax regime is being overhauled by the current administration)<br />
affecting plant economics or continued growth in the downstream<br />
sector, substantial unfavorable movement in market<br />
prices for the project's NGL products.<br />
• 95 •
Power Receivable <strong>Finance</strong>, LLC<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Subordinate<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
B1<br />
Credit Strengths<br />
PRF's credit strengths are:<br />
-Cash flow available for debt service is provided by a fixed<br />
margin between funds received under the CDWR PPA and<br />
funds paid to J. Aron under the back-to-back Mirror PPA.<br />
-CDWR's credit quality is supported by the 2001 passage<br />
of Assembly Bill 1X, which gives CDWR the legislative<br />
authority to raise customer rates sufficient to cover CDWR's<br />
revenue requirement which includes the cost to procure<br />
power under this and other similar PPA's and CDWR's debt<br />
service costs.<br />
-Goldman Sachs Group, Inc. (GSG) guarantees both<br />
PRF's obligations to perform under its PPA with CDWR and<br />
J.Aron's obligations under the Mirror PPA.<br />
-The depth and the liquidity of the WECC market<br />
- J.Aron's ability to be able manage commodity risk<br />
- Risk of whether J. Aron can source power at or below the<br />
contractual price is borne by J. Aron<br />
-A six month maximum debt service reserve letter of credit<br />
and a $4.5 million liquidity reserve<br />
Credit Challenges<br />
PRF's credit challenges are:<br />
- A force majeure event, although unlikely, would allow the<br />
CDWR to terminate its contract with PRF<br />
-The CDWR contract could be challenged by various entities<br />
within California<br />
-Tight debt service coverage ratio of senior debt (1.05x)<br />
-The possibility that the CDWR novates the PPA to an<br />
electrical corporation<br />
Rating Rationale<br />
Power Receivable <strong>Finance</strong>, LLC’s (PRF) Baa2 senior secured<br />
rating reflects the stability and predictability of the project's<br />
cash flow, which is derived from a power purchase agreement<br />
(PPA) between PRF and California Department of Water<br />
Resources (CDWR: A2 Power Supply Revenue Bonds) that<br />
expires in 2011.<br />
The rating also considers the credit strength and energy<br />
procurement skills of J. Aron & Co. (J.Aron), a leading commodity<br />
trading firm, which has entered into a back-to-back<br />
Mirror PPA with PRF and is fully responsible for delivering<br />
the contracted electric supply to PRF in order for PRF to fulfill<br />
its contractual obligations with CDWR. J. Aron’s obligations<br />
associated with this PPA and PRF’s obligations to<br />
perform under its PPA with CDWR are guaranteed by Goldman<br />
Sachs Group, Inc. (GSG: Aa3, senior unsecured). The<br />
rating further considers the delivery flexibility under the PPA<br />
and the depth and liquidity of the WECC market.<br />
The rating also factors in the tight debt service coverage<br />
ratio of senior debt (1.05 times average) in the transaction,<br />
leaving little room for unexpected events. At the same time,<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
the rating considers the ability of CDWR to novate the contract<br />
to an electrical corporation given the improvement in<br />
the credit quality of both Southern California Edison Company<br />
and Pacific Gas and Electric Comapny. The rating considers<br />
the probability of a significant force majeure event in<br />
the western market. Such an event, believed to be remote,<br />
would give CDWR the ability to terminate its PPA with PRF,<br />
thereby jeopardizing the future receipt of cash flow from<br />
CDWR for debt repayment. The rating acknowledges the<br />
continued uncertainty concerning certain aspects of the California<br />
market, including long-term power procurement issues<br />
and whether competition will be reintroduced into the market.<br />
Additionally, PRF has a $22.1 million subordinated debt<br />
tranche (rated B1), which under certain scenarios, is the first<br />
loss position in the transaction. The B1 rating incoporates the<br />
probability that this tranche will, in all likelihood, be paid on<br />
a timely basis, but also considers the modest size of this<br />
tranche relative to the amount of the total debt which<br />
increases the severity of loss for subordinated debt holders<br />
should a loss of principal occur in the transaction.<br />
Structurally, there is a six month maximum debt service<br />
reserve letter of credit (sized at $37.1 million) available to<br />
senior debt holders and a $4.5 million liquidity reserve to<br />
meet any debt service shortfall, subject to provisions in the<br />
waterfall.<br />
PRF is a special purpose limited liability company formed<br />
by a subsidiary of Goldman Sachs Group, Inc. to securitize a<br />
PPA between J. Aron and the CDWR. The PPA was purchased<br />
by J. Aron along with other contracts from subsidiaries<br />
of Allegheny Energy Inc. on 09/15/2003.<br />
Rating Outlook<br />
The stable rating outlook reflects the high probability of<br />
expected cash flow payments from CDWR continuing as contemplated<br />
under the terms of PPA coupled with the expectation<br />
of J. Aron being able to satisfy its obligations under the<br />
Mirror PPA with PRF.<br />
What Could Change the Rating - UP<br />
Given the relatively fixed nature of the cash flow margin, the<br />
tight debt service coverage ratios in the transaction, and the<br />
uncertainty around power procurement and market reform<br />
issues in California, it is unlikely that the rating would be<br />
upgraded.<br />
What Could Change the Rating - DOWN<br />
The rating could be negatively impacted should there be a<br />
severe deterioration in CDWR's rating or if the terms of the<br />
CDWR PPA are challenged or restructured.<br />
.<br />
• 96 •
PPL Montana, LLC<br />
Billings, Montana, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
PPL Montana's credit strengths include:<br />
1. Low cost baseload coal and hydro plants with sound<br />
operating history.<br />
2. Revenue hedge provided by the hydro plants in high<br />
hydro years.<br />
3. Strong covenants and collateral package.<br />
4. Relatively strong capital structure resulting in cash flow<br />
to adjusted debt that exceeds 20%.<br />
Credit Challenges<br />
PPL Montana's credit challenges include:<br />
1. Largest off-taker recently emerged from bankruptcy and<br />
is rated speculative grade.<br />
2. A portion of revenues are exposed to merchant price risk.<br />
3. Region has substantial amount of hydro capacity which<br />
could result in greater future earnings and cash flow volatility.<br />
Rating Rationale<br />
<strong>Moody's</strong> Baa3 rating for PPL Montana's pass through trust<br />
certificates reflects PPL Montana's well running low cost<br />
facilities, PPL Corporation's operating experience and significant<br />
equity contribution and its solid financial profile. The<br />
rating, however, also reflects the merchant nature of PPL<br />
Montana's revenues, and the region’s material amount of<br />
hydro capacity which could result in lower regional wholesale<br />
power prices when hydro conditions are better.<br />
PPL Montana signed a power purchase contract with<br />
NorthWestern Corporation (Ba1 Senior Implied) for 300<br />
megawatts of around-the-clock electricity supply at $31.15<br />
per megawatt hour and 150 megawatts of on-peak supply at<br />
$34.93 per megawatt hour. The delivery term of the contract<br />
is five-years effective July 1, 2002. The contracts were<br />
affirmed by a bankruptcy court after NorthWestern filed for<br />
bankruptcy in September 2003 because of their pivotal role in<br />
meeting NorthWestern's provider of last resort obligations.<br />
Analyst<br />
Phone<br />
Scott Solomon/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
PPL Montana hedges a large portion of its remaining capacity<br />
through short and medium-term power sales.<br />
<strong>Moody's</strong> rating also reflects support provided by PPL<br />
Energy Supply, LLC (Baa2 senior unsecured, stable outlook).<br />
A subsidiary of PPL Energy Supply, LLC acts as the lender to<br />
PPL Montana under a $100 million revolving credit facility<br />
expiring December 2005, with a one year term loan option<br />
thereafter, and as the obligor under a six month rent reserve<br />
letter of credit.<br />
PPL Montana's financial performance remains strong, as<br />
evidenced by cash from operations that was in excess of 20%<br />
of total debt. Power prices in the northwest United States<br />
have risen due to increased natural gas prices in the region<br />
and a concern of low hydro conditions. PPL Montana has<br />
taken the opportunity to sell energy forward at attractive<br />
spark spreads to a group of creditworthy counterparties.<br />
<strong>Moody's</strong> expects PPL Montana to continue mitigating forward<br />
price risk through the use of such hedging strategies.<br />
Initial negotiations between PPL Montana and North-<br />
Western to extend the power purchase contracts have been<br />
contentious.<br />
Rating Outlook<br />
The stable rating outlook reflects the project's balanced capital<br />
structure, its strong historical operational performance and<br />
its largely hedged near-term position.<br />
What Could Change the Rating - UP<br />
Significant improvements in cash flow or the credit quality of<br />
Northwestern could have positive rating implications.<br />
What Could Change the Rating - DOWN<br />
Poorer than anticipated operating performance at the plant,<br />
higher than expected environmental costs that cannot be<br />
recovered through the wholesale power market, material<br />
decline in wholesale power prices or significant decline in<br />
price for power supplied to NorthWestern beyond 2007.<br />
• 97 •
Proyectos de Energia, S.A. de C.V.<br />
Mexico City, Mexico<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for Proyectos de Energia, S.A. de C.V. are:<br />
- Unconditional lease payment obligations of Comisión<br />
Federal de Electricidad (CFE)<br />
- Debt obligations rank parri-passu with CFE's senior<br />
unsecured debt<br />
- Strong government support<br />
Credit Challenges<br />
Credit challenges for Proyectos de Energia, S.A. de C.V. are:<br />
- National efforts to reform the electric sector<br />
- Considerable level of capital expenditures for CFE<br />
- CFE's reliance on government subsidies<br />
- Large underfunded pension plan at CFE<br />
Rating Rationale<br />
The Baa2 rating of Proyectos de Energia, S.A. de C.V.'s<br />
(Proyectos de Energia) senior secured debt debt is based on<br />
the unconditional lease payment obligations of Comisión<br />
Federal de Electricidad (CFE), the Mexican national utility.<br />
The lease obligations rank pari-passu with all CFE unsecured<br />
indebtedness.<br />
The Baa2 rating reflects the importance of the substations<br />
and the critical role that CFE plays in the Mexican electric<br />
market. The rating recognizes CFE's interlocking relationship<br />
with the Mexican government (Local currency rating of<br />
Baa1; Foreign Currency Rating of Baa1) and the degree of<br />
subsidy provided by the Mexican government for electric service.<br />
CFE implemented a rate increase in 2002 in an effort to<br />
address the sizeable government subsidy that exists for electricity.<br />
The impact on cash flow resulting from the rate<br />
increase has been moderate and no further rate increases have<br />
been proposed.<br />
The Baa2 rating also incorporates the challenges facing<br />
CFE and the Mexican government as it attempts to entice<br />
third party international capital to support this growth. The<br />
rating further considers the growing amount of debt that will<br />
need to be refinanced by CFE over the next few years and the<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
marketplace uncertainty that exists around reforming the<br />
electric sector.<br />
A key rating consideration remains the progress in approving<br />
electric legislation which is broadly intended to spur<br />
investment in electric generation and infrastructure. Energy<br />
demand is expected to increase by 5.6% on average in the<br />
near to medium term. The current electric reform proposal<br />
remains a key policy objective of the Fox administration and a<br />
primary agenda item at each national assembly. However, it<br />
remains to be approved by governmental representatives of<br />
the divergent political parties. Under the proposal, currently<br />
contested among various public entities, CFE would continue<br />
to provide electricity to small end-users and would continue<br />
to transmit and distribute power throughout the country.<br />
Large end-users would be free to purchase power from independent<br />
private firms.<br />
Proyectos de Energia is a trust established to provide<br />
financing for the construction of 13 substations that collectively<br />
provide 1,370-megavolt ampere of capacity throughout<br />
Mexico. CFE is obligated to make quarterly debt service payments<br />
covering quarterly interest and principal at maturity.<br />
CFE is Mexico's principal state electric generation, transmission<br />
and distribution company.<br />
Rating Outlook<br />
The stable outlook incorporates the strong interlocking relationship<br />
between the government of Mexico and CFE balanced<br />
against the need to raise capital to meet demand as well<br />
as the need, at some point, to fund unfunded pension obligations.<br />
What Could Change the Rating - UP<br />
An improvement in CFE's credit metrics. Clarity around the<br />
plans to restructure the electric sector. Solid, satisfactory<br />
progress in the country's economic progress and credit profile.<br />
What Could Change the Rating - DOWN<br />
Deterioration in CFE's credit metrics. Changes in the electric<br />
sector that negatively impact CFE's credit quality.<br />
• 98 •
PSEG Power L.L.C.<br />
Newark, New Jersey, United States<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Senior Unsecured<br />
Baa1<br />
Bkd Subordinate Shelf<br />
(P)Baa2<br />
Parent: Public Service Enterprise Group Incorporated<br />
Outlook<br />
Stable<br />
Sr Unsec Bank Credit Facility<br />
Baa2<br />
Senior Unsecured<br />
Baa2<br />
Subordinate Shelf<br />
(P)Baa3<br />
Preferred Shelf<br />
(P)Ba1<br />
Commercial Paper P-2<br />
PSEG Power Capital Trust I<br />
Outlook<br />
Stable<br />
Key Indicators<br />
Preferred Shelf<br />
(P)Baa2<br />
PSEG Power Capital Trust II<br />
Outlook<br />
Stable<br />
Preferred Shelf<br />
(P)Baa2<br />
PSEG Power Capital Trust III<br />
Outlook<br />
Stable<br />
Preferred Shelf<br />
(P)Baa2<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Mo Ying W. Seto/New York<br />
Daniel Gates/New York<br />
PSEG Power L.L.C.<br />
LTM 3Q 04 2003 2002 2001<br />
FFO - Cap Interest + Interest / Interest 3.1 3.7 3.3 3.7<br />
FFO / Debt 17% 20% 17% 23%<br />
Retained Cash Flow / Debt 17% 20% 17% 23%<br />
Debt / Adj. Capitalization[1] 57% 58% 71% 76%<br />
Net Income Available for Common / Common Equity 14% 32% 33% 46%<br />
Common Dividends / Net Income Available for Common 0% 0% 0% 0%<br />
[1] Adj. Capitalization includes debt and equity, but excludes deferred taxes<br />
Opinion<br />
Credit Strengths<br />
• Eighty-five percent of PSEG Power’s (Power) output is<br />
generated by low-cost nuclear and coal-fired generation<br />
favorably located in PJM East<br />
• Power’s output is generally 75% contracted on a 3-year<br />
rolling basis; 2005 auctions for 1/3 of Public Service Electric<br />
Gas’ (PSE&G) and other NJ load provide opportunity to<br />
increase margins<br />
• PJM East prices have been increasing due to high gas<br />
costs; Power expected to increase gross margins under new<br />
contracts<br />
• <strong>2006</strong> credit metrics are expected to be in line with rating<br />
category; the pending merger with Exelon Generation<br />
(Genco) should also underpin current ratings; the combined<br />
entity is expected to have strong credit metrics and Genco’s<br />
nuclear expertise is expected to help address NRC concerns<br />
Credit Challenges<br />
• Nuclear operations have experienced a series of<br />
unplanned and longer than planned outages and higher<br />
expenses for replacement power<br />
• Only 40% of output contracted for <strong>2006</strong>; newly completed<br />
merchant gas-fired facilities in Midwest expected to<br />
remain a drag on performance due to lack of demand at least<br />
through <strong>2006</strong><br />
• NRC investigation resulted in no fines, but action plan<br />
for operational improvements, previously identified maintenance,<br />
and planned uprates will require additional capital<br />
expenditures<br />
• Translating capital expenditures into improved financial<br />
performance involves execution risk<br />
Rating Rationale<br />
Power’s Baa1 senior unsecured debt rating reflects the<br />
expected achievement of credit metrics in <strong>2006</strong> that are more<br />
commensurate with its risk profile and rating category after a<br />
credit improvement effort begun in 2002, as well as the pending<br />
merger with Genco, which is expected to close in <strong>2006</strong>.<br />
On a combined basis, the new Genco should have FFO /<br />
debt coverages north of 45% and debt / capital ratios slightly<br />
below 45%, which we view positively.<br />
Over the next twelve to eighteen months, Moody’s will<br />
monitor the merger process. We anticipate that the approval<br />
process will be rigorous and that a fair amount of asset sales as<br />
likely to be necessary to assuage market power concerns.<br />
Additionally, we note that regulators have sometimes been<br />
known to try to poach synergies from even unregulated businesses<br />
in merger transactions, which can sometimes endanger<br />
the merger economics.<br />
Moody’s will also monitor Power’s progress in addressing<br />
the NRC’s concerns over safety and reliability, Power’s ability<br />
to secure higher margins from the next BGS auction, as well<br />
as management’s ability to translate capital expenditures<br />
related to uprates into improved operating and financial performance.<br />
Rating Outlook<br />
The stable rating outlook for Power reflects our expectation<br />
that the company will improve its credit metrics over the next<br />
2 years; that issues at the company’s nuclear operations will be<br />
resolved expeditiously; and that Exelon will be able to successfully<br />
navigate the merger approval process without negative<br />
consequences for new Genco.<br />
What Could Change the Rating - UP<br />
An upgrade in Power’s ratings is unlikely due to the anticipated<br />
merger with Genco, which is rated Baa2 unsecured.<br />
What Could Change the Rating - DOWN<br />
Power’s ratings could fall if its operations deteriorate to a significant<br />
extent, or if Exelon is unable to successfully navigate<br />
the merger approval process and there are negative rulings<br />
directly affecting Power or if there were a significant deterioration<br />
in Genco’s credit quality and the merger were still contemplated<br />
following such a change.<br />
• 99 •
Quezon Power (Philippines), Limited Co.<br />
Quezon City, Philippines<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
B3<br />
Analyst<br />
Phone<br />
Jennifer W. Wong/Hong Kong 852.2916.1173<br />
Ken Chan/Hong Kong 852.2916.1162<br />
Brian Cahill/Sydney 612.9270.8105<br />
Credit Strengths<br />
• Contractual electricity payments from Meralco, the offtaker<br />
for the power produced by QPL, remain current<br />
• Liquidity position of QPL remains adequate<br />
Credit Challenges<br />
• Weak financial position of Meralco<br />
• Ongoing PPA contract renegotiation between QPL and<br />
Meralco creates uncertainties<br />
Rating Rationale<br />
The B3 rating reflects the weak financial position of the<br />
project's off-taker - Meralco, despite the sound operating and<br />
financial profiles of QPL. While Meralco has successfully<br />
drawn a US$228 million 7-year secured debt facility to refinance<br />
its debt obligations, its financial position remains fragile,<br />
overshadowed by various key issues. Any adverse<br />
development regarding these issues could profoundly and<br />
negatively impact Meralco's creditworthiness. Nevertheless,<br />
<strong>Moody's</strong> believes there is a tendency for Meralco to continue<br />
honoring its obligations to QPL in order to generate income<br />
for the former's debt servicing.<br />
<strong>Moody's</strong> notes that Meralco has yet to pay the last phase of<br />
a Supreme Court-ordered customer refund of P18 billion.<br />
The refund schedule for this amount has not yet been finalized.<br />
Moreover, the Court of Appeals has over-ruled a P0.17/<br />
kwh tariff increase approved by the Energy Regulatory Commission<br />
(ERC) in June 2003. <strong>Moody's</strong> understands Meralco<br />
will appeal the case to the Supreme Court. Although Meralco<br />
continues to charge higher rates, it faces the risk that it will<br />
eventually have to refund previous additional charges to customers<br />
as well as terminate the hikes. Furthermore, uncertainties<br />
continue to surround Meralco's ability to pass<br />
through NPC settlement payments and potential payment of<br />
gas true-up obligations.<br />
The rating also reflects the uncertainty arising from the<br />
ongoing discussion between QPL and Meralco regarding various<br />
adjustments to the 3rd Power Purchase Agreement (PPA)<br />
Amendment. However, we note that - notwithstanding the<br />
renegotiation of the PPA - electricity payments from Meralco<br />
to QPL remain current. QPL's liquidity position is moderate<br />
following its cash dividend distribution last year but remains<br />
adequate, supported by a 6-month Debt Service Reserve LC<br />
and fully-funded reserve accounts.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Upward rating pressure could evolve for QPL if Meralco's<br />
financial position improves significantly, while the project<br />
continues to maintain debt service coverage ratio (DSCR) of<br />
over 1.25x.<br />
What Could Change the Rating - DOWN<br />
Downward rating pressure could result if: 1) QPL experiences<br />
problems in receiving payments from Meralco, which in turn<br />
affects its ability to honor its debt obligations in a timely fashion;<br />
or 2) contract renegotiations result in a significant weakening<br />
of QPL's cash flow, such that the project's DSCR falls<br />
below the minimum covenant of 1.25x.<br />
• 100 •
Ras Laffan Liquefied Natural Gas Company Ltd.<br />
Doha, Qatar<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
First Mortgage Bonds<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A1<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
Andrew Blease/London<br />
Stuart Lawton/London<br />
Ras Laffan Liquefied Natural Gas Company Ltd.<br />
2004 2003 2002 2001 2000<br />
CFO + Interest Expense - Gross Capex[1][2] $1602.5m $1297.7m $849.4m $901.2m $611.2m<br />
Interest Expense + Debt Repayment $283.1m $296.9m $308.8m $243.5m $161.9m<br />
Debt Service Coverage Ratio[3] 5.7 4.4 2.8 3.7 3.8<br />
Debt/Capitalization 60.7% 66.2% 68.4% 73.1% 58.4%<br />
FFO/Debt[4] 104.1% 69.3% 45.4% 40.5% 31.0%<br />
(CFO - Capex)/Debt[1] 98.9% 70.5% 38.9% 37.1% 24.0%<br />
[1] CFO = Cash Flow from Operating Activities [2] Interest Expense = Reported Gross Interest + Capitalized Interest [3] (CFO + Interest Expense - Gross Capex) / (Interest Expense + Debt<br />
Repayment) [4] FFO = CFO before changes in working capital<br />
Opinion<br />
Recent Developments<br />
The ratings of Ras Laffan reflect the application of Moody’s<br />
rating methodology for government-related issuers (“GRIs”).<br />
Please refer to Moody’s Rating Methodology entitled “The<br />
Application of Joint Default Analysis to Government-Related<br />
Issuers”, published in April 2005. The rating of Qatar was<br />
upgraded in May 2005 to A1.<br />
Credit Strengths<br />
- Strong financial profile during current period of high oil<br />
prices. Can also sustain oil prices at US$10/bbl prior to<br />
breakeven. Also benefits from US$200m contingent subordinated<br />
support from ExxonMobil (Aaa)<br />
- Growing global demand for LNG<br />
- <strong>Project</strong> finance structural enhancements<br />
- World class operational input from ExxonMobil<br />
- Strategic importance to Qatar (A1) as part of the development<br />
of the North Field, which is critical to Qatar's future<br />
prospects<br />
- Strategic importance to ExxonMobil as part of its growing<br />
dependence on gas revenues<br />
Credit Challenges<br />
- Usual risks around lack of diversity associated with single<br />
asset project financing<br />
- Uncertainty over future restructuring of its main customer,<br />
the Korean national gas company Kogas (A3, stable<br />
outlook)<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Ras Laffan reflect the combination of the following<br />
inputs: baseline credit assessment of 4 (on a scale of 1 to 6,<br />
where 1 represents lowest credit risk); A1 local currency rating<br />
of the Qatari government; high dependence; and high<br />
support.<br />
The baseline credit assessment of 4 is underpinned by the<br />
company's ability to withstand a low oil price environment,<br />
based on its 25 year SPA with Kogas. Discussions on potential<br />
restructuring of Kogas have continued for several years without<br />
resolution, and <strong>Moody's</strong> does not expect any changes to<br />
negatively impact upon the financial profile or dominance of<br />
Kogas, or its need for LNG. In the meantime Kogas continues<br />
to increase its LNG purchases. Spot cargo sales volumes<br />
are robust.<br />
High dependence reflects the fact that a large and growing<br />
proportion of the revenues of the Government of Qatar is<br />
composed of oil/gas export receipts. Hence, as oil/gas export<br />
prices fall, there is a high correlation between the deterioration<br />
in the financial strength of both Ras Laffan and Qatar.<br />
High support reflects the fact that Ras Laffan plays a central<br />
role in the development of Qatar's economy, which is largely<br />
planned around increasing gas exports. Other factors include<br />
a high degree of tolerance for government intervention in<br />
Qatar and the Government's concern that a default by Ras<br />
Laffan may damage Qatar's ability to attract foreign investment<br />
into other sectors of the economy.<br />
Rating Outlook<br />
The stable outlook reflects the good ongoing operating and<br />
financial performance, which has exceeded initial expectations.<br />
The rating outlook of Qatar is stable.<br />
Drivers of Rating Change<br />
A ratings upgrade could follow a reduction in oil price<br />
breakeven levels over time as debt amortises.<br />
A ratings downgrade could follow long-term plant operational<br />
problems, or weakening of Kogas credit profile.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 101 •
Rede Ferroviaria Nacional-REFER, E.P.<br />
Portugal<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Senior Unsecured -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa2<br />
Aa2<br />
Analyst<br />
Phone<br />
Andrew Blease/London 44.20.7772.5454<br />
Monica Merli/London<br />
Stuart Lawton/London<br />
Rede Ferroviaria Nacional-REFER, E.P.<br />
2003 2002 2001<br />
EBIT Margin (before G'will Amort'n)[1] -133.4% -143.9% -109.1%<br />
Adj RCF / Net Adj Debt[2] -4.1% -6.8% -13.9%<br />
Adj FFO Interest Coverage[3] -0.5 -1.1 -2.5<br />
Adj RCF/Capex + Investments (net of disposals)[4] -17.6% -33.2% -68.9%<br />
[1] (Revenues - Operating Costs +/- One-time non-recurring items + Goodwill amortisation)/Turnover EXCLUDING own costs capitalised [2] (Retained Cash Flow post Working Capital + 2/3<br />
Operating Lease Expense)/(Total Debt+ 8*OpLease Expense+Guarantees+Hybrids+Off-balance sheet debt+Pension liabilities-(Cash+Marketable Securities)) [3] (Funds From Operation post<br />
Working Capital + Cash Interest Expense)/Interest Expense [4] Retained Cash Flow post Working Capital/(Capex - Sale of Tangible Fixed Assets + Acquisitions - Divestments)<br />
Opinion<br />
Recent Developments<br />
The rating of Rede Ferroviária Nacional REFER EP<br />
("REFER") reflects the application of Moody’s new rating<br />
methodology for government-related issuers (“GRIs”). Please<br />
refer to Moody’s Rating Methodology entitled “The Application<br />
of Joint Default Analysis to Government-Related Issuers”,<br />
published in April 2005, and its accompanying press<br />
release. Please also refer to Moody’s Special Comment entitled<br />
“Rating Government-Related Issuers in European Corporate<br />
<strong>Finance</strong>” for a detailed discussion of the application of<br />
the GRI rating methodology to corporate issuers in Europe.<br />
Credit Strengths<br />
• Manages substantially all of the Portuguese rail infrastructure<br />
• Legal status affords financial protections and ensures<br />
close control by the Republic of Portugal<br />
Credit Challenges<br />
• Poor liquidity and over reliance on short term uncommitted<br />
credit lines<br />
• Weak financial position with high debt leverage and low<br />
profitability<br />
• Deteriorating financial position stresses importance of<br />
access to debt markets<br />
Rating Rationale<br />
In accordance with <strong>Moody's</strong> GRI methodology, the rating of<br />
REFER reflects the combination of the following inputs, (a) a<br />
Baseline Credit Assessment of 6, (b) the Aa2 local currency<br />
rating of the Government of the Republic of Portugal<br />
("RoP"), (c) high Dependence, and (d) high Support.<br />
The baseline credit assessment of 6 reflects REFER's<br />
record of material operating losses, its unsustainable debt<br />
burden and a likely continued deterioration in its financial<br />
position due to further significant capital expenditure commitments.<br />
Furthermore, REFER has a very poor alternate<br />
liquidity position as it relies predominantly on short-term<br />
uncommitted finance to fund operating and capital expenditure<br />
shortfalls with limited short term committed alternate<br />
sources of liquidity. Nevertheless, these factors are somewhat<br />
mitigated by its status as an ‘Entidade Pública Empresarial’,<br />
which effectively makes it an agent of RoP for managing the<br />
railway infrastructure owned by RoP, protects REFER from<br />
bankruptcy, and ensures that REFER is controlled and overseen<br />
by RoP.<br />
The high Dependence recognises that REFER obtains a<br />
significant amount of its cash flow from RoP, either directly<br />
(although this has declined in recent years) or through the<br />
Portuguese train operating company, and that REFER's non-<br />
Government revenues derive almost exclusively from the Portuguese<br />
domestic market. The high Support reflects Moody’s<br />
expectation that, if required, RoP would provide funds to<br />
REFER to enable it to meet its debt obligations on a timely<br />
basis in all necessary circumstances. This reflects REFER's<br />
critical role in the Portuguese transport sector, RoP's close<br />
control of REFER, and REFER's close connections with various<br />
parts of the Government on a day to day basis. A substantial<br />
part of REFER's debt is guaranteed by RoP, and <strong>Moody's</strong><br />
understands that RoP keeps a close watch on the financial<br />
position of REFER as part of its state debt management activities.<br />
Rating Outlook<br />
Given the high Support and high Dependence assumed in the<br />
rating, together with the poor financial profile of REFER,<br />
which is not expected to change in the near term, Moody’s<br />
would expect REFER’s rating to move in line with that of<br />
RoP. The stable outlook therefore reflects the stable outlook<br />
on the RoP rating.<br />
What Could Change the Rating - UP<br />
An upwards move in the rating of RoP.<br />
What Could Change the Rating - DOWN<br />
A downwards move in the rating of RoP. Furthermore, any<br />
indication that RoP’s willingness to provide support to<br />
REFER on a timely basis, if required, is weaker than that<br />
incorporated within the high Support factor could result in a<br />
downgrade in the rating.<br />
In addition to the factors listed above affecting the baseline<br />
credit assessment, the ratings may also be impacted by<br />
changes in the ratings of the supporting government, or by<br />
changes in <strong>Moody's</strong> assessments of default dependence and<br />
support described in the rating rationale.<br />
• 102 •
Reliant Energy Mid-Atlantic Power Hldgs., LLC<br />
Houston, Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B1<br />
Analyst<br />
Phone<br />
James Hempstead/New York 1.212.553.1653<br />
Fred Zelaya/New York<br />
Daniel Gates/New York<br />
Reliant Energy Mid-Atlantic Power Hldgs., LLC<br />
2004 2003 2002 2001<br />
FFO - Cap. Interest + Adj. Interest / Adj. Interest[1] 0.2 0.9 2.8 (0.3)<br />
FFO / Adjusted Debt[2] -6% 0% 23% -12%<br />
Retained Cash Flow / Adjusted Debt[2] -6% 0% 23% -12%<br />
Adj. Debt / Adj. Capitalization[2][3] 89% 82% 66% 74%<br />
Net Income Available for Common / Common Equity -62% -5% -2% 0%<br />
Common Dividends / Net Income Available for Common 0% 0% 0% 0%<br />
[1] Interest adjusted for imputed interest on operating leases [2] Debt adjusted for operating leases [3] Adj. Capitalization includes equity and adj. debt, but excludes deferred tax<br />
Opinion<br />
Credit Strengths<br />
The credit strengths for REMA include:<br />
• Improving financial flexibility of parent company, Reliant<br />
Energy<br />
• Pass-Through certificates beginning to amortize, approximately<br />
$525 million remain outstanding<br />
• Significant coal fired generating assets within attractive<br />
mid-Atlantic region<br />
Credit Challenges<br />
The credit challenges for REMA include:<br />
• Operational challenges in managing non-regulated<br />
wholesale generation fleet<br />
• Potentially increasing environmental and fuel expenditures<br />
• Cash flow concentration associated with coal fired base<br />
load assets due to uneconomic dispatch positions for intermediate<br />
and peak generation facilities create some outage risk<br />
Rating Rationale<br />
Reliant Energy Mid-Atlantic Power Holdings, LLC’s<br />
(REMA) B1 senior secured rating reflects its ownership interests<br />
in several wholesale generating facilities within the Pennsylvania-New<br />
Jersey-Maryland (PJM) power pool. REMA’s<br />
rating reflects the relatively low operating costs for the primarily<br />
coal facilities, the assets' ability to meet expected nearterm<br />
environmental requirements and the strategic significance<br />
of these assets to the parent company. However, the rating<br />
also reflects the portfolio's exposure to merchant power<br />
markets, challenging fundamentals within PJM, rising fuel<br />
costs and uncertainty associated with numerous legal and regulatory<br />
investigations of REMA's parent company, Reliant<br />
Energy.<br />
Rating Outlook<br />
The stable outlook for REMA reflects the elimination of<br />
near-term liquidity issues of its parent, accompanied by the<br />
reasonable operational challenges of managing its generation<br />
fleet within the greater PJM region.<br />
What Could Change the Rating - UP<br />
Ratings could be upgraded with and upgrade of the consolidated<br />
Reliant Energy.<br />
What Could Change the Rating - DOWN<br />
Unexpected operational or financial events associated with<br />
managing this portfolio of assets would be viewed negatively,<br />
such as an extended outage or increasingly stringent environmental<br />
requirements. A sustained, or increasingly negative<br />
trend associated with REMA’s financial condition would be<br />
viewed negatively, although we view the subordinated intercompany<br />
notes payable (to Reliant) as quasi-equity in time of<br />
severe financial distress.<br />
• 103 •
Rutas del Pacifico<br />
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Rutas del Pacifico<br />
2004<br />
Outstanding debt US $200,000,000<br />
Road length<br />
139-km<br />
Debt Service Coverage Ratio (2003) 1.5<br />
Traffic growth 2003-2004 (1) 21%<br />
(1) 2004 reflects first full year of operations for Troncal Sur<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Rutas del Pacifico are:<br />
- The road's strong alignment connecting Chile's largest<br />
city, its vital port, and tourist destinations along the eastern<br />
coast<br />
- Road improvements bolster its traffic retention capability<br />
and underpin its reliable revenue generating capacity<br />
- Flexible concession terms<br />
Credit Challenges<br />
Credit challenges for Rutas del Pacifico are:<br />
- Vulnerability to economic conditions<br />
Rating Rationale<br />
The Baa2 underlying rating of the Rutas del Pacífico, S.A.,<br />
toll road revenue bonds reflects the road's strong alignment,<br />
serving the two most densely populated and economically<br />
critical regions in the country, and the baseline protections<br />
afforded by the unique concession. Also considered in the rating<br />
are political support for the project and contractual and<br />
legal protections that provide standard bondholder protection,<br />
including 1.4 times target debt service coverage ratios.<br />
Financial projections are conservative; and the level of traffic<br />
growth needed for breakeven coverage is comfortably below<br />
that of historic growth rates.<br />
Rutas del Pacifico, S.A. is a single purpose company owned<br />
50% by ACS, Chile and 50% by Sacyr, Chile which are in<br />
turn subsidiaries of the Spanish companies ACS and Sacyr,<br />
respectively. The Company holds the concession for a maximum<br />
term of 25 years for the 109 km Ruta 68 connecting<br />
Santiago with the Port of Valparaíso and the Viña del Mar<br />
region, the new 30 km Troncal Sur and 10 kilometers of Ruta<br />
60 which connects Ruta 68 with Troncal Sur. The Bonds<br />
carry guarantees from the Inter-American Development Bank<br />
and FSA (both rated Aaa by <strong>Moody's</strong>).<br />
The location of the three project components – particularly<br />
the longer Ruta 68 – is excellent. At one end of the Ruta 68<br />
alignment is the capital city Santiago with the nation’s largest<br />
concentration of population (4.5 million). At the western terminus<br />
of the road is one of Chile’s two major ports – the Port<br />
of Valparaíso – and the key vacation and tourist region of Viña<br />
del Mar.<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
Chee Mee Hu/New York<br />
Daniel Gates/New York<br />
The project combines the proven revenue generating<br />
capacity of Ruta 68 with the more recently tolled Troncal Sur.<br />
There are some free alternative roads along Ruta 68, but<br />
given the mountainous terrain along portions of the alignment<br />
and the reconfiguration of the toll collection system to<br />
thwart toll evaders, use of avoidance roads will become less<br />
attractive and less feasible.<br />
A unique element of the Rutas del Pacífico, S.A., concession<br />
is the Ingresos Total de la Concession (the “ITC”). The<br />
ITC is a pre-determined amount of revenues that can accrue<br />
to the Company. The maximum term of the concession is<br />
either 300 months or the date by which the ITC is reached,<br />
whichever is shorter. Once the ITC is reached, the concession<br />
terminates. The financing structure accommodates the ITC<br />
by assuming a final maturity of 2024 and principal amortization<br />
beginning in 2004. If operating cash flows are better than<br />
projected, the financing structure provides for earlier principal<br />
maturities through deposits to the Mandatory Anticipated<br />
Prepayment Account.<br />
Credit issues going forward will be the effective control of<br />
the toll collection and management system designed to<br />
reduce toll-avoidance and leakage, and expectations of stable<br />
growth in the service area economies.<br />
Financial results for 2003, the road's first full year of operations,<br />
reflected an improvement in operating revenues of 11%<br />
over 2002 figures. 2004 traffic figures include the first full<br />
year of tolling for the Troncal Sur portion of the toll road.<br />
Ruta 68 traffic experienced an increase of 11.4% in 2004 and<br />
overall traffic increased by approximately 21% from the previous<br />
year.<br />
Rating Outlook<br />
The stable outlook reflects <strong>Moody's</strong> expectation that financial<br />
forecasts will continue to be met over the near term.<br />
What Could Change the Rating - UP<br />
A sizeable and sustainable improvement in the road's cash<br />
flow in combination with a signifcant increase in traffic<br />
growth above original projections.<br />
What Could Change the Rating - DOWN<br />
A significant decline in economic conditions and traffic patterns,<br />
falling short of the original projections.<br />
• 104 •
Salton Sea Funding Corporation<br />
Imperial Valley, California, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba1<br />
Analyst<br />
Phone<br />
Richard E. Donner/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
Salton Sea Funding Corporation [1]<br />
2004 2003 2002 2001 2000<br />
Cash Available For Debt Service 91,231 98,260 111,228 80,887 81,927<br />
Interest + Principle Repayment 53,434 53,347 55,121 53,451 51,546<br />
Debt Service Coverage 1.71 1.84 2.02 1.51 1.59<br />
Total Debt/Capitalization[2] N/A N/A N/A N/A N/A<br />
FFO / TD[3] N/A N/A N/A N/A N/A<br />
CAFDS / TD 29.1% 21.2% 22.6% 15.5% 15.1%<br />
[1] Consolidated numbers include Salton Sea Funding Corp., Salton Sea Guarantors, Partnership Guarantors and Salton Sea Royalty. [2] Capitalization ratio could not be calculated because<br />
SSFC equity figures do not take into consideration intercompany eliminations. [3] FFO could not be calculated because funds from operations figures do not take into consideration intercompany<br />
eliminations.<br />
Opinion<br />
Credit Strengths<br />
• Cash flows primarily derived from long-term contracts with<br />
Southern California Edison, which has an improving credit<br />
profile.<br />
Credit Challenges<br />
• Uncertainties related to prospective cash flows when Southern<br />
California Edison reverts to its avoided cost in 2007.<br />
• Exposure to volatile commodity prices in the competitive<br />
California electricity market.<br />
Rating Rationale<br />
The Ba1 senior secured rating of Salton Sea Funding Corp.<br />
(SSFC) reflects concentrated exposure to the California electricity<br />
market and to Southern California Edison Company<br />
(SCE). Salton Sea is a wholly-owned subsidiary of CE Generation<br />
and is a funding vehicle for ten California-based geothermal<br />
projects representing an aggregate net ownership<br />
interest of 327 MWs of electrical generating capacity. Eight<br />
of the ten geothermal projects are under contract with SCE<br />
and the remaining two provide power to open California electricity<br />
market.<br />
The debt rating reflects a balance between the favorable<br />
impact of SCE’s improving credit quality and the project’s<br />
weaker than expected operating and financial performance.<br />
The debt service coverage ratios for CEG and Salton Sea are<br />
below the base case levels as outlined in the Offering Circulars<br />
for both projects, but these coverages are showing<br />
improvement. The rating also considers that revenues will be<br />
exposed to the uncertainty of variable energy payments equal<br />
to SCE’s avoided energy cost once fixed energy payments end<br />
in 2007, potentially reducing cash flow available for debt service<br />
should those energy payments fall below current levels.<br />
Rating Outlook<br />
SSFC’s ratings outlook is stable, reflecting the improved<br />
longer term prospects for SCE, but balanced with the<br />
projects' weaker than expected operating and financial performance,<br />
although the project has begun to show some<br />
improvement in the DSCRs.<br />
What Could Change the Rating - UP<br />
The current forecasted debt service coverages for SSFC,<br />
while still expected to be below original forecasts in the<br />
Offering Circular, do show improvement to the 1.7x-2.0x<br />
range in a few years time. Potential exists for an upgrade if<br />
these higher coverages could be realized, which Moody’s<br />
believes would require an improvement in the operating and<br />
financial performance of the plants and establishment of<br />
energy payments form SCE that are not radically different<br />
from the current level after the expiry of the fixed rate<br />
arrangement in May 2007.<br />
What Could Change the Rating - DOWN<br />
Likewise, any deterioration in operating performance, coverages<br />
or payments from SCE for purchased power could negatively<br />
pressure the ratings.<br />
• 105 •
SCL Terminal Aéreo Santiago S.A.<br />
Santiago, Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daisy Dominguez/New York<br />
Daniel Gates/New York<br />
SCL Terminal Aéreo Santiago S.A.<br />
1Q 05 LTM 2004 2003 2002<br />
Funds from Operations / Debt 4.1% 4.0% 3.5% 3.1%<br />
Retained Cash Flow / Debt 4.1% 4.0% 3.5% 3.1%<br />
Dividends / Net Income Available for Common 0.0% 0.0% 0.0% 0.0%<br />
Funds from Operations + Interest / Interest 2.71 2.72 1.78 1.76<br />
Debt / Capitalization 91.8% 92.6% 90.5% 88.7%<br />
Net Income Available for Common / Common Equity 17.6% 3.9% -25.5% -16.9%<br />
Passenger Traffic Growth[1] 7.3% 4.7% 7.9% -5.3%<br />
[1] Period of January - March, 2004 and 2005<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for SCL are:<br />
- Most active airport in the country.<br />
- Stable and sound Chilean economy.<br />
Credit Challenges<br />
Credit challenges for SCL are:<br />
- Vulnerability to economic conditions in the region.<br />
- Prolonged dispute with the Ministry of Public Works<br />
over compensation measures.<br />
- Deteriorating financial and operational position.<br />
Rating Rationale<br />
SCL's Ba3 senior unsecured rating reflects an overall moderate<br />
improvement in passenger traffic and operating results.<br />
The rating further reflects the airport's essential market position<br />
in Chile given its role as the nation's international gateway,<br />
and its position as one of the key projects in the<br />
government's overall privatization efforts. The bonds are<br />
insured by MBIA and carry MBIA's financial strength rating<br />
of Aaa.<br />
Total passenger flows increased by approximately 5% in<br />
2004 over 2003 levels, and increased 6.39% in the first eight<br />
months of 2004. The latest consultant's projections forecast<br />
long term growth annual rates of 4.5% in passenger traffic<br />
from 2004 to 2020, which is consistent with GDP forecasts.<br />
These improvements signal a turnaround from the traffic<br />
declines of 2001 and 2002 that resulted from the convergence<br />
of various economic crises in Latin America, the events of 9/<br />
11/01, SARs, and war in the Middle East.<br />
SCL's underlying rating further reflects structural<br />
improvements reached in 2004 that will result in stronger and<br />
more stable cash flow as a result of the Convenio Complementario<br />
No. 2 - the supplementary agreement to the 1997<br />
Concession Agreement - which the company signed with the<br />
Ministry of Public Works in August 2004. The Convenio provides<br />
for a number of Concession improvements including<br />
the following enhancements: (1) The MDI, which is a minimum<br />
passenger tariff revenue guarantee based on assumed<br />
annual passenger growth of 5% for domestic passengers , and<br />
5.5% for international passengers. (2) A maximum possible<br />
extension of the original Concession term by 6.5 years if the<br />
annual MDI is not achieved. (3) Agreement enhancements<br />
that provide potential additional operating revenues of about<br />
US $9.4 million per year.(4) Tighter enforcement of airlinederived<br />
revenues.<br />
The company issued approximately US $85 million of local<br />
currency debt in 2004. Proceeds from the 2004 bonds are to<br />
be used for additional capital projects (per the Convenio<br />
Complementario No. 2) and for reserves intended to enhance<br />
the $172.5 million outstanding 1998 bonds as well as the 2004<br />
bonds. The 2004 legal structure prohibits dividend distributions<br />
so long as any 1998 and 2004 bonds remain outstanding.<br />
It also provides for principal repayment of the 2004 bonds<br />
only after all of the 1998 bonds have matured in 2012. MBIA<br />
is providing credit enhancement for the 2004 bonds.<br />
Company officials expect to announce 2004 year-end<br />
results by the end of the first quarter 2005. Third quarter<br />
financial results reflected an improvement in credit metrics<br />
and 2004 year-end traffic results further indicate an upward<br />
trend in operating profile.<br />
SCL was formed by an international consortium in 1998<br />
specifically to construct, renovate and operate the Arturo<br />
Merino Benitez International Airport in Santiago, Chile.<br />
SCL's shareholders are Agunsa (47.02%), ACS (14.77%),<br />
Fomento de Construcciones y Contratas S.A. (14.78%),<br />
Sabco Administradora de Fondos de Inversion (13.43%) and<br />
YVR Airport Services Ltd (10%).<br />
Rating Outlook<br />
The stable outlook reflects SCL's improved operating and<br />
regulatory structure and the stability provided by the implementation<br />
of the MOP's Convenio Complementario No. 2<br />
enhancements to improve liquidity and financial flexibility.<br />
What Could Change the Rating - UP<br />
Significantly improved and sustainable traffic and financial<br />
performance.<br />
What Could Change the Rating - DOWN<br />
A deterioration in traffic and revenue position and depletion<br />
of reserves.<br />
• 106 •
Selkirk Cogen Funding Corporation<br />
Boston, Massachusetts, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for Selkirk Cogen are:<br />
-Long-term power purchase agreements with credit worthy<br />
off-takers<br />
-Strong operating history<br />
-Consistently healthy debt service coverage ratios (DSCR)<br />
-Extension or replacement of natural gas supply contracts<br />
mitigates fuel supply risks<br />
Credit Challenges<br />
Credit challenges for Selkirk Cogen are<br />
-One Power Purchase Agreement (PPA) expires before the<br />
maturity date of the financing exposing Selkirk Cogen to<br />
merchant risk beginning in 2008.<br />
-While Selkik Cogen has managed the market risks associated<br />
with the amended PPA with NiMo, the amended PPA<br />
could, under certain scenarios, increase cash flow volatility at<br />
the project<br />
-Single asset concentration.<br />
Rating Rationale<br />
The Baa3 rating of Selkirk Cogen Funding Corporation (Selkirk<br />
Cogen) reflects among other things, a strong 20-year<br />
PPA with Consolidated Edison of New York (ConEd: A1<br />
Issuer Rating) for unit II which expires in 2014, and incorporates<br />
the Niagara Mohawk Power Corporation (NiMo: Baa1<br />
Issuer Rating) amended PPA, which expires in 2008. Under<br />
the NiMo amended PPA, Selkirk receives fixed monthly contract<br />
payments and pays Niagara Mohawk market prices for<br />
capacity and energy. The risk of Selkirk having to pay NiMo<br />
market prices is mitigated by Selkirk's right to sell energy and<br />
capacity from this unit at prevailing market prices.<br />
The rating further acknowledges the project’s increased<br />
exposure to merchant revenues and cash flow beginning in<br />
July 2008 following the expiry of the Niagara Mohawk<br />
amended PPA. While cash flows could begin to have greater<br />
volatility in 2008, Selkirk Cogen is expected to remain highly<br />
contracted through the term of the financing as the revenues<br />
from the power purchase agreement with ConEd, which<br />
extends past the final maturity of the financing, are expected<br />
to provide 85% of the total electric revenues and 75% of the<br />
total revenues at Selkirk Cogen during the final four years of<br />
the financing.<br />
The rating considers Selkirk Cogen’s extension of its four<br />
natural gas contracts with various natural gas suppliers<br />
through the term of the financing under terms and conditions<br />
that are neutral to credit quality. Selkirk Cogen had extended<br />
three of the four natural gas supply contracts with its existing<br />
suppliers in November and December 2004, and replaced the<br />
fourth natural gas supply contract with a contract from a new<br />
supplier during November 2005. Based upon the terms of the<br />
extended contracts and the terms of the new natural gas contract,<br />
Moody’s anticipates that Selkirk Cogen’s DSCR will<br />
average around 1.80x during the term of the financing with a<br />
minimum DSCR of around 1.50x. While these projected<br />
financial metrics are relatively strong in comparison to other<br />
gas fired power projects in the Baa3 rating category, achieving<br />
the projected coverages in the last four years of the financing<br />
is partially dependent upon merchant revenues. An important<br />
consideration for the rating is the expectation that revenues<br />
Analyst<br />
Phone<br />
A.J. Sabatelle/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
derived from a power purchase agreement with ConEd will<br />
provide sufficient cash flow to cover all of the project’s obligations<br />
through the 2012 maturity of the bonds.<br />
Under the terms of the financing documents, Selkirk<br />
Cogen had established a Gas Contract Extension Fund since<br />
the extensions or replacements of the natural gas supply contracts<br />
did not occur prior to December 26, 2004. Excess cash,<br />
which would have been distributed to the owners, had been<br />
trapped and used to begin funding the Gas Contract Extension<br />
Fund. With the extension or the replacement of the natural<br />
gas supply contracts and the resulting expected financial<br />
metrics, the excess cash being held in the Gas Contract<br />
Extension Fund is likely to be released to the sponsors on the<br />
next distribution date.<br />
Selkirk Cogen is a wholly owned subsidiary of Selkirk<br />
Cogen Partners, L.P. (Selkirk Partners) established to serve as<br />
a single-purpose financing subsidiary. Selkirk Partners is a<br />
Delaware limited partnership that owns a 345 natural gasfired<br />
cogeneration facility in Bethlehem, New York. The<br />
partnership has long-term contracts for the sale of electric<br />
capacity and energy produced by the facility with Niagara<br />
Mohawk and ConEd and steam produced by the facility with<br />
GE Advanced Materials, a core business of General Electric<br />
Company. Selkirk Cogen’s obligations are unconditionally<br />
guaranteed by Selkirk Partners.<br />
Selkirk Partners are jointly owned by subsidiaries of The<br />
McNair Group, ArcLight Capital Partners, Caithness<br />
Energy, Atlantic Power Corporation and Cogentrix. A subsidiary<br />
of Cogentrix acts as the managing general partner for the<br />
partnership.<br />
Rating Outlook<br />
The stable outlook reflects the continuation of strong cash<br />
flow metrics at Selkirk Cogen, particularly through 2008 as<br />
cash from operations to total debt is expected to remain above<br />
30% during this timeframe. The stable outlook also incorporates<br />
the successful extension and replacement of the natural<br />
gas supply contracts through the term of the financing, and<br />
considers the expected continuation of strong operating performance,<br />
a characteristic of the project since its inception.<br />
What Could Change the Rating - UP<br />
While the potential for a rating upgrade is limited by the<br />
project’s near-term exposure to the merchant energy market<br />
place beginning in 2008, the rating could be upgraded if such<br />
exposure is mitigated through the establishment of new offtake<br />
agreements which result in a sustainable DSCR that is in<br />
excess of 1.6x on a fully contracted basis through the term of<br />
the financing or if the project’s competitive position enables it<br />
to secure incremental merchant margins that result in a<br />
DSCR that is comfortably in excess of 2x on a sustainable<br />
basis.<br />
What Could Change the Rating - DOWN<br />
The rating could be downgraded in the event of deterioration<br />
in the operating performance of the plant that results in the<br />
DSCR falling below 1.4x on a sustainable basis, or should<br />
there be a material decline in the credit quality of the off-takers,<br />
principally ConEd, which has historically provided<br />
around 65% of the project’s revenues.<br />
• 107 •
Sincrudos de Oriente SINCOR C.A.<br />
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Recent Developments<br />
The Ba3 rating of Sincrudos de Oriente Sincor, S.A. reflects<br />
the application of Moody’s new rating methodology for government-related<br />
issuers (“GRIs”). Please refer to Moody’s<br />
Rating Methodology entitled “The Application of Joint<br />
Default Analysis to Government-Related Issuers”, published<br />
in April 2005, and its accompanying press release.<br />
Credit Strengths<br />
Credit strengths for Sincor include:<br />
- Offshore, U.S. $, trustee-controlled accounts, debt service<br />
tests for dividends, a six-month debt service<br />
account, and waiver of sovereign immunity<br />
- price support guarantees for purchased syncrude<br />
- life-of-project sponsor offtake guarantees<br />
- adequate reserve position<br />
Credit Challenges<br />
Credit challenges for Sincor include:<br />
- location in Venezuela amid sociopolitical unrest<br />
- unilateral imposition of a 1600% increase in royalty tax<br />
claims by the Chavez administration<br />
- Chavez administration claim for $1 billion in back taxes<br />
for excess overproduction<br />
- greater risk of future sovereign actions which could affect<br />
the creditworthiness of the project<br />
Rating Rationale<br />
In accordance with Moody’s GRI rating methodology, the<br />
ratings of Sincor reflect the combination of the following<br />
inputs:<br />
- Baseline credit assessment of 6 (on a scale of 1 to 6, where<br />
1 represents lowest credit risk)<br />
- B1 local currency rating of the Venezuelan government<br />
- low dependence<br />
- low support<br />
Similar to the other three Venezuelan heavy oil projects,<br />
the baseline credit assessment of 6 primarily reflects the operating<br />
environment in Venezuela amid lingering volatility,<br />
political uncertainties and recent actions taken by the Chavez<br />
administration against the oil & gas industry. These factors<br />
are balanced against strong fundamental economics, continued<br />
operational improvements and increased financial flexibility<br />
at the project. Sincor has reached first stage completion,<br />
Analyst<br />
Phone<br />
Stephen G. Moore/New York 1.212.553.1653<br />
Thomas S. Coleman/New York<br />
Daniel Gates/New York<br />
repaid $1,874 million in borrower funding, achieved lower<br />
turnaround cycle times than plan and achieved mechanical<br />
completion of a major debottlenecking project.<br />
The operating environment in Venezuela encompasses lingering<br />
socio-political unrest and its resultant impact on the<br />
operating capacity and financial condition of entities operating<br />
within Venezuela including the unilateral imposition of a<br />
16.67% royalty tax in place of the 1% tax documented in the<br />
project's agreements. This change reduces cash flow coverage<br />
of debt service on an on-going basis. At current oil prices and<br />
production levels, the increase in royalty taxes has not prevented<br />
the project from achieving strong cash flow coverages.<br />
However, the royalty increase would become more significant<br />
to cash flow coverage if oil prices were to decline to more historic<br />
norms. In addition, the unilateral nature of the change<br />
suggests that there might be a greater risk of future sovereign<br />
actions which could affect the creditworthiness of the project.<br />
Sincor is a $4.6 billion integrated extra-heavy oil project<br />
established to develop and transport extra-heavy crude oil<br />
from the Orinoco belt in southeastern Venezuela, and to<br />
upgrade and market a 30-32 degree API gravity syncrude.<br />
<strong>Project</strong> sponsors are Total Fina Elf (47%), PDVSA (38%) and<br />
Statoil (15%).<br />
Low dependence reflects the low likelihood of a correlation<br />
between a default by the government and a default by the<br />
project. While the hydrocarbons industry is important to the<br />
Venezuelan government, the project is majority-owned by<br />
Total and Statoil. All of its product is sold for U.S. dollars into<br />
the export market, with proceeds paid into offshore trustee<br />
accounts.<br />
Low support reflects Moody’s opinion that the government<br />
would not be likely to step in to support the project should it<br />
incur financial difficulties.<br />
What Could Change the Rating - UP<br />
Resolution of the simmering socio-political turmoil in Venezuela,<br />
greater long term predictability of legal and tax<br />
regimes.<br />
What Could Change the Rating - DOWN<br />
A resumption of strikes, social upheaval or increased interference<br />
with the operating capacity and financial condition of<br />
PDVSA.<br />
• 108 •
Sithe/Independence Funding Corporation<br />
Oswego, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Ba2<br />
Credit Strengths<br />
The credit strengths of Sithe Independence Funding Corporation<br />
(Sithe Funding) include:<br />
• The project benefits from a capacity contract and tolling<br />
contracts which adequately cover senior debt service even at<br />
low dispatch levels;<br />
• Significant cash flows from capacity payments by Consolidated<br />
Edison Company of New York (Con Ed, senior unsecured<br />
A1);<br />
• Debt service reserve of $83 million funded with cash;<br />
• Strategic location of the project in the relatively capacity<br />
constrained New York market.<br />
Credit Challenges<br />
The credit challenges of Sithe Funding include:<br />
• Significant cash flows from Dynegy Holdings Inc. (DHI,<br />
senior unsecured Caa2, under review for possible upgrade);<br />
• Difficulty in entering into a replacement tolling contract<br />
in the event that DHI were to abrogate the existing tolling<br />
agreements;<br />
• Continued technical default under the various project<br />
agreements with DHI’s affiliates due to the failure of DHI to<br />
provide certain substitute guaranties for its subsidiaries.<br />
Rating Rationale<br />
Sithe/Independence Funding Corporation is a wholly owned<br />
subsidiary of Sithe/Independence Power Partners, L.P., which<br />
is a 1,040 MW natural gas fired cogeneration facility located<br />
in Oswego County, New York. Sithe Funding’s debt is guaranteed<br />
by Sithe/Independence Power Partners and secured by<br />
all the assets of Sithe/Independence<br />
The Ba2 senior secured rating for Sithe Funding is supported<br />
by the project’s good operating performance and cash<br />
flows that are underpinned by a fixed revenue stream based on<br />
contractual capacity payments from Con Edison. The Con<br />
Analyst<br />
Phone<br />
M. Sanjeeva Senanayake/New York 1.212.553.1653<br />
Scott Solomon/New York<br />
Daniel Gates/New York<br />
Edison capacity payments provide sufficient revenues to support<br />
a majority of the project’s overall fixed costs including<br />
debt service on the project bonds. Independence also has a<br />
cash funded debt service reserve of $83 million, which would<br />
allow for approximately one year of debt service and would<br />
provide sufficient time for the project to secure other contractual<br />
revenue sources in a downside scenario in which revenues<br />
under the Dynegy Tolling Agreement and Financial Swap<br />
Agreement were not available to the project. Sithe Independence<br />
is a low heat rate generating facility located in a market<br />
that has a good supply demand balance, which might allow<br />
the project to maintain sufficient cash flow even under some<br />
scenarios in which the Dynegy tolling payments are not available<br />
and the project has to sell power in the open market.<br />
Rating Outlook<br />
The stable outlook reflects Moody’s expectation that payments<br />
received for installed capacity from Con Ed are projected<br />
to be sufficient to cover annual debt service and a<br />
majority of all of the project’s fixed costs. Stable outlook also<br />
considers the improving credit profile of DHI, the guarantor<br />
of its tolling counterparty as well as the indirect owner of<br />
Sithe/Independence.<br />
What Could Change the Rating - UP<br />
• A substantial improvement of DHI’s credit strength combined<br />
with improved project economics achieved through<br />
higher dispatch levels for the project on a sustained basis.<br />
What Could Change the Rating - DOWN<br />
• Deterioration of the creditworthiness of the project’s primary<br />
contract counterparties;<br />
• The termination or restructuring of the company’s capacity<br />
or tolling arrangements which could expose the project to<br />
the merchant market.<br />
• 109 •
Sociedad Concesionaria Central<br />
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Credit Strengths<br />
Credit strengths for Central are:<br />
- Important location along Route 5 (the Pan American<br />
Highway)<br />
- Significant MOP regulatory support<br />
Credit Challenges<br />
Credit challenges for Central are:<br />
- General construction risks associated with an urban toll<br />
road<br />
- Implementation and administrative challenges of the free<br />
flow electronic toll collection system<br />
Rating Rationale<br />
The underlying Baa3 rating of Sociedad Concesionaria Central,<br />
S.A.'s senior secured bonds reflects the road's important<br />
location along Route 5 (the Pan American Highway), wellestablished<br />
traffic patterns, the fundamental importance of<br />
the road in a heavily congested service area, structural<br />
enhancements providing protection for construction risk and<br />
liquidity risk, and strong management experience in infrastructure<br />
development, construction, operations, and toll<br />
road administration.<br />
The project is one of the longest roads under construction<br />
of the four urban tolled expressways that have been concessioned<br />
to the private sector by the Ministry of Public Works<br />
as part of the comprehensive Plan de Transporte Urbano de<br />
Santiago (PTUS). All four urban toll road concessions will be<br />
operated as open access, free-flow electronic tolling system<br />
without physical barriers. The 60-kilometer road consists of<br />
two segments: Avenida Norte Sur is a 40-kilometer segment<br />
of Route 5, a major arterial road and the only continuous<br />
north-south highway that will provide uninterrupted high<br />
speed service throughout the densely developed western portion<br />
of the metropolitan Santiago area, and Avenida General<br />
Velasquez which consists of 20 kilometers running roughly<br />
Analyst<br />
Phone<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daisy Dominguez/New York<br />
Daniel Gates/New York<br />
parallel to and connecting with Avenida Norte Sur. The<br />
project is essentially an expansion and upgrade of existing<br />
roads, which have extensive track records reflecting longstanding<br />
usage patterns and core essentiality. The road will be<br />
opened for tolling operations in segments from 2004 to <strong>2006</strong>,<br />
allowing revenues to be phased in section by section, and<br />
allowing management to add electronic toll collection (ETC)<br />
systems incrementally. The toll road began the first phase of<br />
operations on December 1st, 2004 and construction remains<br />
on time for the following segments.<br />
The financing structure provides added bondholder protection<br />
through the structure of the principal repayment<br />
schedule and various reserve funds.<br />
Sociedad Concesionaria Central, S.A. is a closed stock corporation<br />
established for the sole purpose of constructing and<br />
operating the Sistema Norte Sur under a 30-year concession<br />
granted by the Ministry of Public Works. The corporation<br />
consists of Grupo Dragados S.A. (48%), Skanska AB (48%),<br />
Constructora Belfi S.A. (2%), and Constructora Brotec S.A.<br />
(2%).<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook is based upon the expectation that<br />
implementation of ETC systems will be effectively managed<br />
and that financial projections will be sustainable over the near<br />
term.<br />
What Could Change the Rating - UP<br />
Post construction and ramp-up, traffic and operating revenues<br />
that are considerably in excess of consultant projections.<br />
What Could Change the Rating - DOWN<br />
Poor management of the ETC system and significant and<br />
continued decline in traffic and operating revenues from consultant<br />
projections.<br />
• 110 •
Sociedad Concesionaria Costanera Norte S.A.<br />
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for Costanera Norte are:<br />
- A strong alignment overlaying an existing roadway that is<br />
an important component of the urban transportation network<br />
- Service area has a user base which has higher than average<br />
socio-economics<br />
- The Ministry of Public Works' (MOP) agreed to a provision<br />
for the highest level of Minimum Revenue Guarantee<br />
that has been granted to date<br />
- Significant MOP regulatory support<br />
Credit Challenges<br />
Credit challenges for the Costanera Norte are:<br />
- General construction risks associated with an urban toll<br />
road facility<br />
- Implementation and administrative challenges of the free<br />
flow electronic toll collection system<br />
Rating Rationale<br />
The underlying rating of Baa2 (global scale) for Sociedad<br />
Concesionaria Costanera Norte, S.A.’s senior secured bonds<br />
reflects the availability of the Minimum Revenue Guarantee<br />
from the Ministry of Public Works (MOP), the fundamental<br />
importance of the alignment to Santiago’s urban transportation<br />
network, the synergies expected from the timing and<br />
coordination with three other tollroad projects in the greater<br />
Santiago area that will also feature free-flow electronic tolling<br />
technology. Additional considerations are the advanced stage<br />
of construction and the proven capabilities of the construction<br />
team, factors which help to mitigate completion risk.<br />
The debt consists of Series A - 1,900,000 UFs – due 2016<br />
and carrying an interest rate of 5% and Series B – 7,600,000<br />
UFs – due in 2024 and carrying an interest rate of 5.5%. The<br />
Bonds are insured by the Inter-American Development Bank<br />
(IDB) (rated Aaa) and AMBAC Assurance Corporation (rated<br />
Aaa).<br />
One of four urban toll road projects to be granted as long<br />
term concessions to the private sector by Chile’s Ministry of<br />
Public Works (MOP), the Costanera Norte toll road is one of<br />
Analyst<br />
Phone<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daisy Dominguez/New York<br />
Daniel Gates/New York<br />
the highest profile transportation projects in Chile due to an<br />
alignment which follows the historic Mapocho River in central<br />
Santiago. The 42-kilometer road consists of two components:<br />
the main east-west roadway running along and, in<br />
portions, under the Mapocho River, and the shorter Avenida<br />
Kennedy. Both portions are existing roadways operating<br />
under various levels of congestion. The eastern terminus is<br />
anchored by the higher income Las Condes and Vitacura districts<br />
while the western terminus connects with Route 68<br />
(Rutas del Pacifico) which is another toll road concession providing<br />
service from Santiago to the western coastal areas of<br />
Valparaiso and Vina del Mar. Costanera Norte will also provide<br />
an alternate route to Santiago Airport.<br />
Awarded through Supreme Decree No. 375 in 1999 for 30<br />
years, the concession ends in 2033, while the Bonds mature in<br />
2024.<br />
The toll road remains under construction and has faced<br />
slight delays primarily due to bridge construction on the<br />
Mapocho River. Company officials have announced that 32 of<br />
the 42km project will be operational by the end of March,<br />
representing a three month delay from original projections.<br />
Sociedad Concesionaria Costanera Norte, S.A. is a Chilean<br />
corporation whose shareholders are: 70% Impregilio S.A.,<br />
10% Simest, 10% Empresa Constructora Tecsa S.A. and 10%<br />
Empresa Constructora Fe Grande.<br />
Rating Outlook<br />
Moodys' stable outlook is based upon the expectation that the<br />
project will be completed within the projected timeframe and<br />
that implementation of ETC systems will be effectively managed.<br />
What Could Change the Rating - UP<br />
Post-construction and successful ramp-up, operating revenues<br />
that are considerably in excess of consultant projections.<br />
What Could Change the Rating - DOWN<br />
Significant delay or prolonged dispute over construction or<br />
the ETC implementation.<br />
• 111 •
Sociedad Concesionaria Vespucio Norte Express S.A.<br />
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for Sociedad Concesionaria Vespucio Norte<br />
Express, S.A,:<br />
- The alignment runs through a well-developed and still<br />
growing portion of northern Santiago<br />
- The toll road is essentially an expansion and upgrade of<br />
the existing Americo Vespucio east-west highway<br />
- Significant MOP regulatory support<br />
Credit Challenges<br />
Credit challenges for Sociedad Concesionaria Vespucio Norte<br />
Express, S.A,:<br />
- General construction risks associated with an urban toll<br />
road facility<br />
- Implementation and administrative challenges of the free<br />
flow electronic toll collection system<br />
Rating Rationale<br />
The underlying Baa3 rating for Sociedad Concesionaria Vespucio<br />
Norte Express, S.A (VNE) reflects the project's wellestablished<br />
customer base, the fundamental importance of the<br />
road in a heavily congested area, standard bondholder protections,<br />
and strong management experience in infrastructure<br />
construction and toll road management.<br />
VNE is one of four restricted access, free-flow electronic<br />
tolling expressways serving the greater Santiago metropolitan<br />
area. Granted as long-term concessions by the Ministry of<br />
Public Works ("MOP"), the four expressways (including the<br />
Sociedad Concesionaria Central and the Sociedad Concesionaria<br />
Costanera Norte) comprise an inter-linked high<br />
speed transport grid providing essential services to the most<br />
important region in the country. VNE is the north-western<br />
half of a "ring" road that will encircle central Santiago. The<br />
VNE alignment follows that of the Americo Vespucio Avenue<br />
that has been in heavy use for more than 10 years. As such,<br />
user patterns are well-established, obviating the need for a<br />
prolonged ramp-up period once the construction is completed<br />
and the road is opened as a limited access, high speed<br />
toll facility.<br />
The road provides connectivity from the mostly residential<br />
areas to the east including Quilicura and Maipu, to the industrial,<br />
commercial and manufacturing areas to the west including<br />
Recoleta and Renca. VNE is the principal route to<br />
Santiago's International Airport and to the large ENEA business/industrial<br />
zone that is being developed in three phases<br />
adjacent to the airport. The likelihood of construction of a<br />
completely new alternative free road is unlikely within the<br />
tenor of the bonds given the current urban density and the<br />
limitations to government funding available. The main competitor<br />
to VNE, running east-west following the Mapocho<br />
River is the Costanera Norte toll road. However, Costanera<br />
Norte is sufficiently south of VNE to attract a slightly different<br />
customer base and it is also tolled at the same adjustable<br />
per kilometer fare structure as VNE. It is highly likely that,<br />
Analyst<br />
Phone<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Daisy Dominguez/New York<br />
Daniel Gates/New York<br />
once all four urban ETC toll roads are up and running,<br />
induced traffic growth will occur and there will be seamless<br />
use of all four roads for interconnected trips throughout the<br />
greater Santiago region. The project began construction in<br />
2003. Three of the six stretches will begin charging tolls in<br />
mid-2005 and the entire road is expected to be completed by<br />
year-end 2005.<br />
All four urban toll road concessions are required to be freeflow<br />
electronic tolling facilities with inter-operable technology<br />
and standardized fare structures. The toll rates for all four<br />
urban toll roads will have a base tariff of 20/40/60 Chilean<br />
pesos per kilometer with multiple factor adjustments based on<br />
vehicle size and congestion level. Each concession has the<br />
ability to increase or decrease tolls based on congestion levels<br />
upon 15 days notice to the public with each adjusted toll in<br />
place for at least 3 months. Further, tolls can be adjusted once<br />
a year for inflation plus a 3.5% increase in real terms at the<br />
discretion of the concession owner. VNE will benefit from<br />
the fact that Central opened in late 2004 and Costanera<br />
Norte is expected to open in March 2005.<br />
The financing structure is consistent with other similar<br />
projects and provides sufficient bondholder protections.<br />
These include dividend restrictions, a standard cashflow<br />
waterfall, and a debt service reserve fund initially funded with<br />
a Letter of Credit equal to the next two debt service payments<br />
(1 year). The first principal payment is in 2010 allowing some<br />
financial flexibility in the first years of ramp-up and operations.<br />
Sociedad Concesionaria Vespucio Norte Express S.A. was<br />
established in 2002 under the laws of the Republic of Chile<br />
for the sole purpose of constructing and operating the VNE<br />
under the terms of a 30 year concession agreement granted by<br />
the Ministry of Public Works in 2003 and expiring in 2033.<br />
Shareholders of the company consist of Dragados Concesiones<br />
de Infraestructuras S.A. (Grupo ACS) (54%), Hochtief<br />
HTP Projecktentwicklung GmbH (45%), Empresa Constructora<br />
Brotec S.A. (0.5%), and Empresa Constructora Belfi<br />
S.A. (0.5%). Grupo ACS has entered into an agreement with<br />
Compania Espanola de Financiacion del Desarollo S.A.<br />
(Cofides) providing a sale option of up to 15% of the shares in<br />
the Company to Cofides.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook is based upon the expectation that the<br />
project will be completed on time and that implementation of<br />
ETC systems will be effectively managed.<br />
What Could Change the Rating - UP<br />
Post-construction and ramp-up, traffic and operating revenues<br />
that are considerably in excess of consultant projections.<br />
What Could Change the Rating - DOWN<br />
Significant delay or prolongued dispute over the construction<br />
program or the implementation of the ETC system.<br />
• 112 •
Southern Power Company<br />
United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Sr Unsec Bank Credit Facility<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1<br />
Baa1<br />
Baa1<br />
Commercial Paper P-2<br />
Analyst<br />
Phone<br />
Michael G. Haggarty/New York 1.212.553.1653<br />
Daniel Gates/New York<br />
Southern Power Company<br />
Q1 05 LTM 2004 2003 2002<br />
Adjusted Funds from Operations / Adjusted Debt[1][2] 20% 22% 12% 9%<br />
Retained Cash Flow / Adjusted Debt[2] 2% 3% 12% 9%<br />
Common Dividends / Adj. Net Income Available for Common 193% 186% 0% 0%<br />
Adjusted FFO + Adjusted Interest / Adjusted Interest[1][3] 3.7 3.9 3.2 3.4<br />
Adjusted Debt / Adjusted Capitalization[2][4] 57% 58% 56% 61%<br />
Net Income Available for Common / Common Equity 13% 14% 15% 7%<br />
[1] FFO adjusted for preferred dividends [2] Debt adjusted for mandatorily redeemable preferred securities [3] Interest adjusted for preferred dividends [4] Adj. Capitalization includes adj.<br />
debt, equity, and preferred stock at par value, but excludes deferred taxes<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Southern Power include:<br />
• Demonstrates sound debt service coverages, given that<br />
over 95% of Southern Power’s projected cash flow is derived<br />
largely from selling power on a contracted basis over the next<br />
five years.<br />
• SPC’s estimated $57 million of on-going capital requirements<br />
for 2005 is very manageable, given that plant McIntosh<br />
was transferred to Georgia Power (GPC) and Savannah Electric<br />
(SE&P) in 2004.<br />
• Minimum Contract Maintenance Covenant contained in<br />
SPC’s senior notes indenture ensuring sufficient contracted<br />
operating cash flow for its debt service obligations. This covenant<br />
requires that at least 80% of operating cash flow be<br />
derived from long-term contracts, or equity contributions<br />
would be required by the parent or SPC would not be paying<br />
any dividends in order to bring SPC's capital structure back<br />
to the 60% debt and 40% equity.<br />
• Under Southern Power’s new credit facility, the company<br />
is limited to a 65% debt to capitalization ratio.<br />
• Long-term contracts with the regulated affiliates have<br />
been approved by the state regulators and the FERC. SPC<br />
has market based rate authority for all its contracts.<br />
• Fuel and related transportation costs are pass through<br />
arrangements in substantially all of SPC’s purchased power<br />
contracts with the off-takers/purchasers of capacity and<br />
energy.<br />
Credit Challenges<br />
Credit challenges for Southern Power include:<br />
• Some long-term contracts begin to expire by 2009-2010.<br />
• Future capital spending could increase should SPC build<br />
additional generating facilities.<br />
• Beginning in 2003, SPC was permitted to move to a capital<br />
structure of 65% debt and 35% common equity from the<br />
previous mix of 60% debt and 40% common equity. However,<br />
SPC’s debt to capitalization was 57.5% at year end 2004.<br />
Rating Rationale<br />
Southern Power Company's (SPC) Baa1 senior unsecured<br />
rating reflects significant contracted revenues and reasonable<br />
debt service coverage ratio. In fact, SPC's current and future<br />
revenues are almost fully contracted through 2009 and partially<br />
contracted through 2023. SPC is a direct wholly-owned<br />
subsidiary of The Southern Company. SPC was formed to<br />
undertake the construction and ownership of wholesale electric<br />
power generation primarily interconnected to the transmission<br />
systems of Southern Company's five regulated<br />
subsidiaries.<br />
All of SPC's projects are new, gas-fired generating plants<br />
using General Electric gas turbines. Under the company's<br />
existing asset portfolio, total generating capacity is 5,455 MW<br />
for plants in service, including Plant Oleander. In addition to<br />
the 5,455 MW in commercial service, SPC is completing limited<br />
construction on Franklin 3, a 615 MW combined cycle,<br />
but has deferred final completion until 2011. All of these<br />
projects are located in Alabama, Georgia and Florida. SPC's<br />
business strategy is to provide domestic wholesale electric<br />
generation in the high growth Southeastern region.<br />
In April 2005, SPC signed a purchase and sale agreement<br />
with Constellation Energy Group, Inc., a non-affiliate, for<br />
Plant Oleander, a 680-MW simple cycle, dual-fueled facility<br />
in Florida. The purchase price is $218 million with no debt<br />
assumed. This transaction closed in early June 2005, upon<br />
receiving FERC approval. Plant Oleander currently has longterm<br />
contracts with Seminole Electric (510 MW) through<br />
December 31, 2009 and Florida Power & Light (170 MW)<br />
through May 31, 2007. Similar to other SPC’s long-term contractual<br />
arrangements, fuel costs associated with Plant Oleander<br />
are fully passed through to FP&L and Seminole.<br />
Rating Outlook<br />
The stable outlook reflects expected steady financial performance<br />
due to contracted generation.<br />
What Could Change the Rating - UP<br />
A sustained improvement in SPC’s key financial ratios,<br />
including FFO/Interest coverage ratio above 4.5x, FFO/Debt<br />
ratio above 25%, RCF/Debt ratio above 15%; decreased capital<br />
expenditures.<br />
What Could Change the Rating - DOWN<br />
A deterioration in key financial ratios, including FFO/Interest<br />
coverage ratio below 3x, an FFO/Debt ratio below 15%,<br />
RCF/Debt ratio below 10%; inability to extend the terms of<br />
existing long-term contracts or negotiate new ones in the<br />
future.<br />
• 113 •
Sutton Bridge Financing Limited<br />
Sutton Bridge, United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Bkd Senior Secured<br />
Baa3<br />
Ult Parent: Electricite de France<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aa1<br />
Sr Unsec Bank Credit Facility -Dom Curr<br />
Aa1<br />
Senior Unsecured<br />
Aa1<br />
Commercial Paper P-1<br />
Parent: EDF Energy plc<br />
Outlook<br />
Stable<br />
Key Indicators<br />
Senior Unsecured<br />
A3<br />
Commercial Paper P-2<br />
Other Short Term P-2<br />
Parent: London Energy plc<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
A3<br />
Analyst<br />
Phone<br />
Chetan Modi/London 44.20.7772.5454<br />
David G. Staples/London<br />
Stuart Lawton/London<br />
Sutton Bridge Financing Limited<br />
2004 2003 [1]2002<br />
Funds available for debt service[2] £58.4m £57.1m £62.8m<br />
Debt service[3] £38.7m £40.1m £46.3m<br />
Debt service cover ratio[4] 1.51 1.42 1.36<br />
Debt/Capitalization 71.3% 76.7% 76.9%<br />
FFO/Debt[5] 16.4% 13.1% 13.9%<br />
(CFO - Capex)/Debt[6] 15.0% 14.9% 15.8%<br />
[1] Restated [2] As defined in project agreement: Net profit plus interest expense, tax, depreciation and amortisation [3] Interest expense + movement in borrowings [4] Funds available for<br />
debt service / Debt service [5] FFO = CFO before changes in working capital [6] CFO = Cash flow from operating activities<br />
Opinion<br />
Credit Strengths<br />
- no electricity market price risk during life of CTA, subject to<br />
EDF Energy credit risk<br />
- plant owned by EDF Energy and used as part of its generation<br />
portfolio to supply its customers<br />
Credit Challenges<br />
- Exposure to electricity wholesale price risk from 2014<br />
- continual evolving nature of the UK electricity market<br />
- single asset risks usual for project financing<br />
Rating Rationale<br />
Sutton Bridge owns and operates a 790 megawatt gas-fired<br />
power station in England. The Baa3 senior secured rating is<br />
based on the plant’s limited exposure to price and volume risk<br />
to 2014 based on a Capacity and Tolling Agreement (CTA)<br />
with EDF Energy (A3 - formerly London Electricity). EDF<br />
Energy is also the ultimate owner of Sutton Bridge.<br />
Under the CTA, EDF Energy purchases all of the project’s<br />
capacity in return for a fixed monthly payment designed to<br />
cover, inter alia, debt service on the notes. The plant is used<br />
by EDF Energy as part of its generation portfolio to hedge its<br />
supply obligations.<br />
The rating incorporates the single-asset risk of the project,<br />
and the uncertainty associated with merchant sales following<br />
expiration of the CTA.<br />
The recovery in wholesale electricity prices has improved<br />
the relative economics of power generated by Sutton Bridge.<br />
The 2004 accounts showed financial performance in line with<br />
expectations.<br />
Rating Outlook<br />
This reflects the good operating performance of the plant,<br />
and the ongoing commitment to the CTA from EDF Energy.<br />
What Could Change the Rating - UP<br />
- More explicit support from EDF Energy for the credit<br />
What Could Change the Rating - DOWN<br />
- Any attempt by EDF Energy to renegotiate the terms of the<br />
CTA, or expectation that the term of the CTA may not be<br />
extended beyond 2014. The credit profile beyond 2014 may<br />
be significantly weaker than Baa3 in the absence of similar<br />
supportive contractual arrangements, and the rating may be<br />
downgraded by more than one notch in the period approaching<br />
such date if the plant is likely to operate as a merchant<br />
facility with electricity and gas market risk<br />
- Operational problems experienced at plant<br />
- Material downgrading of EDF Energy<br />
• 114 •
Tenaska Alabama II Partners, L.P.<br />
Alabama, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for Tenaska Alabama II are:<br />
• Cash flows are derived from a long term energy conversion<br />
agreement (ECA) with Coral Power L.L.C., which benefits<br />
from payment guarantees from Coral Energy Holding,<br />
L.P. and Shell Oil Company.<br />
• Operational risks are mitigated by a long-term service<br />
agreement (LTSA) with General Electric.<br />
• The project is not subject to fuel risk as Coral provides<br />
fuel under the ECA.<br />
• The alignment of the ECA and the LTSA results in very<br />
little variability in cash flow over a wide range of dispatch scenarios.<br />
• The project achieved commercial operation May 2003.<br />
Availability for the contract years ended May 2004 and May<br />
2005 and through September 2005 was above 99%.<br />
Credit Challenges<br />
Credit challenges for Tenaska Alabama II are:<br />
• Tenaska Alabama II operates in the Southeastern U.S., an<br />
overbuilt wholesale power market.<br />
• Contract pricing is above the current market level.<br />
• Single asset risk increases the project’s sensitivity to any<br />
operational difficulties beyond those covered by its LTSA.<br />
• High degree of leverage at the project.<br />
Rating Rationale<br />
Tenaska Alabama II Partners, L.P. (TAIIP) is a limited partnership<br />
that owns an 885 MW natural gas-fired, combined<br />
cycle power project located in Autauga County Alabama. The<br />
Baa3 rating for TAIIP’s senior secured bonds reflects predictable<br />
cash flows provided under a 20 year Energy Conversion<br />
Agreement (ECA) with Coral Power, L.L.C. (Coral), which<br />
benefits from an irrevocable and unconditional payment<br />
guarantee from its A2 rated parent, Coral Energy Holding,<br />
L.P., which in turn is guaranteed by Aa2 rated Shell Oil Company<br />
(Shell). Pursuant to the ECA, TAIIP is obligated to<br />
make all of the project's electrical output available to Coral<br />
over a 20 year term. Coral is also responsible for providing<br />
the fuel to the project, such that the ECA constitutes a tolling<br />
agreement. This structure eliminates fuel risk as a significant<br />
credit consideration.<br />
Each month during the operating term, Coral will pay the<br />
Partnership a capacity payment that is expected to cover fixed<br />
O&M expenses and debt service. The plant must meet availability<br />
and efficiency targets to avoid the payment of penalties.<br />
Operational risks, however, are viewed to be modest due<br />
to the standard technology, the relatively high reliability history<br />
for similar plants and Tenaska Operations, Inc.'s extensive<br />
experience as operator of other plants with the same<br />
technology and configuration. In addition, General Electric<br />
International guarantees the availability performance of the<br />
equipment and will provide major maintenance and repairs<br />
for the gas turbines and steam turbine under a long-term service<br />
agreement (LTSA).<br />
The bonds are secured by all of the project's assets, the<br />
partnership interests, all contracts and cash flow. The project<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
features liquidity provisions that include a 6-month debt service<br />
reserve letter of credit (to be provided by a bank rated at<br />
least A3) and a working capital facility. Liquidity is further<br />
supported by a waterfall structure for disbursements, which<br />
requires debt service be fully funded and a minimum coverage<br />
compliance test be met before distributions can be made to<br />
the sponsors.<br />
The project achieved commercial operation in May 2003.<br />
Both on-peak and off-peak availability for the contract years<br />
ended May 31, 2004 and May 31, 2005 were over 99% and<br />
the capacity factors were approximately 6% and 4% respectively.<br />
As of September 30, 2005, on-peak and off-peak availability<br />
for the contract year beginning June 1, 2005, were<br />
99% and 100%, respectively and the capacity factor was 12%.<br />
For the fiscal year ended December 31, 2004 and the 12-<br />
month period ended September 30, 2005, revenues approximated<br />
$72 million and $64 million, respectively. Net operating<br />
cash flow during these periods has been generally in line<br />
with the base case projections presented in the October 2003<br />
Offering Circular. For the full year ended December 2004,<br />
the debt service coverage ratio (calculated in accordance with<br />
the financing documents) was 1.45 times; for the twelve<br />
months ended September 30, 2005 the debt service coverage<br />
ratio was 1.44 times. These metrics are consistent with the<br />
Offering Circular but are toward the lower end of the range<br />
compared to similar projects in the rating category. However,<br />
TAIIP’s cash flows, and resulting debt service coverage ratios,<br />
are expected to be more stable than most other similar<br />
projects.<br />
The Baa3 rating also recognizes that the project is a single<br />
asset that is reliant upon one off-taker, Coral, for 100% of its<br />
revenues and cash flow. The project also relies on Coral for<br />
fuel delivery. Additionally, TAIIP is highly leveraged, with a<br />
capital structure that has negative equity on a GAAP basis.<br />
Rating Outlook<br />
The stable rating outlook for TAIIP reflects the credit quality<br />
of the off-taker/fuel supplier and the view that the project will<br />
be able to achieve consistent availability factors which will<br />
result in stable cash flows.<br />
What Could Change the Rating - UP<br />
Given the single asset risk, the high degree of leverage of the<br />
project, and the market that TAIIP operates in, there are limited<br />
prospects for this project financing to be upgraded in the<br />
near term. A substantial and unexpected reduction in leverage<br />
could have positive implications for the rating.<br />
What Could Change the Rating - DOWN<br />
TAIIP’s rating could be downgraded if there were a multinotch<br />
downgrade of the ratings of Coral Energy Holdings,<br />
L.P. and Shell, if there were significant operating weaknesses<br />
at the project causing availability factors to fall outside the<br />
range covered by the LTSA impacting the project's cash flow<br />
stability, or if the project were to incur significant unplanned<br />
expenses.<br />
• 115 •
Tenaska Georgia Partners, L.P.<br />
Georgia, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Credit Strengths<br />
Credit strengths for Tenaska Georgia are:<br />
• Cash flows derived from a long-term power purchase<br />
agreement (PPA) with Exelon Generation Company, LLC.<br />
• Existence of Long-Term Service Agreement (LTSA) with<br />
General Electric reduces operating and maintenance risk.<br />
• Reservation payments increase over time to match the<br />
increased debt service on the project.<br />
• The project has been in full commercial operation since<br />
June 2002. Availability has been above 99%.<br />
Credit Challenges<br />
Credit challenges for Tenaska Georgia are:<br />
• Tenaska Georgia operates in the Southeastern US, an<br />
overbuilt wholesale power market.<br />
• Without the contract with Exelon, Tenaska Georgia<br />
would not likely be able to cover its operating or debt service<br />
costs.<br />
• Leverage is high.<br />
• Amortization of debt is substantially back-end loaded.<br />
Rating Rationale<br />
Tenaska Georgia Partners, L.P. (Tenaska Georgia) is a limited<br />
partnership that owns a 942 MW natural gas-fired electric<br />
generation peaking facility in Heard County, Georgia. Tenaska<br />
Georgia’s Baa3 senior secured rating reflects the strength<br />
of a power purchase agreement (PPA) with Exelon Generation<br />
Company, LLC (Exelon: Baa1 senior unsecured) that<br />
expires in 2030 as well as the importance of the asset to<br />
Exelon’s long-term trading and marketing business.<br />
The rating also considers the reasonably high probability<br />
that required availability levels, which could impact reservation<br />
payments, will be reached each year given the expected<br />
operating performance of the units. The rating also acknowledges<br />
that as a simple cycle plant, operating risk should be<br />
low particularly given the existence of a LTSA with General<br />
Electric which provides long-term maintenance services to<br />
the plant and covers major parts replacement and repair,<br />
inspection and overhaul services for the six units. Moreover,<br />
ongoing maintenance on the units is likely to be low since the<br />
plant is likely to be dispatched only during peak times of the<br />
year.<br />
The rating considers the long-term economic value of the<br />
PPA to Exelon, including the reasonable reservation charge<br />
that the off-taker pays to Tenaska Georgia. While the current<br />
economics of the PPA is likely to be above market given the<br />
amount of regional excess capacity, the relatively reasonable<br />
reservation charge should not pose a large economic burden<br />
to Exelon, given Exelon's annual operating cash flow. Over<br />
time, the economics of this PPA should improve as the Southeastern<br />
wholesale power market recovers.<br />
The project’s contract structure serves to enhance credit<br />
quality as the reservation payment has specific contracted<br />
fixed price increases which improve debt service coverage<br />
ratios. While the base case coverage ratios start off low for the<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
current rating category, the reservation payment increases are<br />
expected to move the coverage ratios into a range that is more<br />
consistent with an investment grade rating over the life of the<br />
transaction. Over the next several years, the project is likely to<br />
be infrequently dispatched, given the region's excess capacity.<br />
Debt service coverage under a Zero Dispatch scenario is<br />
expected to average slightly less than 1.40 times for the next<br />
several years.<br />
Tenaska Georgia reached full commercial operation in June<br />
2002. The annual availability factors for the contract years<br />
ended May 31, 2004 and May 31, 2005 were both 100% and<br />
the capacity factors were 0.03% and 0% respectively. As of<br />
September 30, 2005, the annual availability for the contract<br />
year beginning June 1, 2005 was 99.9% and the capacity factor<br />
was 0.57%. Tenaska Georgia generated approximately $42<br />
million of revenues in 2004 and about $44 million during the<br />
12-month period ended September 30, 2005. Cash from<br />
operations for the 12-month periods ending December 31,<br />
2004 and September 30, 2005 approximated $8 million and<br />
$11 million, respectively.<br />
Modifications to certain operating agreements made by<br />
Tenaska Georgia, which became effective October 2004, have<br />
improved the project’s financial performance and debt service<br />
coverage ratios. For the years ending December 2003 and<br />
2004 Tenaska Georgia’s debt service coverage ratio, calculated<br />
according to the financing documents, was 1.25 times and<br />
1.32 times respectively. For the 12-months ended September<br />
30, 2005, Tenaska Georgia achieved a debt service coverage<br />
ratio of 1.40 times. We expect debt service coverage ratios to<br />
remain near this level for the next several years.<br />
Rating Outlook<br />
The stable rating outlook incorporates the view that the<br />
project can maintain high availability factors given the low<br />
operating risk involved with six simple cycle natural gas-fired<br />
peaking units, the anticipation of continued receipt of<br />
monthly reservation payments from Exelon, and the stable<br />
credit outlook for Exelon.<br />
What Could Change the Rating - UP<br />
Given the challenging market that Tenaska Georgia operates<br />
in, the high concentration of cash flows from Exelon, the high<br />
leverage, the limited improvement in the debt service coverage<br />
ratio anticipated over the next several years, and the backended<br />
amortization schedule, there are limited prospects for<br />
this project financing to be upgraded in the medium term.<br />
What Could Change the Rating - DOWN<br />
Tenaska Georgia’s rating could be downgraded if operating<br />
weaknesses at the project cause availability factors to fall,<br />
impacting the size of the reservation payment from Exelon; a<br />
substantial degradation in the credit quality of the off-taker,<br />
Exelon, could also adversely affect the project rating.<br />
• 116 •
Tenaska Virginia Partners, L.P.<br />
Virginia, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa3<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
Richard E. Donner/New York<br />
Daniel Gates/New York<br />
Credit Strengths<br />
Credit strengths for Tenaska Virginia are:<br />
• Cash flows are derived from a long term energy conversion<br />
agreement (ECA) with Coral Power L.L.C. which benefits<br />
from payment guarantees from Coral Energy Holding,<br />
L.P. and Shell Oil Company.<br />
• Operational risks are mitigated by a Long-Term Service<br />
Agreement (LTSA) with General Electric.<br />
• The project is not subject to fuel risk as Coral is responsible<br />
for supplying fuel under the ECA.<br />
• The alignment of the ECA and LTSA results in very little<br />
variability in cash flow over a wide range of dispatch scenarios.<br />
• The project achieved commercial operation May 1, 2004.<br />
Availability has been consistently high at approximately 99%.<br />
Credit Challenges<br />
Credit challenges for Tenaska Virginia are:<br />
• Tenaska Virginia operates in the Southeastern U.S., an<br />
overbuilt wholesale power market; although this is mitigated<br />
to some extent by its access to the PJM Interconnection.<br />
• Contract pricing is above the current market level.<br />
• Single asset concentration increases the project’s sensitivity<br />
to any operational difficulties beyond those covered by the<br />
LTSA.<br />
• High leverage at the project.<br />
Rating Rationale<br />
Tenaska Virginia Partners, L.P. (TVP) is a limited partnership<br />
that owns an 885 MW natural gas-fired combined cycle electric<br />
generating facility in Fluvanna County, Virginia. The<br />
Baa3 rating on TVP’s senior secured debt reflects the predictable<br />
cash flows provided under a 20-year Energy Conversion<br />
Agreement (ECA) with Coral Power, L.L.C. (Coral), which<br />
benefits from an irrevocable and unconditional payment<br />
guarantee from its A2 rated parent, Coral Energy Holding,<br />
L.P., which in turn is guaranteed by Aa2 rated Shell Oil Company<br />
(Shell). Pursuant to the ECA, TVP is obligated to make<br />
all of the project's electrical output over a 20-year term available<br />
to Coral. Coral is also responsible for providing the fuel<br />
to the project, such that the ECA constitutes a tolling agreement.<br />
This structure eliminates fuel risk as a significant credit<br />
consideration.<br />
Each month during the operating term, Coral pays the<br />
Partnership a capacity payment that is expected to cover fixed<br />
O&M expenses and debt service. The plant must meet availability<br />
and efficiency targets to avoid the payment of penalties.<br />
Operational risks, however, are viewed to be modest due<br />
to the standard technology, the relatively high reliability history<br />
for similar plants and Tenaska Operations, Inc.'s extensive<br />
experience as operator of other plants with the same<br />
technology and configuration. In addition, General Electric<br />
International guarantees the availability performance of the<br />
equipment and provides major maintenance and repairs for<br />
the gas turbines and steam turbine under a long-term service<br />
agreement (LTSA). Pricing provisions under the LTSA are<br />
well aligned with those of the ECA, so there is very little variability<br />
in the <strong>Project</strong>'s cash flow under a wide range of dispatch<br />
scenarios.<br />
The bonds are secured by all of the project's assets, the<br />
partnership interests, all contracts, guarantees and cash flow.<br />
The project features liquidity provisions that include a 6-<br />
month debt service reserve in the form of a letter of credit to<br />
be provided by a bank rated at least A3, and a $5 million<br />
working capital facility.<br />
The project achieved commercial operation in May 2004.<br />
The on-peak and off-peak availability factors for TVP’s first<br />
contract year, ended May 31, 2005, were 98.4% and 99.9%,<br />
respectively and the capacity factor was approximately 5%. As<br />
of September 30, 2005, the on-peak and off-peak availability<br />
for the contract year beginning June 1, 2005 were 99.9% and<br />
99.8% respectively, and the capacity factor was approximately<br />
38%. For the 12-months ended September 30, 2005, revenues<br />
were approximately $73 million; net operating cash flow<br />
has been generally in line with the base case projections presented<br />
in the April 2004 Offering Circular. For the 8-months<br />
ended December 2004, the debt service coverage ratio (calculated<br />
in accordance with the financing documents) was 1.43<br />
times; for the twelve months ended September 30, 2005 the<br />
debt service coverage ratio, including a one time electrical<br />
interconnection refund was 1.60 times, excluding the refund,<br />
the debt service coverage ratio would have been approximately<br />
1.43 times. TVP’s debt service coverage ratios are consistent<br />
with the Offering Circular but on the low end of the<br />
range compared to similar projects in the rating category.<br />
However, projected cash flows are expected to be more stable<br />
than most other similar power projects.<br />
The Baa3 rating also recognizes the project’s concentration<br />
risk as it is a single asset facility that is reliant upon a single<br />
off-taker for 100% of its revenues and cash flow. The project<br />
also relies on Coral for fuel delivery. Additionally, the rating<br />
takes into account TVP’s highly leveraged capital structure<br />
that has negative equity on a GAAP basis. It also considers<br />
contract pricing that is above the current market level.<br />
Rating Outlook<br />
The stable rating outlook for TVP reflects the credit quality<br />
of the offtaker/fuel supplier and the view that the project will<br />
be able to achieve consistent availability factors which will<br />
result in stable cash flows.<br />
What Could Change the Rating - UP<br />
Given the single asset risk, the high leverage of the project,<br />
and the market that TVP operates in, there are limited prospects<br />
for this project financing to be upgraded in the near<br />
term. A substantial and unexpected reduction in leverage<br />
could have positive implications for the rating.<br />
What Could Change the Rating - DOWN<br />
TVP’s rating could be downgraded if there is a multi-notch<br />
downgrade of the ratings of Coral Energy Holding, L.P. and<br />
Shell, or if there are significant operating weaknesses at the<br />
project causing availability factors to fall outside the range<br />
covered by the LTSA impacting the project's cash flow stability,<br />
or if the project incurs significant unplanned expenses.<br />
• 117 •
Tenaska Washington Partners, L.P.<br />
Washington, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
Credit strengths for Tenaska Washington are:<br />
• Contracted revenues stream through a purchase power<br />
agreement (PPA) with Puget Sound Energy.<br />
• Robust debt service coverage ratios.<br />
• Restructured PPA that was approved by the state commission<br />
and provides benefits to both Tenaska Washington<br />
and Puget.<br />
• PPA remains intact if the facility loses its QF status.<br />
Credit Challenges<br />
Credit challenges for Tenaska Washington are:<br />
• High degree of leverage at the project.<br />
• Single asset concentration increases the project’s sensitivity<br />
to operational difficulties.<br />
Rating Rationale<br />
Tenaska Washington Partners L.P. (Tenaska Washington) is a<br />
limited partnership that owns a 270 MW gas-fired combined<br />
cycle cogeneration plant near Ferndale, Washington. Tenaska<br />
Washington’s Baa2 senior secured rating is supported by the<br />
predictable cash flows provided under a 17-year power purchase<br />
agreement (PPA) with Puget Sound Energy, Inc.<br />
(Puget: Baa2 senior secured). The rating further considers the<br />
stronger-than-expected and fairly robust debt service coverage<br />
ratios exhibited at the project for the past several years,<br />
reflecting the inherent underlying financial strength of Tenaska<br />
Washington. <strong>Moody's</strong> expects this higher than originally<br />
forecasted trend to continue for the foreseeable future. The<br />
rating also incorporates the project’s high leverage and single<br />
asset concentration, which is mitigated by the strong and<br />
resilient debt service coverages expected throughout the<br />
transaction.<br />
Under the terms of the PPA, Puget must take or pay for all<br />
energy produced by the project, except during the month of<br />
May when scheduled maintenance takes place. Puget may displace<br />
the project if a cheaper alternative is available but must<br />
continue to pay the fixed-price energy payment as if power<br />
had been produced. The resulting savings from not actually<br />
generating power at the project is shared equally between the<br />
project and Puget.<br />
Analyst<br />
Phone<br />
Laura Schumacher/New York 1.212.553.1653<br />
A.J. Sabatelle/New York<br />
Daniel Gates/New York<br />
The fuel cost component of the tariff is largely a passthrough<br />
for the partnership since Puget provides the bulk of<br />
the natural gas to the project. Although there are differences<br />
between the tariff rate and actual fuel costs, the restructured<br />
PPA substantially eliminates price risk on fuel. The PPA<br />
remains intact even if the facility loses its QF status. Finally,<br />
Tenaska Washington’s all-in price is regionally competitive,<br />
thereby making the contract less likely to be challenged in the<br />
future.<br />
For 2004 and through September 2005, the project’s availability<br />
factors have been approximately 99%. Capacity factors,<br />
including displacement hours, have been approximately<br />
100% exclusive of scheduled maintenance periods. In both<br />
2004 and year-to-date 2005, the project was displaced more<br />
than twice as much as it was dispatched.<br />
Net income for the year ending December 2004 was<br />
approximately $38 million, and for the 12 months ending<br />
September 30, 2005 approximately $42 million. Cash from<br />
operations for 2004 was approximately $48 million, and for<br />
the 12 months ending September 30, 2005 was approximately<br />
$51 million. The debt service coverage ratio for the 12<br />
months ended December 31, 2004 and September 30, 2005,<br />
as calculated in the financing documents, was 2.23x and 2.09x,<br />
respectively.<br />
Rating Outlook<br />
Tenaska Washington’s rating outlook is stable reflecting the<br />
credit quality of the off-taker, the consistently strong financial<br />
profile of the project and the likelihood of continued similar<br />
results in the foreseeable future.<br />
What Could Change the Rating - UP<br />
Given the single asset risk and the credit rating of the offtaker,<br />
limited prospects exist for this rating to be upgraded in<br />
the near to medium term.<br />
What Could Change the Rating - DOWN<br />
The rating could be downgraded if credit deterioration surfaces<br />
at Puget or if the operating performance of the plant<br />
materially underperforms for an extended period of time.<br />
• 118 •
Tietê Certificates Grantor Trust<br />
New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
Caa2<br />
Analyst<br />
Phone<br />
Richard Sippli/Sao Paulo 55.11.3443.7444<br />
Benedito Oliveira/Sao Paulo<br />
Daniel Gates/New York 1.212.553.1653<br />
Tietê Certificates Grantor Trust<br />
2003 2002 2001 2000<br />
Gross Cash Flow / Adjusted Total Debt[1] 29.4% 23.5% 17.7% 22.1%<br />
Retained Cash Flow / Adjusted Total Debt[1][2] 22.9% 5.6% 14.2% 22.1%<br />
Dividends / Net Income 50.2% —— 122.9% 0.0%<br />
Gross Cash Flow + Interest Exp / Interest Exp. 4.1x 3.6x 2.8x 3.4x<br />
Adjusted Total Debt / Adjusted Capitalization[1] 77.4% 77.3% 65.4% 65.1%<br />
Net Income / Equity 44.0% -0.6% 5.3% 7.6%<br />
[1] Adjusted total debt includes post retirement obligations [2] Calculation of RCF includes all common and preferred stock dividends, in addition to interest on own capital<br />
Opinion<br />
Credit Challenges<br />
The credit challenges for Tietê Certificates Grantor Trust<br />
(“Tietê”) are:<br />
(1) Brazil's still evolving regulatory environment.<br />
(2) The structural subordination of the issuer's debt to<br />
operating company debt.<br />
(3) The amount of dividends available to be upstreamed is<br />
reduced by payments that must be paid to preferred shareholders<br />
and minority common shareholders.<br />
Credit Strengths<br />
The credit strengths for Tietê are:<br />
(1) Strong long term demand for power in the Brazilian<br />
economy.<br />
(2) Tietê's 30 year concession agreement.<br />
(3) Low production cost and low hydro risk.<br />
(4) High portion of contracted revenues.<br />
Rating Rationale<br />
The Caa2 rating reflects the issuer's default on the note payment<br />
that was due on December 15, 2003, although the contractual<br />
interest payment was subsequently made in full by the<br />
end of that month. The Caa2 rating also considers <strong>Moody's</strong><br />
view that the restructuring of the terms of the certificates<br />
took place due to a distressed situation in which expected dividend<br />
flows from AES Tietê S.A. were unlikely to cover nearterm<br />
debt service payments under the original terms of the<br />
issuance.<br />
AES Tietê is a ten-dam hydroelectric generating company<br />
located in the State of São Paulo, Brazil. The Company has<br />
been granted the right to operate the dams pursuant to a 30-<br />
year concession agreement. Approximately 97% of its revenues<br />
are derived from power sales under contract to Brazilian<br />
electric distribution companies.<br />
Rating Outlook<br />
The positive outlook considers <strong>Moody's</strong> estimation that the<br />
dividends received from the operating company are likely to<br />
cover the restructured debt service obligations after January<br />
1, <strong>2006</strong>, absent a significant devaluation of the current R$/<br />
US$ exchange rate or unexpectedly high domestic inflation<br />
rates.<br />
What Could Change the Rating - UP<br />
An upgrade in the rating could result from increased revenues<br />
and margins at the operating company due to an improved<br />
mix of contract tariffs, in addition to a reduction in uncertainty<br />
in the regulatory environment for the Brazilian electricity<br />
sector.<br />
What Could Change the Rating - DOWN<br />
A negative rating action or outlook change could result from a<br />
lower-than-expected level of dollar denominated dividend<br />
payments. A reduction in dividend payments could be caused<br />
by weak operational fundamentals or non-operational factors,<br />
such as a high level of R$-US$ currency devaluation, noncash<br />
financial expenses related to the issuer's obligations to<br />
Eletrobras, or an unfavorable regulatory environment.<br />
Recent Developments<br />
On February 04, 2004, <strong>Moody's</strong> Investors Service affirmed its<br />
Caa2 rating for the certificates due 2016 issued by Tietê Certificates<br />
Grantor Trust, and revised the rating outlook to positive<br />
from negative. The change in outlook from negative to<br />
positive reflects the closing of the restructuring of the certificates,<br />
and the resulting reduction in required debt service<br />
payments in 2004 and 2005.<br />
Recent Results<br />
Tietê posted 2003 cash flow from operations of R$ 353 million,<br />
EBITDA of R$ 612 million and net revenues of R$ 779<br />
million. Free cash flow increased to R$ 245 million from R$<br />
37 million in 2002. Free cash flow was used for debt reduction<br />
and to increase the company's cash position, equal to R$ 266<br />
million as of December 31, 2003. Total debt (not including<br />
the debt at Tiete Certificates Grantor Trust) as of December<br />
31, 2003 was R$ 1.5 billion, of which R$ 106 million was<br />
short term in nature. During the year ending December 31,<br />
2003, gross cash flow to total debt increased to 29.4% from<br />
23.5% and gross cash flow interest coverage increased to 4.3x<br />
from 4.0x. The improvement in these indicators was driven<br />
by increased cash generation resulting from a tariff increase<br />
and higher operational margins resulting from increased sales<br />
to Eletropaulo.<br />
During the 12-month period ending March 31, 2004,<br />
EBITDA increased to R$ 625 million and total debt to<br />
EBITDA dropped to 2.3x from 2.4x at year-end 2003.<br />
EBITDA-Capex interest coverage increased to 4.5x from<br />
4.4x. Cash increased to R$ 373 million as of March 31, 2004.<br />
Net income for the period, which largely determines the<br />
amount of dividend that can be paid, reached R$ 262 million,<br />
up from R$ 195 million in 2003.<br />
• 119 •
Transurban <strong>Finance</strong> Company Pty Ltd<br />
Melbourne, Victoria, Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Sr Sec Bank Credit Facility -Dom Curr<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
A3<br />
A3<br />
Analyst<br />
Phone<br />
Clement K. Chong/Sydney 612.9270.8108<br />
David Howell/Sydney 612.9270.8167<br />
Brian Cahill/Sydney 612.9270.8105<br />
Credit Strengths<br />
Credit strengths for Transurban <strong>Finance</strong> Company Pty Ltd<br />
(TFC) are:<br />
• Established traffic on Melbourne City Link (MCL), an<br />
integral part of Melbourne's transport network, which continues<br />
to exhibit strong growth<br />
• Full electronic toll collection which allows for small and<br />
frequent increases in tolls, reducing the sensitivity of traffic<br />
demand to increases in toll.<br />
• Guaranteed annual toll increase enshrined in the Concession<br />
Deed allowing tolls to increase by the lesser of 4.5% or<br />
CPI+2.5% until 2015 and by CPI thereafter.<br />
• MCL's low and predictable operating costs and capital<br />
expenditure.<br />
Credit Challenges<br />
TFC's credit challenges include:<br />
• Complex corporate and capital structure<br />
• Growing non-MCL activities, including construction of<br />
new toll roads within the Transurban Group, could pressure<br />
cash flow in the future.<br />
• Minimal retained cash flow resulting in reliance on standby<br />
facilities.<br />
Rating Rationale<br />
The Aaa rating on the credit wrapped senior secured notes of<br />
TFC reflects the insurance policy provided by MBIA Insurance<br />
Corp. The underlying senior secured rating and the rating<br />
of the A$1.8 billion MTN program of A3 reflects the<br />
established traffic demand, strong cash flow and low operating<br />
risk of MCL. <strong>Moody's</strong> considered MCL to be an important<br />
piece of infrastructure in Melbourne, connecting three<br />
major highways, rail, port and the airport. The importance of<br />
MCL in Melbourne's road network drives strong traffic<br />
demand and growth, enhancing revenue. Cash flows are further<br />
enhanced by the ability to increase tolls quarterly by<br />
more than CPI until 2015 (with escalation by CPI thereafter).<br />
Also considered in the rating is the Material Adverse Effect<br />
regime in the Concession Deed which provides some protection<br />
against potential adverse impacts of construction of competing<br />
infrastructure and of the occurrence of uninsurable<br />
force majeure events.<br />
These credit strengths are tempered by MCL's complex<br />
ownership and capital structure. The rating also considers<br />
MCL's exposure to technology and its heavy reliance on computer<br />
systems for toll collection, but <strong>Moody's</strong> believes this<br />
exposure is mitigated by a sound track record of system performance<br />
and the presence of an adequate back-up support<br />
program.<br />
<strong>Moody's</strong> considers TFC's gearing to be high. At the same<br />
time, its debt service coverage measures are considered reasonable<br />
for its A3 rating given the low business risk and<br />
strong cash flow generation.<br />
TFC group faces growing exposure to non-CityLink activities,<br />
which could over time pressure its business and financial<br />
risk profile. Such a development could occur if the Transurban<br />
Group's other businesses fail to perform as expected and,<br />
as a result, pressure CityLink entities for additional distributions<br />
to support the lost distributions from its non-performing<br />
assets. However, for now, <strong>Moody's</strong> sees this risk as<br />
actually diminishing by the proposed investment in an established<br />
toll road such as the M2 Motorway. Nevertheless the<br />
acquisition highlights the way in which the group is fast<br />
evolving into a holder of multiple toll road assets.<br />
Recent Developments/Results<br />
The Transurban Group is in the process of acquiring shares in<br />
the Hills Motorway Group (unrated). In affirming TFC's A3<br />
underlying rating, <strong>Moody's</strong> considers that the Transurban<br />
group will generate growing cash flow from two mature toll<br />
roads: the Melbourne CityLink Toll Road, which it already<br />
owns, and the M2 Motorway. The M2 has a history of steady<br />
traffic and revenue growth, serving traffic between the fastgrowing<br />
region of north-western Sydney and the CBD.<br />
The Transurban Group is undertaking a scrip bid for Hills<br />
Motorway Group and will not issue any new debt to fund this<br />
acquisition. <strong>Moody's</strong> expects that future distributions from<br />
Hills Motorway will likely be available to service TFC's obligations,<br />
improving its diversity of cash flow. At the same time,<br />
TFC will likely be re-geared - through incurrence of additional<br />
debt - following the acquisition. The affirmation of<br />
TFC's current rating considers the company's stated intention<br />
of maintaining a financial profile that is consistent with<br />
an A3 rating. For example it is expected that TFC's interest<br />
cover ratio (ICR) will remain above 2.0 times over the next<br />
five years. If it became apparent - during the course of this<br />
transaction - that this financial policy was not to be followed,<br />
its rating could come under pressure.<br />
TFC's debt holders continue to benefit from the stable<br />
cash flows from, and the security over, the Transurban<br />
Group's core asset - the Melbourne CityLink Toll Road (CityLink).<br />
Rating Outlook<br />
The outlook on both ratings is stable.<br />
What Could Change the Rating - UP<br />
Sustained improvement in TFC's financial profile indicated<br />
by FFO/Interest above 3.0x from improved traffic and use of<br />
excess cash to pay down debt.<br />
What Could Change the Rating - DOWN<br />
TFC's Aaa credit-wrapped rating could be downgraded upon<br />
a downgrade of MBIA's insurance financial strength rating.<br />
TFC's underlying rating could come under downward<br />
pressure if new developments at the Transurban group level<br />
led to pressure on TFC for increased distributions to its parent<br />
company. Covenants in TFC's debt documents only partially<br />
mitigate this concern. TCL could fund the group's<br />
other activities by up-streaming more cash through additional<br />
borrowings up to the level permitted by its financial covenants.<br />
As the A3 underlying rating assumes an expected financial<br />
profile, which is stronger than that implied at the<br />
financial covenants level, TFC's rating could consequently<br />
come under pressure.<br />
TFC's underlying rating could also come under downward<br />
pressure if sustained deterioration in traffic on the MCL<br />
results in weaker financial profile, indicated by FFO/Interest<br />
of less than 1.7x.<br />
• 120 •
Utility Contract Funding, L.L.C.<br />
Houston, Texas, United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa1<br />
Credit Strengths<br />
Credit strengths include:<br />
• Contracted nature of cash flow streams provides structural<br />
stability to debt service coverage<br />
• Amended PPA with Public Service Electric & Gas Company<br />
(PSE&G) has been approved by the New Jersey Board<br />
of Public Utilities, is included in rate base as part of stranded<br />
costs, and is provided additional protection against renegotiation<br />
by the NJ Electric Discount and Energy Competition<br />
Act<br />
• Mirror PPA with Morgan Stanley Capital Group guaranteed<br />
by Morgan Stanley<br />
• $27 million liquidity account offers protection from<br />
potential mismatches between the projected energy delivery<br />
schedule and the actual delivery schedule<br />
Credit Challenges<br />
Credit challenges include:<br />
• Contracts structured to provide 1.01x coverage ratio,<br />
which provides little flexibility to deal with adverse events<br />
• Six-month debt service reserve unlikely to be replenished<br />
if utilized<br />
Rating Rationale<br />
Utility Contract Funding (UCF) was structured to monetize<br />
the difference in prices received under an Amended and<br />
Restated Power Purchase Agreement (PPA) with PSE&G for<br />
electric capacity and delivered energy, and prices paid to Morgan<br />
Stanley Capital Group (MSCG) under a Mirror PPA.<br />
MSCG’s obligations under its contract with UCF are guaranteed<br />
by Morgan Stanley (Aa3 senior unsecured).<br />
As the lower-rated counterparty to UCF, PSE&G’s credit<br />
quality is the primary credit driver for UCF’s rating. However,<br />
the project is also subject to timing differences in cash<br />
flow and debt service resulting from energy delivery optionality<br />
in its contract with PSE&G. UCF’s Baa1 senior secured<br />
Analyst<br />
Phone<br />
Fred Zelaya/New York 1.212.553.1653<br />
James Hempstead/New York<br />
Daniel Gates/New York<br />
rating is, therefore, also supported by a liquidity account that<br />
is available to cover timing differences in electric power deliveries<br />
and debt service requirements.<br />
Due to the timing differences, the project’s DSCR has been<br />
below 1.0x during certain six-month periods. However, this<br />
was anticipated in the project structure, and the liquidity provisions<br />
are sized to meet the maximum allowable swing in<br />
electric power deliveries. Due to sufficient working capital in<br />
the project structure, no drawings from the liquidity account<br />
have been necessary to meet debt service obligations to date.<br />
On a twelve-month calculation basis, the DSCR has been<br />
1.00x or greater.<br />
UCF continues to be in compliance with its agreements<br />
and is performing as anticipated. Bear Stearns acquired the<br />
project from El Paso through an indirect subsidiary in June<br />
2004 and is assumed the role of administrative agent.<br />
Rating Outlook<br />
The stable outlook reflects PSE&G’s Baa1 senior unsecured<br />
rating and stable outlook.<br />
What Could Change the Rating - UP<br />
PSE&G is currently the primary credit driver for UCF. An<br />
upgrade PSE&G senior unsecured debt would result in an<br />
upgrade of UCF.<br />
What Could Change the Rating - DOWN<br />
PSE&G is currently the primary credit driver UCF. A downgrade<br />
of PSE&G’s senior unsecured debt would result in a<br />
downgrade of UCF. In addition, were any problems to arise<br />
with respect to MSCG’s obligations to deliver power under its<br />
contract with UCF without a corresponding liquidated damages<br />
payment from either MSCG or Morgan Stanley under<br />
its guaranty, a downgrade could result, potentially without<br />
there having been any negative rating action on PSE&G,<br />
MSCG, or Morgan Stanley.<br />
• 121 •
Westralia Airports Corporation PTY Limited<br />
Perth, Western Australia, Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bkd Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
David Howell/Sydney 612.9270.8167<br />
Clement K. Chong/Sydney 612.9270.8108<br />
Brian Cahill/Sydney 612.9270.8105<br />
Chee Mee Hu/New York 1.212.553.1653<br />
Westralia Airports Corporation PTY Limited<br />
[1]2004 2003 2002 2001<br />
EBITDA Margin (%) 64.3 63.6 61.8 65.4<br />
Fund From Operations/ Senior Interest (X) 2.0 1.8 1.7 1.7<br />
Retained Cash Flow/ Senior Debt (%) 4.5 4.4 3.1 0.8<br />
Retained Cash Flow/ Capital Expenditure (%) 80.8 89.7 208.9 23.8<br />
Revenue per Emplaned Passenger (A$ Million) 38.3 36.7 31.6 28.8<br />
Senior Debt per Emplaned Passenger (A$ Million) 136.3 158.0 183.9 164.8<br />
[1] For the year ended June 30, 2004<br />
Opinion<br />
Credit Strengths<br />
Westralia Airports Corporation Pty Limited's (WAC) credit<br />
strengths are its:<br />
– dominant position, with Perth Airport being the only<br />
major airport in Western Australia<br />
– diversified revenue stream, with revenue being generated<br />
by aeronautical charges, retail, property and commercial trading<br />
Credit Challenges<br />
WAC's credit challenges are the:<br />
– concern about the impact of the property trust on WAC<br />
cash flow<br />
– impact of one off external events on international traffic<br />
(which accounts for around 30% of total traffic) that may<br />
impact WAC's liquidity<br />
- highly leveraged which limits financial flexibility<br />
Rating Rationale<br />
The Aaa rating of WAC's bonds reflects the payment guarantee<br />
provided by MBIA. The underlying Baa3 rating reflects<br />
Perth Airport's dminant position in Western Australia, given<br />
it is the main domestic and only international airport. The<br />
rating further considers the diversity of WAC's revenue<br />
stream, which comprises earnings generated from aeronautical,<br />
retail and car parking operations as well as property development.<br />
The rating is tempered by Perth Airport's relative size and<br />
its high leverage. Despite its ranking as Australia's 4th largest<br />
airport, when compared with its larger counterparts, it exhibits<br />
less of an ability to withstand external shocks. In our consideration<br />
of the potential impact of external shocks, <strong>Moody's</strong><br />
believes WAC has sufficient liquidity to withstand and additional<br />
one-off event, such as SARS, with about A$25 illion<br />
available for debt servicing, if required. WAC's leverage, indicated<br />
by Senior Debt/EBITDA of 5.5x and Senior Debt/Capitalisation<br />
of 51% in FY04, is high for its rating. However,<br />
<strong>Moody's</strong> believes this high leverage is manageable within its<br />
rating given its low business risk.<br />
WAC has a large land bank - in excess of its aeronautical<br />
requirements - and which can be used to substantially expand<br />
its property business. In this context, it has set up a property<br />
trust, which is outside the senior lenders security structure, to<br />
undertake non-aeronautical property developments. Furthermore,<br />
in its rating analysis, Moody;s considers the potential<br />
impact on cash flow of the trust and any reduction in WAC's<br />
non-aeronautical property revenues.<br />
Rating Outlook<br />
The outlook for both ratings is stable.<br />
What Could Change the Rating - UP<br />
WAC's underlying rating could be upgraded upon a material<br />
reduction in debt or improvement in operating performance<br />
such that FFO/Senior Interest is maintained at over 2.5x and<br />
Senior Debt/EBITDA is less than 5.0x.<br />
What Could Change the Rating - DOWN<br />
WAC's Aaa rating would be downgraded upon a downgrade<br />
of MBIA's insurance rating. WAC's underlying rating could<br />
be considered for a downgrade if material external event<br />
which impacts long-term performance of the airport such that<br />
FFO/Senior Interest falls less than 1.7x, RCF/Senior Debt<br />
close to zero and Senior Debt/EBITDA exceeds 8.0x.<br />
• 122 •
Windsor Petroleum Transport Corporation<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Opinion<br />
Moody’s Rating<br />
Stable<br />
Baa2<br />
Credit Strengths<br />
— Major oil companies have long-term need for well-maintained<br />
OPA compliant VLCCs.<br />
— Bareboat charters structured at sufficiently low rates to<br />
remain competitive with spot market rates and current market<br />
suggests the existing charters will remain competitive.<br />
— Staggered termination schedule and cash termination<br />
payments provide liquidity for debt service and time to<br />
arrange replacement charters in event of termination.<br />
— Frontline Ltd. as ultimate vessel owner provides marketing<br />
expertise in event of charter termination.<br />
Credit Challenges<br />
— VLCCs operate in commodity shipping markets subject to<br />
highly volatile day rates and shifting vessel values.<br />
— Termination option is entirely the charterer’s for any<br />
reason, including changing vessel needs, market day rates,<br />
supply and demand, etc.<br />
— Unknown counterparty risk in the event of a replacement<br />
charter.<br />
— Termination risk could increase with vessel age, possibly<br />
due to environmental issues or ready availability of newer<br />
replacement vessels.<br />
Rating Rationale<br />
Windsor Petroleum Transport Corporation is a special purpose<br />
entity that financed the construction of four very large<br />
crude oil carriers (VLCCs), all of which are leased under<br />
long-term charter to affiliates of BP p.l.c. (rated Aa1). The<br />
VLCCs are state-of-the-art double hulls that provide safe and<br />
cost-effective transport of large crude volumes. The serial<br />
notes, rated Aa1, reflect BP p.l.c.’s unconditional guarantee of<br />
four underlying bareboat charters entered into by BP Shipping<br />
Limited, a wholly owned subsidiary. The leases are noncancelable<br />
for initial periods ranging from 9 to 10.5 years,<br />
during which time the serial notes are fully amortized. The<br />
bareboat charters provide crew, maintenance, and insurance;<br />
Analyst<br />
Phone<br />
Thomas S. Coleman/New York 1.212.553.1653<br />
Michael Doss/New York<br />
John Diaz/New York<br />
absorb operating cost variances; and are responsible for safe<br />
vessel operation. The term notes, which are rated Baa2,<br />
reflect re-chartering risk and potential exposure to fluctuating<br />
tanker rates: BP Shipping has the option, in its sole discretion,<br />
to elect not to renew the charters at the end of the initial periods.<br />
Weak VLCC markets and charter rates could prompt BP<br />
not to renew, and re-chartering rates could also prove insufficient<br />
for debt service. These risks are mitigated by BP's continuing<br />
need for state-of-the-art environmentally sound<br />
vessels; by low breakevens on charter rates, which would tend<br />
to support renewal; by required pre-notification of nonrenewal,<br />
which provides time to re-charter the vessels; and by<br />
staggered charter terminations. The vessels are relatively new,<br />
having been constructed by Samsung Heavy Industries and<br />
delivered in 2000.<br />
Rating Outlook<br />
Windsor ’s serial notes have a stable outlook and will continue<br />
to be linked to BP's Aa1 senior debt rating. The Baa2 term<br />
notes reflect fundamental and structural protections. Changes<br />
in world tanker markets and shipping rates could affect recharter<br />
risk and the outlook on the term notes as break dates<br />
approach. Windsor's first break date option occurs in January<br />
2009.<br />
What Could Change the Rating - UP<br />
The term notes reflect fundamental termination risk and we<br />
would not expect to upgrade them except in the event that the<br />
charterers relinquished the termination option.<br />
What Could Change the Rating - DOWN<br />
In the event of a charter break, we would expect to review the<br />
term notes for downgrade, focusing on Frontline’s remarketing<br />
efforts and success in finding acceptable replacement<br />
charters, counterparty risk of the charterer, and spot market<br />
conditions, including replacement day rates, supply/demand<br />
and vessel market values.<br />
• 123 •
10 Moody’s Corporate Governance Assessment<br />
PAGE INTENTIONALLY LEFT BLANK
Credit Opinions<br />
Governments<br />
Supranationals<br />
Financial Guarantors<br />
<strong>Project</strong> Developers<br />
• 125 •
PAGE INTENTIONALLY LEFT BLANK
Ambac Assurance Corporation<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Matthew Noll/New York 1.212.553.1653<br />
Dagmar H. Silva/New York<br />
Jack Dorer/New York<br />
Ambac Assurance Corporation (SAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Gross Par Written ($mil) 59,209 118,106 115,339 116,377 90,133 76,984<br />
Net Income ($mil) 323 677 598 502 410 338<br />
Expense Ratio (%) 9.8 11.1 8.2 9.7 12.1 17.1<br />
Loss Ratio (%) 3.3 12.2 6.1 7.5 (0.5) 3.4<br />
Adjusted NPO ($mil)[1] 474,709 467,870 440,887 394,647 321,932 280,094<br />
Market Share (%)[2] 23.8 23.8 24.4 25.1 24.3 24.8<br />
Hard Capital ($mil) 9,977 9,820 8,392 6,982 5,918 4,929<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 47.6 47.6 52.5 56.5 54.4 56.8<br />
Credit Quality Ratio (Expected Loss/Adjusted NPO) (bps)[3] na 45.4 39.6 38.4 37.2 38.0<br />
Tail Risk Ratio(99.9 % Losses / Adjusted NPO) (bps)[3] na 140.5 130.7 124.3 126.0 132.8<br />
Hard Capital Ratio(Hard Capital / 99.9 % Losses)(x)[3] na 1.51 1.45 1.40 1.43 1.31<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[3] na 1.47 1.43 1.38 1.40 1.26<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality and well diversified insured portfolio and<br />
nominal liquidity needs<br />
• Leading global provider of financial guaranty insurance—highest<br />
returns of its peers<br />
• Strong risk adjusted capitalization and stable, predictable<br />
earnings<br />
• Proven strategy, and transparency of business risks<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single-name exposures<br />
• Alternatives to financial guaranty and new entrants are<br />
likely to increase competition<br />
• Declining issuance and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Reliance on limited pool of reinsurers, some under credit<br />
stress<br />
Rating Rationale<br />
The Aaa insurance financial strength rating of Ambac Assurance<br />
Corporation (Ambac) reflects the limited risk characteristics<br />
of the company's core business, as well as its strong<br />
capital base, solid underwriting, expert surveillance and risk<br />
management skills, and consistently profitable financial<br />
results. Growth expectations for Ambac's core business<br />
remain healthy, particularly in the structured and international<br />
sectors. Additionally, Ambac’s well established US<br />
municipal business continues to balance the insured portfolio<br />
with low risk exposure while still providing good premiums.<br />
The strategy of pursuing new product types and new business<br />
sectors while retaining a strong hold on the steady, historically<br />
lower risk municipal business should ensure that<br />
Ambac continues to build a highly rated, highly diversified<br />
insured portfolio containing transactions with a low probability<br />
of default and low severity of loss. Furthermore, Ambac's<br />
conservatively managed investment portfolio generates a<br />
steady stream of earnings with minimal volatility. The company’s<br />
substantial capital base, proactive management, and<br />
leading market position form the foundation of its well established<br />
franchise. These strengths are somewhat moderated by<br />
the uncertainty of taking on new risks which may pose greater<br />
uncertainties than the traditional US-based municipal business.<br />
Rating Outlook<br />
The outlook for Ambac’s Aaa insurance financial strength rating<br />
is stable, as is the outlook for the Aa2 senior debt rating of<br />
its parent, Ambac Financial Group, Inc (AFG). New forms of<br />
US structured products and international sectors have been<br />
and will continue to be the main source of opportunity for<br />
Ambac and most all of the major financial guarantors.<br />
What Could Change the Rating - DOWN<br />
• Deterioration in competitive environment or product<br />
demand<br />
• Failure to maintain three-year average operating ROE<br />
above 12%<br />
• Hard and total capital ratios falling below 1.3x without<br />
corrective action<br />
• Extensive diversification in higher risk businesses<br />
Recent Developments<br />
Ambac's Credit Enhancement Production (adjusted gross<br />
premiums written) through the first six months of 2005<br />
totaled $597 million, an 11% decrease versus the same period<br />
in 2004. Gross par written was $59.2 billion, a 10.5% increase<br />
versus the first six months of 2004. On a US GAAP basis,<br />
AFG's total net premiums earned, total revenue and net<br />
income for the first six months of 2005 were $393 million,<br />
$797 million, and $372 million respectively, versus $355 million,<br />
$689 million and $352 million during the same six<br />
month period of 2004. Strong auto securitizations and investor<br />
owned utility (IOU) demand helped increase results, while<br />
increased competition from other guarantors and other forms<br />
of credit enhancement, fewer health care transactions, and<br />
unsteady international business offset results.<br />
• 127 •
Ambac Financial Group, Inc.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Ambac Assurance Corporation<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa2<br />
Stable<br />
Aaa<br />
Ambac Assurance UK Limited<br />
Outlook<br />
Stable<br />
Insurance Financial Strength<br />
Aaa<br />
Analyst<br />
Phone<br />
Matthew Noll/New York 1.212.553.1653<br />
Dagmar H. Silva/New York<br />
Jack Dorer/New York<br />
Ambac Financial Group, Inc. (U.S. GAAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Total Revenue ($mil)[1] 797 1,405 1,272 959 725 621<br />
Net Income ($mil) 372 725 619 433 433 366<br />
Pretax Operating Income/Revenue (%) 64.3 69.5 66.8 58.8 60.4 53.7<br />
Interest Coverage (x) 20.0 19.0 16.7 13.9 15.1 13.9<br />
Expense Ratio (%) 14.9 14.0 13.8 15.3 17.0 17.7<br />
Loss Ratio (%) 10.8 9.1 8.2 6.5 5.3 4.8<br />
Return on Equity (%)[2] 14.1 16.4 16.8 14.4 15.9 15.5<br />
Total Assets ($mil) 19,530 18,585 16,747 15,356 12,268 10,120<br />
Total Debt ($mil) 792 792 792 617 619 424<br />
Shareholders' Equity ($mil) 5,293 5,024 4,255 3,625 2,984 2,596<br />
Financial Leverage (%)[3] 13.8 14.3 16.6 15.5 17.5 14.3<br />
Market Value Equity ($mil) 7,649 9,002 7,435 5,961 6,109 6,264<br />
[1] Revenue prior to 2001 includes interest expense from financial services operation. [2] Operating return on equity = (Net income minus the after-tax impact of accounting for derivatives<br />
and foreign exchange) / average equity excluding accumulated other comprehensive income. ROE for first half of 2005 is annualized. [3] Financial leverage = Long-term debt / (long term<br />
debt + shareholders' equity - accumulated other comprehensive income)<br />
Opinion<br />
Credit Strengths<br />
• High quality and well diversified insured portfolio and<br />
nominal liquidity needs<br />
• Leading global provider of financial guaranty insurance—highest<br />
returns of its peers<br />
• Strong risk adjusted capitalization and stable, predictable<br />
earnings<br />
• Proven strategy, and transparency of business risks<br />
Credit Challenges<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single-name exposures<br />
• Alternatives to financial guaranty and new entrants are<br />
likely to increase competition<br />
• Declining issuance and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Reliance on limited pool of reinsurers, some under credit<br />
stress<br />
Rating Rationale<br />
Ambac Financial Group Inc.'s (AFG) Aa2 senior debt rating is<br />
attributable to the strength of its principal operating subsidiary,<br />
Ambac Assurance Corporation (Ambac). Ambac (insurance<br />
financial strength rating Aaa) is a large financial guaranty<br />
insurer, providing guaranties in the municipal and structured<br />
finance markets, both in the US and abroad. Ambac is the primary<br />
source of capital for maintaining AFG’s debt service<br />
requirements, which are subordinate to any insurance claims<br />
generated by Ambac.<br />
Through its non-financial guaranty subsidiaries, AFG has<br />
made disciplined efforts to diversify beyond its core financial<br />
guaranty franchise by offering guaranteed investment contracts,<br />
interest rate swaps, and other financial and structuring<br />
services to municipal and non-municipal issuers.<br />
Rating Outlook<br />
The outlook for the Aa2 senior debt rating of AFG is stable,<br />
as is the outlook for Ambac’s Aaa insurance financial strength.<br />
Growth in US structured products and international sectors<br />
have been and will continue to be the main source of opportunity<br />
for Ambac and most all of the major financial guarantors.<br />
What Could Change the Rating - UP<br />
• <strong>Moody's</strong> does not foresee ratings improvement in light of<br />
the Aaa rating of the operating company and subordination of<br />
holding company debt to policyholders' claims<br />
What Could Change the Rating - DOWN<br />
• Hard and total capital ratios of operating company falling<br />
below 1.3x without corrective action<br />
• Deterioration of competitive environment and reduction<br />
in franchise value<br />
• Financial leverage above 16% and/or double leverage<br />
above 120% without mitigating factors<br />
• Extensive diversification in higher risk businesses<br />
Recent Developments<br />
Ambac's Credit Enhancement Production (adjusted gross<br />
premiums written) through the first six months of 2005<br />
totaled $597 million, an 11% decrease versus the same period<br />
in 2004. Gross par written was $59.2 billion, a 10.5% increase<br />
versus the first six months of 2004. On a US GAAP basis,<br />
AFG's total net premiums earned, total revenue and net<br />
income for the first six months of 2005 were $393 million,<br />
$797 million, and $372 million respectively, versus $355 million,<br />
$689 million and $352 million during the same six<br />
month period of 2004. Strong auto securitizations and investor<br />
owned utility (IOU) demand helped increase results, while<br />
increased competition from other guarantors and other forms<br />
of credit enhancement, fewer health care transactions, and<br />
unsteady international business offset results.<br />
• 128 •
Argentina<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B3/NP<br />
Caa1/NP<br />
Analyst<br />
Phone<br />
Mauro Leos/New York 1.212.553.1653<br />
Alessandra Alecci/New York<br />
Vincent J. Truglia/New York<br />
Argentina<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth -0.8 -4.4 -10.9 8.8 9.0 8.0 5.0<br />
CPI Inflation, eop -0.7 -1.5 41.0 3.7 6.1 11.0 10.0<br />
General Government Balance/GDP (%) -2.4 -3.2 -1.5 0.5 2.6 2.5 2.2<br />
General Government Debt/GDP (%) 45.0 53.7 134.6 138.0 124.9 76.9 71.3<br />
General Government Debt/Revenue (%) 230.1 286.2 763.7 671.7 532.0 307.5 287.1<br />
Current Account Balance/GDP (%) -3.2 -1.2 8.5 5.9 2.2 1.3 0.1<br />
External Debt/Exports (%)[1] 393.0 439.6 479.1 437.1 386.3 270.5 233.0<br />
External Vulnerability Indicator[2] 180.4 260.0 333.9 301.7 208.7 106.4 92.1<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of Argentina are:<br />
- A solid international reserve position;<br />
- An increased share of local currency debt<br />
Credit Challenges<br />
Credit challenges for Argentina are:<br />
- Preserving fiscal conditions that assure medium-term<br />
debt sustainability<br />
- Assuring consistency in the economic policy mix<br />
Rating Rationale<br />
Argentina's B3 foreign-currency country ceiling incorporates<br />
the debt reduction and the improved debt profile that resulted<br />
from the restructuring process completed in 2005. To date,<br />
<strong>Moody's</strong> has not rated bonds issued as a result of the debt<br />
exchange.<br />
Even though Argentina's external and government debt<br />
ratios registered a decline, they are in line with those reported<br />
by other countries rated at the low end of the B category. The<br />
ratio of external debt to current account receipts is expected<br />
to decline to 270% in 2005 compared with a pre-exchange<br />
level of 386%, while the government debt-to-GDP ratio will<br />
stand at some 77% versus 125%. When compared with levels<br />
observed before the December 2001 default, the external debt<br />
ratio is below its pre-default equivalent (270% vs 400%),<br />
while the government debt ratio is still higher (77% vs 50%).<br />
Now with a 40% share of peso-denominated debt, Argentina’s<br />
credit vulnerability to exchange rate fluctuations has<br />
been reduced relative to pre-2002 conditions.<br />
Rating Outlook<br />
The near-term perspective reveals that economic and credit<br />
conditions should not report major changes during <strong>2006</strong>.<br />
Even though various elements contributed to a better-thanexpected<br />
overall performance during the post-crisis transition<br />
period, reservations persist about the medium-term outlook,<br />
as it is unclear to what extent recent macroeconomic performance<br />
can be a guide for future prospects. Persistent inflationary<br />
pressures and negative real interest rates are an<br />
indication of inconsistencies in the economic policy mix<br />
which, if not corrected, could complicate macroeconomic<br />
management in the future. Fundamental factors (i.e., economic<br />
policy consistency, international competitiveness,<br />
access to external financing, etc.) are bound to play an<br />
increasing role in the years to come.<br />
What Could Change the Rating - UP<br />
A substantial and sustained reduction in Argentina’s debt<br />
ratios.<br />
What Could Change the Rating - DOWN<br />
Evidence that the government is unable/unwilling to make<br />
the adjustments necessary to prevent a deterioration in the<br />
fiscal indicators.<br />
Recent Developments<br />
The financial implications of the $9.8 billion prepayment to<br />
the IMF do not alter fundamentally Argentina’s credit perspective<br />
as reflected by the current B3 rating.<br />
From the standpoint of the government, the prepayment<br />
should be viewed as equivalent to a debt swap since foreigncurrency<br />
denominated debt with the IMF will be switched for<br />
debt with the Argentine central bank, with specific details yet<br />
to be determined. While the government debt ratios will<br />
remain unaltered, the associated refinancing risk will be effectively<br />
reduced as the government will no longer require market<br />
funding for an equivalent amount in coming years. In this<br />
respect, the “financial relief” that will be derived from the<br />
IMF prepayment should be particularly significant in 2007<br />
and 2008, as $8 billion would have matured during those<br />
years compared with $1.6 billion during <strong>2006</strong>.<br />
While the prepayment to the IMF will lower Argentina’s<br />
external indebtedness, such a development is in line with<br />
Moody’s expectation of a nominal decline in the stock of<br />
external debt as we had not anticipated that the IMF would<br />
provide a rollover of upcoming maturities. Accordingly, the<br />
correction that may be required in the external debt indicators<br />
will come only at the margin and the debt-to-exports<br />
ratio is likely remain above the 200% mark, well in excess of<br />
the mean for the B peer group that stood at 130% in 2005.<br />
Moving beyond its direct financial implication, concerns of<br />
a different nature emerge when we consider the (apparent)<br />
underlying intention behind the government’s decision, i.e.,<br />
to do away with the IMF. While symbolic, given the limited<br />
role that the IMF has played in the design and execution of<br />
economic policy, the decision is an indication that the government<br />
will not only maintain, but will strengthen the heterodox<br />
approach that has recently characterized economic policy<br />
making .<br />
This attitude has been reinforced since last October’s legislative<br />
elections which were viewed by President Kirchner as a<br />
clear indication of political support for his mandate in general,<br />
and for the economic policies of his administration in<br />
particular.<br />
• 129 •
Asian Development Bank<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
Commercial Paper P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Thomas J. Byrne/New York 1.212.553.1653<br />
Mary O'Donnell/New York<br />
Vincent J. Truglia/New York<br />
Asian Development Bank<br />
1999 2000 2001 2002 2003 2004<br />
Return on Earning Assets 1.3 1.7 2.4 2.6 1.1 1.1<br />
Interest Coverage Ratio (x) 1.3 1.4 1.6 1.9 1.4 1.5<br />
Risk-Asset Coverage Ratio[1][2] 191.4 192.8 193.9 208.1 233.1 308.9<br />
Usable Capital/Risk Assets 50.6 55.1 60.0 64.7 68.6 88.6<br />
Net Loans ($ millions) 28,344 28,231 28,739 29,234 25,398 24,197<br />
Liquid Assets/Debt 105.9 97.3 102.8 78.1 152.0 145.2<br />
Total Reserves/Loans Outstanding 26.4 28.5 31.1 33.2 37.6 40.1<br />
[1] Usable equity plus callable capital of countries with Aaa or Aa ratings/Risk Assets. [2] Risk assets defined as loans to countries considered by <strong>Moody's</strong> to be below investment grade.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the Asian Development Bank have been<br />
tested by adversity, they are:<br />
-Solid shareholder support<br />
-Strong capital backing<br />
-Strong financial fundamentals<br />
-Prudent risk management<br />
-Preferred creditor status<br />
Credit Challenges<br />
The ADB is well position to manage potential credit challenges<br />
and concerns, including:<br />
-Concentrated exposure in high credit risk countries<br />
- Maintaining shareholder support.<br />
Rating Rationale<br />
Moody’s Aaa rating for long-term debt issued by the Asian<br />
Development Bank (ADB) and the Prime-1 rating for shortterm<br />
obligations are based on the following factors: (1) solid<br />
support—most of the subscribed capital is pledged by nonborrowing<br />
member countries rated Aaa/Aa; (2) preferred<br />
creditor status that borrowing countries afford the bank; (3)<br />
the bank's strong financial fundamentals; and, (4) prudent risk<br />
management. Under the terms of its charter, ADB’s commitments<br />
for loans, guarantees, and equity investments cannot<br />
exceed subscribed capital, reserves and surplus. The Bank also<br />
limits gross outstanding borrowings to no more than the sum<br />
of callable capital of non-borrowing members, paid-in capital<br />
and reserves (including surplus and special reserve) subject to<br />
the charter limit of 100% of callable capital. The bank has<br />
operated within those restrictions and has never resorted to a<br />
capital call.<br />
With negligible non-accruals on its public sector loans and<br />
very limited, albeit growing, exposure to the inherently riskier<br />
private sector, the ADB maintains a loan portfolio performance<br />
equal to the best in its peer group of multilateral development<br />
banks.<br />
The increase in loan charges in 2000 and reduction in new<br />
lending following the Bank's exceptional response to the<br />
Asian crisis have reversed the downward trend in key financial<br />
ratios, although these had remained above the Bank's conservative<br />
internal guidelines.<br />
Rating Outlook<br />
The ADB’s strong member support and healthy financial condition<br />
ensure a stable near-term outlook, even if some of the<br />
Bank's major borrowing countries encounter again financial<br />
difficulties. The Bank's strong income performance will likely<br />
continue over the rating horizon.<br />
What Could Change the Rating - DOWN<br />
In view of the Bank's strong financials and prudent management,<br />
the most serious threat to the rating could come from a<br />
diminution in shareholder support. Although there is no indication<br />
that such concerns are an issue, the member counties<br />
will need to remain committed to the ADB's developmental<br />
and poverty reduction roles.<br />
Recent Results<br />
In October the ADB launched two debut local currency<br />
demoninated bonds in China and the Philippines, respectively.<br />
These new issues continue the ADB's strategy of developing<br />
local bond markets already evident in India, Malaysia<br />
and Thailand. In China the proceeds of the bond will go<br />
towards financing private sector development projects and in<br />
the Philippines the proceeds will go to a SPV set up to purchase<br />
and resolve a portfolio of NPLs from the National<br />
Home Mortgage <strong>Finance</strong> Corporation (NHMFC).<br />
• 130 •
Australia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa/P-1<br />
Aaa/P-1<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Thomas J. Byrne/New York<br />
Vincent J. Truglia/New York<br />
Australia<br />
1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 4.2 3.3 2.6 3.8 3.6 2.9 2.5 3.4<br />
Inflation, eop 1.5 4.5 4.4 3.0 2.8 2.3 2.7 3.0<br />
Gen'l Gov't Balance/GDP 2.1 0.9 -1.1 0.3 0.8 1.1 0.9 0.8<br />
Gen. Gov. Primary Balance/GDP 4.3 3.0 0.8 2.0 2.4 2.7 2.4 2.3<br />
Gen'l Gov't Debt/GDP 28.5 25.3 22.1 20.8 19.5 20.5 17.4 17.0<br />
Gen'l Gov't Debt/Revenues 75.2 68.9 60.7 56.8 52.8 56.0 47.7 47.2<br />
Current Account Balance/GDP -5.7 -4.1 -2.4 -4.3 -6.0 -6.4 -5.8 -5.2<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Australia are:<br />
— Robust growth performance over the last several years<br />
demonstrates the economy's ability to withstand international<br />
cyclical fluctuations.<br />
— Open trade policies and a market-oriented regulatory<br />
regime provide a favorable environment for growth and<br />
investment.<br />
— The healthy budgetary and public debt situation will<br />
improve over the medium term while vigilant monetary policy<br />
stance will ensure price stability.<br />
— Stable political institutions underpin the pragmatic policy<br />
stance of successive governments and allow for the relatively<br />
peaceful resolution of potentially divisive issues.<br />
Credit Challenges<br />
Credit challenges for Australia are:<br />
— Reliance on foreign savings has left the country with a<br />
large external liability position (relative to GDP and in comparison<br />
with other Aaa countries) that exposes its economy to<br />
shifts in international confidence.<br />
— Although Australia's demographics and policy framework<br />
leave it well positioned to deal with population aging<br />
relative to other industrial countries, the government's own<br />
analysis indicates that health and aged care spending will lead<br />
to the emergence of a funding gap over the next 40 years.<br />
While the fiscal burden is well in the future, policy measures<br />
to address it will have to be initiated in the near term.<br />
Rating Rationale<br />
The foreign currency country ceilings were raised to Aaa<br />
from Aa2 in October 2002, reflecting <strong>Moody's</strong> assessment<br />
that Australia, with low government debt and a flexible<br />
exchange rate, would be unlikely in any circumstances to<br />
impose a debt moratorium or capital controls which might<br />
affect international debt repayments. The government’s<br />
domestic debt rating of Aaa takes into account the aim of<br />
maintaining a balanced budget, on average, over the business<br />
cycle. It is supported by the very low (and declining) level of<br />
public debt and the country's strong financial system.<br />
Australia's ratings reflect its status as a modern and increasingly<br />
diverse economy. Structural reforms have contributed to<br />
important advances in economic efficiency and productivity<br />
growth. The economy has shown a strong capacity to adjust<br />
and maintain healthy, positive growth rates in recent years. It<br />
weathered the Asian financial crisis in the late nineties as well<br />
as the recent global economic slowdown with good public<br />
finances, strong growth, and (by Australian standards) a good<br />
balance of payments position. The ratings also incorporate<br />
the medium-term orientation of fiscal and monetary policies<br />
and <strong>Moody's</strong> expectation that the emphasis on price stability<br />
and a sound budgetary position will be retained over the rating<br />
horizon.<br />
Although Australia has a high level of foreign liabilities relative<br />
to other Aaa rated countries, <strong>Moody's</strong> believes that this<br />
would not result in the government either defaulting on its<br />
own (very small) foreign currency debt or taking action to<br />
interfere with debt repayments by private sector issuers—<br />
even in a crisis situation. Furthermore, in foreign currency<br />
terms (as opposed to total cross-border liabilities), Australia is<br />
a small net creditor.<br />
Rating Outlook<br />
The Aaa ratings are well anchored by the government's low<br />
debt levels, which are trending lower, and <strong>Moody's</strong> analysis<br />
that there is an extremely low probability of the government<br />
imposing measures that would interfere with external debt<br />
repayments of entities domiciled in Australia.<br />
What Could Change the Rating - DOWN<br />
Any trend or event that caused a long-term shift in budget<br />
balances to significant deficits and an increasing public debt<br />
burden might put downward pressure on the rating. Such<br />
trends could include, for example, fiscal costs associated with<br />
an aging population. However, since the government has<br />
been proactive in addressing this issue through its superannuation<br />
policies and proposed reforms to healthcare schemes,<br />
<strong>Moody's</strong> does not anticipate sustained fiscal deterioration<br />
over the rating horizon.<br />
Recent Developments<br />
The Commonwealth budget surplus was about $4 billion<br />
higher than budgeted in FY 2004-05 as tax revenues were<br />
buoyant, and there was some underspending as well. Thus,<br />
the government will have no problem coming up with the<br />
approximately AUD16 billion that it says it will use as "seed<br />
capital" for the new Future Fund, expected to start in the first<br />
part of next year. When Telstra is finally privatized and the<br />
proceeds are most likely added to the Fund, it will already be<br />
quite substantial.<br />
Business investment is quite strong (up 15% in the past<br />
year) as corporate profits—particularly in the resource sector—have<br />
been strong. The strong exchange rate has also<br />
made important capital goods less expensive. Thus, while<br />
consumption spending is expected to slow in <strong>2006</strong>, investment<br />
will continue strong and economic growth is likely to<br />
accelerate somewhat.<br />
• 131 •
Belgium<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Belgium, Government of<br />
Outlook<br />
Stable<br />
Government Bonds<br />
Aa1<br />
Commercial Paper -Dom Curr P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Alexander Kockerbeck/Frankfurt 49.69.707.30.700<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
Belgium<br />
1997 1998 1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%y/y) 3.3 1.9 3.1 3.9 1.0 1.5 0.9 2.6 1.4 2.1<br />
CPI Inflation (%y/y) 1.5 0.9 1.1 2.7 2.4 1.6 1.5 1.9 2.7 2.6<br />
General Government Revenue/GDP 49.9 50.4 50.1 49.9 50.6 51.0 52.1 50.2 49.8 49.3<br />
General Government Expenditure/GDP 51.9 51.2 50.6 49.8 49.9 51.0 52.0 50.2 49.8 49.3<br />
General Government Balance/GDP -2.0 -0.8 -0.5 0.1 0.7 0.0 0.1 0.0 0.0 0.0<br />
Gross General Government Debt/GDP 124.5 119.3 113.6 107.7 106.3 103.2 98.5 94.7 94.3 90.7<br />
Current Account Balance/GDP 5.5 5.1 5.2 4.2 4.1 5.0 4.5 3.5 3.0 3.1<br />
Opinion<br />
Credit Strengths<br />
Belgium's credit strengths are:<br />
• Solid track record of prudent monetary and economic<br />
management, over fifteen years of fiscal discipline<br />
• Economic growth above Eurozone average<br />
• Substantial build up in net external assets<br />
Credit Challenges<br />
Belgium's credit challenges are:<br />
• High general government debt level<br />
• A number of structural distortions, particularly<br />
in the labor and social security areas<br />
Rating Rationale<br />
Belgium's long-term domestic- and foreign-currency denominated<br />
issues are rated Aa1, reflecting the country's track<br />
record of prudent economic management. Despite posting a<br />
public debt largely above the Maastricht criterion of 60% of<br />
GDP, entry into the European Monetary Union (EMU) in<br />
1999 was possible due to substantive progress in fiscal consolidation.<br />
Belgium’s track record of fiscal restraint can be traced<br />
back to the early 1980s, even though an impact on debt burden<br />
and fiscal deficits was not felt until 1994, when the<br />
"snowball effect" of interest charges on a high debt level<br />
began to be reversed. General government accounts shifted<br />
from a deficit of over 7% in 1993 to a roughly balanced budget<br />
since 2000. More than half of this improvement is<br />
accounted for by lower interest expenditure due to declining<br />
interest rates, falling debt stock, and enhanced debt management.<br />
The remainder reflects corrective measures, including<br />
the adoption of new direct and indirect taxes, greater efficiency<br />
in tax administration, and cuts in non-interest spending,<br />
evident in a strong improvement in the primary (noninterest)<br />
surplus between 1993 and 2001, setting the stage for<br />
the positive debt dynamics: the debt to GDP ratio decreased<br />
from a peak of more than 130% in 1993 to below 100% since<br />
2004. Belgium's participation in EMU also reflects a history<br />
of monetary discipline and exchange rate stability (from 1987<br />
until the launch of the euro, the Belgian franc was tied to the<br />
German mark), wage moderation since 1994, progress in<br />
market deregulation and a favorable macroeconomic policy<br />
framework.<br />
Rating Outlook<br />
The outlook for the rating on government bond obligations is<br />
stable, constrained by the still very high public debt level.<br />
Debt reduction is the Belgian government's principal policy<br />
objective, creating additional budgetary scope through<br />
declining interest burden, to fund growing costs of aging.<br />
However, a high dynamic of social security spending already<br />
indicates the need for further social security reform. High<br />
interest burden led to a culture of fiscal discipline. A sustainable<br />
trend of balanced general government budgets has developed<br />
over the past 6 years. The rules of the Silver Fund, a<br />
pension fund to finance future pension costs, do also have a<br />
disciplining effect. Budgets in balance or in surplus are a<br />
broadly accepted political goal. Authorities intend to continue<br />
fiscal consolidation by maintaining a substantial primary surplus<br />
in coming years. In addition, they aim for a progressive<br />
build up of budgetary surpluses from 2007 on, enforced by<br />
law and earmarked for pension funding (Silver fund). Thus,<br />
an explicit link between fiscal consolidation and old age pension<br />
funding will be established. Also, they plan to go ahead<br />
with a comprehensive tax reform focused on lowering taxes to<br />
spur growth and employment, and to lower spending on<br />
unemployment, health care and pensions. The latter pose significant<br />
vulnerability to containment of spending, especially<br />
regarding the large rise in pensioners expected from 2010 on.<br />
Spending control is a key precondition for further reduction<br />
of fiscal pressure. A number of structural distortions, particularly<br />
in the labor and social security areas, could over time<br />
impair the sustainability of the public sector's favorable budgetary<br />
and debt dynamics, as well as the country's long-term<br />
competitiveness and economic growth prospects. Intensified<br />
labor market initiatives ("Generation Pact", 2005) should<br />
increase labor participation, cushioning effects of an aging<br />
society, as do reform measures in the pension system.<br />
What Could Change the Rating - UP<br />
Ongoing success in reducing general government debt.<br />
What Could Change the Rating - DOWN<br />
Trend change towards increasing general government debt.<br />
Recent Developments<br />
Belgian general government debt in relation to nominal GDP<br />
has further decreased to 94.7% in 2004 and close to 94% in<br />
2005, despite debt takeover from national railway SNCB<br />
worth 2.5% of GDP. The general government debt ratio is<br />
expected to decrease further to 90.7% in <strong>2006</strong>. It had peaked<br />
at more than 130% in 1993 and stood at levels above 100%<br />
since 1982. Moody’s recognizes that this 40 percentage point<br />
debt ratio reduction in past 10 years is a remarkable track<br />
record. The average 4 percentage point yearly reduction fits<br />
into authorities’ projection to reduce the debt ratio to below<br />
80% by 2009. This would mean that in 2010 general government<br />
debt in relation to nominal GDP may stay at around<br />
75%, slightly higher than the Eurozone average in 2005.<br />
• 132 •
Buenos Aires, City of<br />
Argentina<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Bonds -Fgn Curr<br />
Bonds -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B3<br />
B1<br />
Analyst<br />
Phone<br />
Steven Hochman/New York 1.212.553.1653<br />
Maria Luisa Duarte/Buenos Aires 54.11.4327.2990<br />
Yves Lemay/New York<br />
Buenos Aires, City of<br />
Debt Highlights (as of 12/31) 1999 2000 2001 2002 2003 2004<br />
Total debt (Ps. millions) 824 969 902 2,333 2,200 2180<br />
As % of total revenue 25.8 30.1 30.8 79.5 54.9 42.3<br />
Financial Highlights (as of 12/31) 2000 2001 2002 2003 2004 B 2005<br />
Financing surplus (requirement) (Ps millions)[1] 70.8 -250.6 -88.5 495.7 807.6 0.0<br />
As % of total revenue<br />
Financing surplus (requirement) 2.2 -8.6 -3.0 12.4 15.7 0.0<br />
Financing surplus (requirement) net of CAPEX 9.5 -0.2 1.4 20.4 26.7 24.2<br />
Federal transfers 7.7 6.4 7.6 12.1 13.1 14.6<br />
Interest expense 2.8 2.4 2.0 3.4 2.4 3.1<br />
% change in own source revenue[2] 0.5 -7.8 -3.1 32.1 27.4 6.9<br />
Economic Highlights(as of 12/31) 1999 2000 2001 2002 2003 2004<br />
Unemployment rate, City (%)[3] 10.3 10.4 14.3 13.5 11.3 7.6<br />
Nation (%)[3] 13.8 14.7 18.3 17.8 14.5 12.1<br />
[1] Total revenue less total expenditures, excluding principal payments [2] Excludes asset sales. [3] Reported for October each year through 2002. Beginning 2003, rate reported is the average<br />
for the latest quarter available for the year.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the City of Buenos Aires include:<br />
•Ongoing economic recovery which supports revenue<br />
growth and fiscal balance<br />
•Debt restructuring that lowered debt service costs<br />
•Broad economy that generates incomes far higher than<br />
the national average<br />
Credit Challenges<br />
Credit challenges for the City of Buenos Aires include:<br />
•Economic uncertainty and continuing fiscal pressures<br />
Rating Rationale<br />
Moody’s upgraded the local currency bond ratings of the City<br />
of Buenos Aires to B1 (Global Scale) and Aa2.ar (Argentina<br />
National Scale) in June 2005. The City's foreign currency<br />
bonds are rated B3, consistent with Argentina's foreign currency<br />
country ceiling.<br />
The rating is based on the city’s continuing economic and<br />
fiscal recovery from severe problems experienced earlier in<br />
the decade, and budget practices that contribute to financial<br />
flexibility. The city generated solid and increasing budget surpluses<br />
in 2003 and 2004, and first half results indicate the city<br />
will register positive results again in 2005. Revenues exceeded<br />
budget forecasts in both 2003 and 2004, while spending<br />
growth was kept below that of revenues.<br />
The city’s positive fiscal performance has been achieved<br />
with the aid of strong revenue gains – more than 36% in 2003<br />
and nearly 29% in 2004 – fed by an economic rebound. It has<br />
also been facilitated by the use of multi-year planning to<br />
guide spending decisions, a practice that should contribute to<br />
continued sound results.<br />
The still-low level of the new ratings acknowledges credit<br />
risks stemming from economic uncertainty, debt ratios that<br />
were substantially increased as a result of currency devaluation<br />
at the start of 2002, and the need to resist ongoing fiscal<br />
pressures. The ratios of debt to GDP and to revenues moderated<br />
in 2003 and 2004. Although the share of revenue the city<br />
devotes to debt service rose in 2003 as debt principal payments<br />
increased, that share eased in 2004 as debt requirements<br />
fell short of budget levels and strong revenue growth<br />
continued. This revenue share is not high when compared to<br />
similarly rated local and regional governments.<br />
Continued application of prudent fiscal policies, a necessary<br />
condition for debt stabilization, appears both achievable<br />
and likely. The 2005 budget projects revenue growth of only<br />
10.7% above 2004 results (compared to 28.8% growth that<br />
year) and a spending increase of 31.2% to achieve budgetary<br />
balance. Actual performance through 2005Q2 was better than<br />
budget, primarily because a large (149%) projected increase<br />
in capital spending is only being partly realized.<br />
The city’s revenues were stagnant from 1998, when Argentina<br />
entered economic recession, through mid-2001, when<br />
they began to drop precipitously. The revenue decline persisted<br />
through 2002Q1 as a result of deepening recession,<br />
freezes on bank deposits, civil unrest, political instability at<br />
the national level, a national debt default, peso devaluation<br />
and the imposition (later eased) of foreign exchange controls.<br />
Notable revenue growth did not resume until the fourth<br />
quarter of 2002.<br />
While acknowledging the city's significant credit risks, it is<br />
important to note, as well, its potential credit strengths. It<br />
benefits from a broad economy that generates incomes far<br />
higher than the national average. Its financial operations,<br />
modernized and improved in the second half of the 1990s,<br />
enabled it to reduce debt and, in the face of economic adversity,<br />
maintain fiscal balance far longer than most other Argentine<br />
jurisdictions. The city also was quick to restore balance as<br />
the economic crisis eased. Its debt poses a modest burden –<br />
even after the January 2002 devaluation – and, following the<br />
restructurings undertaken in 2002 and 2003, is now more<br />
affordable.<br />
Rating Outlook<br />
The city's debt rating outlook is stable.<br />
What Could Change the Rating - UP<br />
Continued sound economic and fical performance at the City<br />
level, in tandem with similar trends at the national level as<br />
recognized in our ratings, could move the City's rating up.<br />
What Could Change the Rating - DOWN<br />
A reversal in the positive economic and fiscal trends of recent<br />
years could move the rating down.<br />
• 133 •
Buenos Aires, Province of<br />
Argentina<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Secured<br />
Bonds<br />
Other Short Term<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ca<br />
Ca<br />
NP<br />
Analyst<br />
Phone<br />
Steven Hochman/New York 1.212.553.1653<br />
Maria Luisa Duarte/Buenos Aires 54.11.4327.2990<br />
Yves Lemay/New York<br />
Buenos Aires, Province of<br />
Debt Highlights (as of 12/31) 1999 2000 2001 2002 2003 2004<br />
Net debt (Ps. millions) 4,676 6,935 10,911 26,812 27,361 29,208<br />
as % of Total Revenue 50.2 80.1 141.8 283.1 242.9 196.6<br />
Financial Highlights (as of 12/31) 2000 2001 2002 2003 2004 [1]2005B<br />
Financing Surplus (Requirement) (Ps. millions)[2] (2,034.6) (4,392.8) (768.9) (141.1) 308.7 10.8<br />
As % of Total Revenue:<br />
Financing Surplus (Requirement) (23.5) (57.1) (8.1) (1.3) 2.1 0.1<br />
Financing Surplus (Requirement) excl. CAPEX (15.0) (33.2) (1.7) 4.2 11.0 9.4<br />
Federal Transfers 44.4 45.8 38.8 39.3 43.1 44.1<br />
Interest Expense 4.4 8.3 3.1 4.2 3.0 3.7<br />
% change in own-source revenue[3] (1.9) (13.3) 20.4 36.1 23.0 14.7<br />
Economic Highlights (as of 12/31) 1999 2000 2001 2002 2003 2004<br />
Unemployment rate - Province (%)[4] 16.1 16.5 21.0 21.0 18.2 15.2<br />
Unemployment rate - nation (%)[4] 13.8 14.7 18.3 17.8 15.4 12.6<br />
[1] Original budget proposal as presented to the Legislature. [2] Total revenue less total expenditures, before principal payments. [3] Excludes asset sales. [4] Through 2002, reported for<br />
October each year. Beginning 2003, reported for average of second half of year. Provincial data are for the Conurbano Bonaerense, which accounts for 70% of the province's population.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the Province of Buenos Aires include:<br />
•Revenue growth since 2002 exceeding that of spending,<br />
and the attainment in 2004 of a financing surplus<br />
Credit Challenges<br />
Credit challenges for the Province of Buenos Aires include:<br />
•Default since January 2002 on foreign currency debt<br />
•Repeated budget deficits incurred before 2004<br />
Rating Rationale<br />
<strong>Moody's</strong> foreign-currency debt rating for the Province of<br />
Buenos Aires is Ca. In January 2002 the Province suspended<br />
its debt service payments, and payment of foreign currency<br />
debt issued under foreign law continues in default. In September<br />
2005 the provincial government announced its intention<br />
to make an exchange offer to the holders of existing<br />
foreign currency bonds; see “Recent Developments” below.<br />
The Province began to generate large budget deficits in<br />
1998, and these continued through 2003. The string of deficits<br />
contributed to rapidly rising debt levels and liquidity<br />
problems. The Province’s total debt rose from almost Ps. 2.9<br />
billion at the end of 1998 (31.1% of that year’s revenue) to Ps.<br />
10.9 billion in 2001 (141.8% of revenue). Reflecting currency<br />
devaluation in 2002, the forced conversion to inflationindexed<br />
pesos of foreign-currency debt issued under Argentine<br />
law, the impact of inflation on that debt and the deficits<br />
incurred in 2002 and 2003, the Province’s total debt reached<br />
Ps. 29.2 billion at year-end 2004, or 196.6% of revenue.<br />
Under a worsening economic crisis and with no access to<br />
domestic or foreign sources of credit, a lack of liquidity led<br />
the Province to issue scrip as payment to employees and suppliers<br />
in lieu of cash in the final months of 2001. Scrip continued<br />
to be issued through July 2002, when its issuance was<br />
ended under an agreement with the national government.<br />
The deficits began shrinking in 2002 as spending was<br />
sharply reduced that year and revenues resumed growing.<br />
With even stronger revenue growth in 2003 and 2004, the<br />
Province achieved a financing surplus in 2004, although<br />
spending continues to exclude interest payments on foreign<br />
currency debt.<br />
Political circumstances are complicating the Province’s<br />
efforts to restore fiscal stability. Although the governor’s party<br />
commands a majority in the provincial legislature, factional<br />
disputes within the majority (Justicialist) party have prevented<br />
the governor from reaching agreement with the legislature on<br />
a budget for 2005.<br />
Until a new budget is approved, provincial spending is subject<br />
to the limits set in the prior year’s budget. The province<br />
reports that spending through June 2005 was 32% higher<br />
than in the same period last year, although the two periods<br />
may not be fully comparable. In September, the governor<br />
announced he would submit new budget proposals — for<br />
both 2005 and <strong>2006</strong> — after legislative elections set for October<br />
23, in hopes that the elections would produce a legislature<br />
more inclined to accept his proposals.<br />
Rating Outlook<br />
The rating outlook is stable.<br />
What Could Change the Rating - UP<br />
A restructuring of foreign currency debt issued under foreign<br />
law which offers payment terms that appear achievable by the<br />
province, could result in an improved rating for the new debt.<br />
Recent Developments<br />
In September 2005 the Province announced its intention to<br />
make an exchange offer to the holders of existing foreign currency<br />
bonds. In a press release, the Province indicated it does<br />
not intend to resume payment on existing bonds that remain<br />
outstanding after the closing of the offer. Under the terms<br />
reported in the press release, holders of existing bonds would<br />
experience a substantial present-value loss.<br />
An offer document further detailing the terms will be published<br />
before the start of what is expected to be a six-week<br />
acceptance period. The starting date of the acceptance period<br />
— provincial officials expect it to be in late October — will<br />
depend on the authorization of foreign regulatory agencies.<br />
The aggregate face amount of bonds subject to the offer<br />
(excluding accrued and unpaid interest) is equal to US$2.8<br />
billion, using exchange rates as of September 12, 2005.<br />
• 134 •
Canada<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Canada, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa/P-1<br />
Aaa/P-1<br />
Stable<br />
Government Bonds<br />
Aaa<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Mary O'Donnell/New York<br />
Vincent J. Truglia/New York<br />
Canada<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 5.2 1.8 3.4 2.0 2.9 2.8 2.7<br />
Inflation (CPI) (% oya) 2.7 2.5 2.2 2.8 1.8 2.5 2.5<br />
General Government Balance/GDP (%) 3.0 1.1 0.3 0.7 1.3 1.2 0.8<br />
General Government Revenue/GDP (%) 44.1 42.9 41.2 41.2 40.7 40.5 40.3<br />
General Government Primary Balance/GDP (%) 6.0 4.0 2.8 2.4 2.8 2.5 2.0<br />
General Government Debt/GDP (%) 81.8 81.0 77.7 73.3 71.5 68.3 65.9<br />
General Government Debt/Revenue (%) 185.5 188.8 188.6 177.9 175.7 168.6 163.5<br />
Opinion<br />
Credit Strengths<br />
Canada's credit strengths include the following.<br />
—Advanced industrial economy with sound monetary policy<br />
and flexible exchange rate<br />
—Good balance of payments performance, with current<br />
account surpluses likely to continue over the medium term<br />
—Improving net external liability position, making for less<br />
vulnerability to shocks than in the past<br />
—Political consensus on maintaining fiscal balance<br />
Credit Challenges<br />
Canada's credit challenges include the following.<br />
—Still relatively high, although declining, general government<br />
debt ratios<br />
—High concentration of external economic and financial<br />
relations with the United States<br />
Rating Rationale<br />
Moody’s rates Canada’s foreign currency country ceilings and<br />
the government’s domestic currency debt Aaa. The rating<br />
reflects the strongly improving trends in Canada’s external<br />
financial position as well as in its government debt ratios.<br />
Canada’s current account balance returned to surplus in<br />
1999, and most medium-term projections indicate that it will<br />
remain there for some time to come, even if there could be an<br />
occasional, small deficit due to cyclical factors. Whereas, in<br />
the past, current account deficits had caused the country’s net<br />
external liability position to rise to a moderately high level,<br />
the return to surpluses has caused this position to decline significantly.<br />
Moody’s expects this trend to continue, greatly<br />
lessening vulnerability to shocks coming from external<br />
(mainly US) developments or from events within Canada.<br />
Part of the improvement in the external position resulted<br />
from the depreciation of the Canadian dollar, which has been<br />
reversed during the past year. However, it is also due to<br />
improved productivity growth in Canada, which, although<br />
lagging somewhat the trend in the US, has picked up from<br />
earlier years. This, in turn, has resulted from economic<br />
reforms over the years in trade, taxation, the financial sector,<br />
and unemployment compensation. Canada's accession to<br />
NAFTA in the mid 1990s was part of this, as was a program of<br />
tax reductions that could reduce corporate taxes to near US<br />
rates. Further tax cuts in the US could put pressure in the<br />
future on Canada to follow suit. Thus, despite the recent rise<br />
in the value of the Canadian currency, <strong>Moody's</strong> believes that<br />
Canada's external finances will continue to improve.<br />
On the public finance front, Canada's ratios of general government<br />
debt to GDP and to revenue have moved significantly<br />
downward, although they are still higher than the<br />
median for Aaa rated countries. The same can be said for the<br />
ratios of net debt to GDP and to revenue, although these are<br />
closer to the median for such countries. Nevertheless,<br />
<strong>Moody's</strong> believes that these ratios are clearly on a downward<br />
trend that will continue into the medium term. This expectation<br />
is supported by developments at both the federal and<br />
provincial levels.<br />
There is political debate over government spending programs<br />
that could affect the rate of improvement in these<br />
ratios. However, there seems little chance that the trend in<br />
the ratios will reverse, given the political consensus in Canada<br />
that supports at least balanced budgets and a continuation of<br />
paying off government debt.<br />
Rating Outlook<br />
The outlook for Canada's ratings is stable, supported by<br />
<strong>Moody's</strong> expectation of further improvements in both the<br />
country's external financial position and general government<br />
debt ratios.<br />
What Could Change the Rating - DOWN<br />
As an advanced industrial country with no controls on capital<br />
movements and declining government debt ratios, Canada's<br />
ratings appear unlikely to move downward. Over the very<br />
long term, should the political consensus on maintaining<br />
sound public finances erode and debt ratios rise again to very<br />
elevated levels, the government's rating could be under pressure.<br />
Despite some pressures on government spending, such a<br />
scenario seems remote. Pressure on public finance coming<br />
from pensions appears to be less in Canada than in some<br />
other Aaa rated countries.<br />
Recent Developments<br />
The government issued its Mid-Year Economic and Fiscal<br />
Update in November, where it affirmed that it expects to post<br />
a surplus once again. The update included proposed tax cuts<br />
and spending increases of $30.9 billion, which are in addition<br />
to the C$10.8 million of initiatives announced since the February<br />
2005 budget. The focus once again is on personal<br />
income tax reduction between FY<strong>2006</strong>-FY2011, with C$29.3<br />
billion added to the C$12.3 billion in cuts that were part of<br />
the 2005 budget.<br />
In late November the Liberal government lost a no confidence<br />
vote, and as a result elections will be held on January<br />
23rd.<br />
• 135 •
Cayman Islands<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Cayman Islands, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa3/P-1<br />
Aa3/P-1<br />
Stable<br />
Issuer Rating<br />
Aa3<br />
Analyst<br />
Phone<br />
Thomas J. Byrne/New York 1.212.553.1653<br />
Alessandra Alecci/New York<br />
Vincent J. Truglia/New York<br />
Cayman Islands<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 1.0 0.6 1.7 2.0 0.9 6.5 4.3<br />
CPI Inflation, eop 2.7 1.1 2.4 0.6 4.4 7.6 3.0<br />
General Government Balance/GDP (%) -0.5 -0.9 -1.4 0.9 -7.1 -3.1 -4.4<br />
General Government Debt/GDP (%) 6.4 8.7 7.7 10.8 13.1 13.5 16.7<br />
General Government Debt/Revenue (%) 32.8 45.8 37.6 46.6 58.4 65.5 84.6<br />
Current Account Balance/GDP (%) -3.5 -4.3 -1.0 -12.8 -24.8 -27.3 -7.5<br />
External Debt/Exports (%)[1] 26.1 36.0 31.5 55.3 69.5 60.2 71.9<br />
External Vulnerability Indicator[2] 17.2 17.1 27.9 145.2 9.9 11.7 13.7<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Support factors consist of:<br />
-Low external debt and debt service<br />
- Prudent macroeconomic management<br />
-A British legal system and stable Overseas Territory political<br />
system<br />
-A resilient tourism sector<br />
-An effective and adaptable regulatory system<br />
-A very high per capita income level<br />
Credit Challenges<br />
Concerns mainly arise from vulnerability to external shocks<br />
- Narrow economic base dependent on tourism<br />
- Vulnerability to hurricane damage<br />
- Statutory and economic constraints on fiscal flexibility<br />
Rating Rationale<br />
The Aa3 foreign currency country ceilings are supported by a<br />
stable political system, favorable social indicators, relatively<br />
high income levels, a prudent economic policies and a favorable<br />
external debt position. The Cayman Islands’ status as a<br />
British overseas territory has contributed to its strong legal<br />
and accounting systems. Constraining the ratings is the economy’s<br />
dependence on exogenous sources of growth and vulnerability<br />
to hurricane damage.<br />
Supported by policies fostering an attractive business environment,<br />
the Cayman Islands experienced robust growth in<br />
the past two decades, as large investments were made in the<br />
two principal sectors of the economy — tourism and financial<br />
services. In recent years, overall economic activity and tourism<br />
in particular were dampened by the 2000-2001 US recession<br />
and the September 11 attacks, and more recently the<br />
recovery in tourism was set back by the devastation of Hurricane<br />
Ivan. In contrast, the financial service sector was barely<br />
affected by the hurricane. Overall, the Cayman Islands demonstrated<br />
in recent years that it can withstand very difficult<br />
stress tests. The prudent fiscal policy stance is reflected in low<br />
and manageable levels of debt. Fiscal capacity, however, is<br />
constrained to some degree by a tax regime that excludes<br />
direct taxes on income.<br />
The Aaa ceilings provided to the foreign debt obligations<br />
of its offshore banking industry (""B" banks) stem from the<br />
separation of such entities from the domestic payments system,<br />
their limited ties to the local economy and ease of relocation<br />
factors.<br />
Rating Outlook<br />
The Cayman Island’s credit fundamentals have demonstrated<br />
resilience to the US recession, the effects of September 11<br />
and the damage inflicted by Hurricane Ivan. Although the<br />
recovery in the tourism sector was set back by the hurricane,<br />
the large and diverse offshore financial services industry<br />
remains robust. The Cayman Islands has taken legal and regulatory<br />
measures to satisfy concerns of the FATF in regard to<br />
money laundering through offshore banking and of the<br />
OECD in regard to tax haven/tax information sharing issues.<br />
Cooperation has reduced reputation risk that could otherwise<br />
arise. The continuation of prudent fiscal and debt management<br />
policies and improvement of public sector management<br />
are the keys to support for the stable outlook. Also, ongoing<br />
development and strengthening of the tourism and financial<br />
services sectors will help the Cayman Islands withstand external<br />
shocks going forward.<br />
What Could Change the Rating - UP<br />
In view of the Cayman Island's narrow economic base and<br />
vulnerability to tropical storms, factors that would lead to<br />
upward movement from the relatively very high rating are<br />
difficult to envisage.<br />
What Could Change the Rating - DOWN<br />
The rating could come under pressure if fiscal policy was<br />
loosened significantly allowing public sector debt to shoot up.<br />
Given the narrow revenue base, this would be hard to sustain.<br />
A sharp and permanent fall off in tourism would be credit<br />
negative.<br />
Recent Developments/Results<br />
The onslaught of Hurricane Ivan in September 2004 inflicted<br />
unprecedented damage on the Islands, but recovery is well<br />
underway. GDP growth contracted sharply during Q4 2004,<br />
but was still positive at 0.9% last year and is projected to<br />
reach 6.5% this year, on the back of reconstruction activity<br />
and continued strong performance of the financial sector.<br />
Registration of hedge funds is soaring, with over 80% of the<br />
world's hedge funds now registered in the Cayman Islands.<br />
The fiscal balance deteriorated last year, but the relatively<br />
high degree of private and public property insurance and private<br />
ownership of economic infrastructure have eased some of<br />
the pressure on public finances for the cost of reconstruction.<br />
The new governor appointed in July by the United Kingdom<br />
has served in several high profile posts, and his appointment<br />
should not have any implications for economic policy.<br />
• 136 •
Chile<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Chile, Government of<br />
Outlook<br />
Government Bonds -Fgn Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
Baa1/P-2<br />
Baa1/P-2<br />
Positive(m)<br />
Baa1<br />
Government Bonds -Dom Curr<br />
A1<br />
Analyst<br />
Phone<br />
Mauro Leos/New York 1.212.553.1653<br />
Luis Ernesto Martinez-Alas/New York<br />
Vincent J. Truglia/New York<br />
Chile<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 4.5 3.4 2.2 3.7 6.1 6.2 5.5<br />
CPI Inflation, eop 4.5 2.6 2.8 1.1 2.4 3.7 3.0<br />
General Government Balance/GDP (%) -0.7 -0.5 -1.2 -0.4 2.1 3.5 2.0<br />
General Government Debt/GDP (%) 13.7 15.0 15.7 13.1 10.9 8.3 7.9<br />
General Government Debt/Revenue (%) 57.7 62.7 67.7 57.0 44.9 33.2 32.8<br />
Current Account Balance/GDP (%) -1.2 -1.6 -0.9 -1.5 1.5 1.0 0.1<br />
External Debt/Exports (%)[1] 145.5 157.0 166.2 151.1 107.0 93.1 87.2<br />
External Vulnerability Indicator[2] 68.8 74.2 79.2 84.8 95.9 41.0 33.4<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Chile are:<br />
- Sound fiscal and monetary policy management<br />
- A solid institutional framework<br />
- Reduced vulnerability to external shocks<br />
Credit Challenges<br />
Credit challenges for Chile are:<br />
- External debt ratios higher than those reported by Baarated<br />
countries<br />
Rating Rationale<br />
Chile’s foreign-currency ratings incorporate the presence of<br />
sound credit fundamentals derived from credible economic<br />
policy management and comprehensive structural reforms.<br />
The ratings are supported by a solid institutional framework<br />
and a broad-based consensus on the general directives of economic<br />
policy.<br />
Chile's credit ratings reflect a resilience to external shocks<br />
which has been tested repeatedly in recent years, as well as the<br />
government's ability to manage adverse external conditions.<br />
These elements, which have become an integral component<br />
of Chile's credit profile, have served to compensate for external<br />
debt ratios that exceed those observed in Baa-rated countries,<br />
a condition that, in <strong>Moody's</strong> opinion, continues to<br />
constrain the foreign-currency credit ratings.<br />
Rating Outlook<br />
The positive outlook assigned to Chile's foreign-currency ratings<br />
reflects Moody’s view that, in addition to long-standing<br />
credit strengths that support the ratings, new elements have<br />
reinforced Chile's credit fundamentals leading to an<br />
improved medium-term credit perspective.<br />
The Chilean economy has registered reduced volatility to<br />
external shocks as a result of changes in the economic policy<br />
framework that have effectively reduced the country’s vulnerability<br />
to fluctuations in commodity prices and international<br />
financial conditions.<br />
The presence of a flexible exchange rate regime and the<br />
operation of a credible structural-fiscal-surplus rule have<br />
allowed the economy to register more stable, sustained<br />
growth and a manageable balance-of-payments position. Also,<br />
the presence of a dynamic domestic capital market which has<br />
become a viable financing option for Chilean corporates has<br />
served to reduce the private sector's reliance on foreign-currency<br />
borrowings.<br />
Last, but not least, Chile’s external debt ratios have<br />
improved substantially in recent years on the back of strong<br />
export growth. The ratio of external debt to current account<br />
receipts declined to 109% in 2004 from an average of 155%<br />
during the previous five years, while the debt service ratio<br />
went to 21% from 28% during the same period. In this<br />
respect, Chile's credit perspective will be strongly influenced<br />
by the anticipated evolution of its external debt ratios, since,<br />
in <strong>Moody's</strong> opinion, a continued reduction in those ratios<br />
represents a necessary condition to consider future improvements<br />
in Chile's foreign-currency credit ratings.<br />
What Could Change the Rating - UP<br />
– Evidence of a sustained decline in Chile's external debt<br />
ratios<br />
What Could Change the Rating - DOWN<br />
– The inability to comply with the fiscal targets incorporated<br />
into the structural surplus framework<br />
Recent Developments<br />
The Chilean economy registered 6.1% growth last year on<br />
the back of favorable external conditions and robust domestic<br />
spending. Statistical evidence coming from various economic<br />
indicators reveals that the momentum has carried into 2005.<br />
<strong>Moody's</strong> expects GDP growth in the order of 5% to 6%<br />
during the 2005-<strong>2006</strong> period. The anticipated growth pattern<br />
will be different from the one observed last year as the thrust<br />
of the growth drive will be coming from domestic spending<br />
(i.e., consumption and investment) with exports playing a<br />
complementary role, a situation that will represent a reversal<br />
from the conditions that were present in 2004.<br />
In the external front, the anticipated export performance<br />
will be modest when compared with the above-normal 52%<br />
nominal growth that was registered last year. Yet, even with<br />
export growth bordering 10%, <strong>Moody's</strong> expects that the balance<br />
of payments will continue to report current account surpluses<br />
during 2005 and <strong>2006</strong>.<br />
In line with the policy framework that is incorporated into<br />
the current fiscal rule, the government's fiscal accounts<br />
should continue to report annual surpluses of some 1% of<br />
GDP in the coming years, a factor that should operate as a<br />
counter-cyclical element in the economy.<br />
• 137 •
China<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
China, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2/P-1<br />
A2/P-1<br />
Stable<br />
Government Bonds<br />
A2<br />
Analyst<br />
Phone<br />
Thomas J. Byrne/New York 1.212.553.1653<br />
Steven A. Hess/New York<br />
Vincent J. Truglia/New York<br />
China<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 8.0 7.5 8.3 9.3 9.5 9.0 7.8<br />
CPI Inflation (%oya) 1.5 -0.3 -0.4 3.2 2.4 2.5 2.0<br />
General Government Balance/GDP -2.8 -2.7 -3.0 -2.5 -2.3 -2.4 -<br />
General Government Debt/GDP 19.1 20.3 22.1 22.3 21.5 21.6 -<br />
General Government Debt/Revenues 127.5 121.4 123.0 120.7 112.9 110.4 -<br />
Current Account Balance/GDP 1.9 1.5 2.8 3.2 4.2 6.4 4.7<br />
External Debt/CA Receipts 51.0 53.6 43.6 37.3 30.8 27.3 25.0<br />
External Vulnerability Indicator[1] 23.5 27.0 24.9 22.9 18.1 16.3 15.0<br />
[1] (Short-Term Debt + Currently Maturing Long-Term Debt)/Official Foreign Exchange Reserves.<br />
Opinion<br />
Credit Strengths<br />
Rating support factors of the government of China are:<br />
-Prudent management of external debt<br />
-A very high level of official foreign exchange reserves<br />
-A greater reliance on FDI than on external debt<br />
-Strong export performance<br />
-Pragmatic reform and WTO liberalization policies.<br />
Credit Challenges<br />
Risks and challenges include:<br />
-Maintaining sustainable economic growth to maximize<br />
employment and to help ensure social stability<br />
-Restructuring an intrinsically weak financial system<br />
-Absorbing the private sector into a state-led economy<br />
-Strengthening the regulatory and legal systems<br />
-Ensuring competitiveness and monetary stability under a<br />
managed exchange rate<br />
-Managing international trade frictions and protectionist<br />
threats<br />
-Maintaining cross-Strait geopolitical stability<br />
Rating Rationale<br />
China’s foreign currency country ceiling was raised to A2<br />
from A3 in October 2003. The strengthening that has<br />
occurred in China's strong external payments position<br />
prompted the upgrade. The smooth transfer of power to a<br />
fourth generation of leaders suggests that political and economic<br />
policymaking will continue to minimize social stability<br />
risks. Even though the foreign currency ceiling for bank<br />
deposits was also raised to A2, from Baa1, <strong>Moody's</strong> nevertheless<br />
considers that the creditworthiness of all other issuers<br />
should be assessed separately from the sovereign, taking into<br />
account their fundamental creditworthiness. This is consistent<br />
with the government's external debt management and<br />
foreign exchange control polices.<br />
Foreign exchange controls and a restricted capital market<br />
also provide insulation to external shocks—<strong>Moody's</strong> expects<br />
the authorities to liberalize cautiously capital controls and to<br />
manage effectively pressures on the BOP and exchange rate.<br />
The authorities have a track record of being able to manage<br />
the economy through periods of turbulence. Challenges arise<br />
from the need to maintain social stability as WTO liberalization<br />
commitments are implemented and the role of the state<br />
sector is scaled back.<br />
Rating Outlook<br />
The stable outlooks for China’s foreign currency country ceilings<br />
are supported by the exceptional strengthening in the<br />
country's external position, and the expectation that China's<br />
external performance will likely remain strong enough to<br />
withstand foreseeable pressures, external or domestic. China's<br />
official foreign exchange reserves stand have risen to a level<br />
that is more than twice that of its total external debt. The performance<br />
of exports and foreign direct investment have continued<br />
to fare well despite global and domestic (i.e. SARS<br />
most recently) disturbances.<br />
China’s new leaders will continue pro-growth economic<br />
policies and pace reforms so as to maintain social stability.<br />
The acceptance of capitalists into the Communist Party<br />
reflects the recognition that a vibrant private sector is crucial<br />
for economic prosperity and social stability. Economic regulations<br />
and laws are being revised accordingly.<br />
What Could Change the Rating - UP<br />
The maintenance of a strong external payments position and<br />
social stability as the economy undergoes the transition from<br />
a state-controlled to market determined system. This implies<br />
a strengthening of China's economic, legal and regulatory<br />
institutions.<br />
What Could Change the Rating - DOWN<br />
A deterioration in the external payments position because of<br />
policy mistakes or economic instability. Downward pressure<br />
on the rating could also arise if there is a setback in peaceful,<br />
cross-Straits relations.<br />
Recent Developments/Results<br />
The RMB appreciated 2.1 percent in July as the authorities<br />
adopted a managed, floating exchange rate policy, but has<br />
strengthened only slightly since. Real GDP of 9.5% in Q2,<br />
year-on-year, was virtually unchanged from Q1 2005 and<br />
from 2004 as a whole. Policy tightening and moderate food<br />
price increases have dampened inflation, despite the spike in<br />
oil import prices—the CPI rose only 1.3 percent in August<br />
2005 from a peak of 5.3 percent in mid-2004 (year-on-year<br />
changes). Rapid export growth has continued, with the value<br />
in August 32% above that of same month a year ago, suggesting<br />
that the current account surplus will reach a record high<br />
well in excess of $100 billion in 2005. Official foreign<br />
exchange reserves rose about $130 billion in the first seven<br />
months of 2005 to reach $740 billion in July, a multiple of<br />
China's total external debt.<br />
• 138 •
CIFG Assurance North America, Inc.<br />
United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Anna Gurvich/New York<br />
Jack Dorer/New York<br />
CIFG Guaranty (GAAP Statistics) [1]<br />
H1 2005 2004 2003 2002<br />
Gross Par Written ($mil) 5,775 12,742 10,086 2,352<br />
Net Income ($mil) (1.65) 11.64 1.58 (7.97)<br />
Expense Ratio (%) 75.1 77.4 127.2 nm<br />
Loss Ratio (%) 10.0 10.0 10.0 9.7<br />
Adjusted NPO ($mil)[2] 28,592 24,728 12,354 2,308<br />
Market Share (%)[3] 1.5 1.3 0.7 0.2<br />
Hard Capital ($mil) 858 891 671 498<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 33.3 27.7 18.4 4.6<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[4] na 27.3 23.6 12.5<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[4] na 141.0 157.2 248.0<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[4] na 2.56 3.45 8.66<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[4] na 2.28 2.81 6.42<br />
[1] Figures for year 2003 and after are based on U.S. GAAP accounting. 2002 data are based on French GAAP accounting. Year-end exchange rates are used for balance sheet items, and the<br />
average exchange rates are used for income statement items. [2] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [3] Total market<br />
share is based on total primary and reinsurance NPO rated by <strong>Moody's</strong>. [4] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All<br />
results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality insured portfolio, nominal liquidity needs<br />
• Strong risk adjusted capitalization<br />
• Strong parent helps franchise, reduces development risks,<br />
provides formal and informal support<br />
• Highly transparent risks and business strategy<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Competitive disadvantage as a relatively new company<br />
with a modest capital base, CIFG needs to further establish<br />
acceptance and trading value<br />
Rating Rationale<br />
The Aaa ratings of the CIFG Group entities - CIFG, CIFG<br />
North America (CIFG NA), and CIFG Europe - are based on<br />
their conservative operational and financial strategy, their<br />
strong capital base relative to projected exposure and the support<br />
derived from their parent, the Caisse Nationale des Caisses<br />
d'Epargne (CNCE - rated Aa2).<br />
CIFG Group is made up of three principal operating companies,<br />
but operates under one management team and follows<br />
unified operating guidelines. The companies' strong capitalization,<br />
combined with CIFG's extensive reinsurance and<br />
financial support of CIFG Europe and CIFG NA, warrants<br />
an analytical approach that considers the consolidated operations<br />
of the Group while assigning ratings to each member.<br />
CIFG's capitalization is consistent with an Aaa rating given<br />
the expected credit characteristics of the Group's prospective<br />
book of business. The ratings also recognize management's<br />
conservative business plan that emphasizes European and US<br />
structured finance as well as US public finance and European<br />
infrastructure. The Group is committed to underwrite well<br />
priced, investment grade financial guaranty transactions and<br />
operates under strict underwriting guidelines and risk management<br />
policies. These guidelines and policies should, over<br />
time, generate a low risk, well-diversified book of business.<br />
The firm's relatively modest capital base, it is the smallest<br />
of the Aaa rated guarantors, does however constrain its ability<br />
to pursue large transactions and could limit the sectors in<br />
which it participates. In an industry where average transaction<br />
size keeps increasing, CIFG's opportunities could be more<br />
limited than the larger Aaa competitors, making it more difficult<br />
for CIFG to establish itself as a proven broad-based provider<br />
of credit enhancement.<br />
CIFG is overcoming regulatory issues that prevented its<br />
US subsidiary from acquiring the U.S. state insurance<br />
licenses. CIFG is now licensed in over 46 U.S. states and<br />
jurisdictions; it is not yet licensed in California.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook for CIFG factors in the expected continuing<br />
parental commitment to financial guaranty, completion<br />
of the licensing process in the US, and successful<br />
implementation of the business plan.<br />
What Could Change the Rating - DOWN<br />
- Failure to progress toward trading parity with the established<br />
guarantors<br />
- Failure to significantly improve core profitability by<br />
2007, and achieve 12% operating ROE over the longer term<br />
- Failure to sustain a reasonable cushion above 1.3X hard<br />
and total capital ratios to absorb business strategy execution<br />
risks<br />
- Evidence of any significant deterioration of the parent's<br />
rating and/or of parental support<br />
- Insufficient progress developing risk and governance processes<br />
Recent Developments/Results<br />
In late 2004, CIFG Holding entered into a $200 million, 20-<br />
year committed debt facility agreement with its parent<br />
CNCE to support its growth. The firm has already drawn $90<br />
million under the facility, most of which has been invested as<br />
equity in its financial guaranty business. At September 30,<br />
2005 the Group had $33.6 billion of net par outstanding in its<br />
insured portfolio.<br />
• 139 •
CIFG Europe<br />
Paris, France<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Anna Gurvich/New York<br />
Jack Dorer/New York<br />
CIFG Guaranty (GAAP Statistics) [1]<br />
H1 2005 2004 2003 2002<br />
Gross Par Written ($mil) 5,775 12,742 10,086 2,352<br />
Net Income ($mil) (1.65) 11.64 1.58 (7.97)<br />
Expense Ratio (%) 75.1 77.4 127.2 nm<br />
Loss Ratio (%) 10.0 10.0 10.0 9.7<br />
Adjusted NPO ($mil)[2] 28,592 24,728 12,354 2,308<br />
Market Share (%)[3] 1.5 1.3 0.7 0.2<br />
Hard Capital ($mil) 858 891 671 498<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 33.3 27.7 18.4 4.6<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[4] na 27.3 23.6 12.5<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[4] na 141.0 157.2 248.0<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[4] na 2.56 3.45 8.66<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[4] na 2.28 2.81 6.42<br />
[1] Figures for year 2003 and after are based on U.S. GAAP accounting. 2002 data are based on French GAAP accounting. Year-end exchange rates are used for balance sheet items, and the<br />
average exchange rates are used for income statement items. [2] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [3] Total market<br />
share is based on total primary and reinsurance NPO rated by <strong>Moody's</strong>. [4] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All<br />
results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality insured portfolio, nominal liquidity needs<br />
• Strong risk adjusted capitalization<br />
• Strong parent helps franchise, reduces development risks,<br />
provides formal and informal support<br />
• Highly transparent risks and business strategy<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Competitive disadvantage as a relatively new company<br />
with a modest capital base, CIFG needs to further establish<br />
acceptance and trading value<br />
Rating Rationale<br />
The Aaa ratings of the CIFG Group entities - CIFG, CIFG<br />
North America (CIFG NA), and CIFG Europe - are based on<br />
their conservative operational and financial strategy, their<br />
strong capital base relative to projected exposure and the support<br />
derived from their parent, the Caisse Nationale des Caisses<br />
d'Epargne (CNCE - rated Aa2).<br />
CIFG Group is made up of three principal operating companies,<br />
but operates under one management team and follows<br />
unified operating guidelines. The companies' strong capitalization,<br />
combined with CIFG's extensive reinsurance and<br />
financial support of CIFG Europe and CIFG NA, warrants<br />
an analytical approach that considers the consolidated operations<br />
of the Group while assigning ratings to each member.<br />
CIFG's capitalization is consistent with an Aaa rating given<br />
the expected credit characteristics of the Group's prospective<br />
book of business. The ratings also recognize management's<br />
conservative business plan that emphasizes European and US<br />
structured finance as well as US public finance and European<br />
infrastructure. The Group is committed to underwrite well<br />
priced, investment grade financial guaranty transactions and<br />
operates under strict underwriting guidelines and risk management<br />
policies. These guidelines and policies should, over<br />
time, generate a low risk, well-diversified book of business.<br />
The firm's relatively modest capital base, it is the smallest<br />
of the Aaa rated guarantors, does however constrain its ability<br />
to pursue large transactions and could limit the sectors in<br />
which it participates. In an industry where average transaction<br />
size keeps increasing, CIFG's opportunities could be more<br />
limited than the larger Aaa competitors, making it more difficult<br />
for CIFG to establish itself as a proven broad-based provider<br />
of credit enhancement.<br />
CIFG is overcoming regulatory issues that prevented its<br />
US subsidiary from acquiring the U.S. state insurance<br />
licenses. CIFG is now licensed in over 46 U.S. states and<br />
jurisdictions; it is not yet licensed in California.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook for CIFG factors in the expected continuing<br />
parental commitment to financial guaranty, completion<br />
of the licensing process in the US, and successful<br />
implementation of the business plan.<br />
What Could Change the Rating - DOWN<br />
- Failure to progress toward trading parity with the established<br />
guarantors<br />
- Failure to significantly improve core profitability by<br />
2007, and achieve 12% operating ROE over the longer term<br />
- Failure to sustain a reasonable cushion above 1.3X hard<br />
and total capital ratios to absorb business strategy execution<br />
risks<br />
- Evidence of any significant deterioration of the parent's<br />
rating and/or of parental support<br />
- Insufficient progress developing risk and governance processes<br />
Recent Developments/Results<br />
In late 2004, CIFG Holding entered into a $200 million, 20-<br />
year committed debt facility agreement with its parent<br />
CNCE to support its growth. The firm has already drawn $90<br />
million under the facility, most of which has been invested as<br />
equity in its financial guaranty business. At September 30,<br />
2005 the Group had $33.6 billion of net par outstanding in its<br />
insured portfolio.<br />
• 140 •
CIFG Guaranty<br />
Paris, France<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Anna Gurvich/New York<br />
Jack Dorer/New York<br />
CIFG Guaranty (GAAP Statistics) [1]<br />
H1 2005 2004 2003 2002<br />
Gross Par Written ($mil) 5,775 12,742 10,086 2,352<br />
Net Income ($mil) (1.65) 11.64 1.58 (7.97)<br />
Expense Ratio (%) 75.1 77.4 127.2 nm<br />
Loss Ratio (%) 10.0 10.0 10.0 9.7<br />
Adjusted NPO ($mil)[2] 28,592 24,728 12,354 2,308<br />
Market Share (%)[3] 1.5 1.3 0.7 0.2<br />
Hard Capital ($mil) 858 891 671 498<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 33.3 27.7 18.4 4.6<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[4] na 27.3 23.6 12.5<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[4] na 141.0 157.2 248.0<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[4] na 2.56 3.45 8.66<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[4] na 2.28 2.81 6.42<br />
[1] Figures for year 2003 and after are based on U.S. GAAP accounting. 2002 data are based on French GAAP accounting. Year-end exchange rates are used for balance sheet items, and the<br />
average exchange rates are used for income statement items. [2] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [3] Total market<br />
share is based on total primary and reinsurance NPO rated by <strong>Moody's</strong>. [4] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All<br />
results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality insured portfolio, nominal liquidity needs<br />
• Strong risk adjusted capitalization<br />
• Strong parent helps franchise, reduces development risks,<br />
provides formal and informal support<br />
• Highly transparent risks and business strategy<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Competitive disadvantage as a relatively new company<br />
with a modest capital base, CIFG needs to further establish<br />
acceptance and trading value<br />
Rating Rationale<br />
The Aaa ratings of the CIFG Group entities - CIFG, CIFG<br />
North America (CIFG NA), and CIFG Europe - are based on<br />
their conservative operational and financial strategy, their<br />
strong capital base relative to projected exposure and the support<br />
derived from their parent, the Caisse Nationale des Caisses<br />
d'Epargne (CNCE - rated Aa2).<br />
CIFG Group is made up of three principal operating companies,<br />
but operates under one management team and follows<br />
unified operating guidelines. The companies' strong capitalization,<br />
combined with CIFG's extensive reinsurance and<br />
financial support of CIFG Europe and CIFG NA, warrants<br />
an analytical approach that considers the consolidated operations<br />
of the Group while assigning ratings to each member.<br />
CIFG's capitalization is consistent with an Aaa rating given<br />
the expected credit characteristics of the Group's prospective<br />
book of business. The ratings also recognize management's<br />
conservative business plan that emphasizes European and US<br />
structured finance as well as US public finance and European<br />
infrastructure. The Group is committed to underwrite well<br />
priced, investment grade financial guaranty transactions and<br />
operates under strict underwriting guidelines and risk management<br />
policies. These guidelines and policies should, over<br />
time, generate a low risk, well-diversified book of business.<br />
The firm's relatively modest capital base, it is the smallest<br />
of the Aaa rated guarantors, does however constrain its ability<br />
to pursue large transactions and could limit the sectors in<br />
which it participates. In an industry where average transaction<br />
size keeps increasing, CIFG's opportunities could be more<br />
limited than the larger Aaa competitors, making it more difficult<br />
for CIFG to establish itself as a proven broad-based provider<br />
of credit enhancement.<br />
CIFG is overcoming regulatory issues that prevented its<br />
US subsidiary from acquiring the U.S. state insurance<br />
licenses. CIFG is now licensed in over 46 U.S. states and<br />
jurisdictions; it is not yet licensed in California.<br />
Rating Outlook<br />
<strong>Moody's</strong> stable outlook for CIFG factors in the expected continuing<br />
parental commitment to financial guaranty, completion<br />
of the licensing process in the US, and successful<br />
implementation of the business plan.<br />
What Could Change the Rating - DOWN<br />
- Failure to progress toward trading parity with the established<br />
guarantors<br />
- Failure to significantly improve core profitability by<br />
2007, and achieve 12% operating ROE over the longer term<br />
- Failure to sustain a reasonable cushion above 1.3X hard<br />
and total capital ratios to absorb business strategy execution<br />
risks<br />
- Evidence of any significant deterioration of the parent's<br />
rating and/or of parental support<br />
- Insufficient progress developing risk and governance processes<br />
Recent Developments/Results<br />
In late 2004, CIFG Holding entered into a $200 million, 20-<br />
year committed debt facility agreement with its parent<br />
CNCE to support its growth. The firm has already drawn $90<br />
million under the facility, most of which has been invested as<br />
equity in its financial guaranty business. At September 30,<br />
2005 the Group had $33.6 billion of net par outstanding in its<br />
insured portfolio.<br />
• 141 •
Colombia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Colombia, Government of<br />
Outlook<br />
Government Bonds -Fgn Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Negative<br />
Ba2/—<br />
Ba3/NP<br />
Negative<br />
Ba2<br />
Government Bonds -Dom Curr<br />
Ba2<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Colombia<br />
1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth -4.2 2.9 1.5 1.9 4.0 4.0 4.0 4.0<br />
Inflation, eop 9.2 8.8 7.6 7.0 6.5 5.5 4.8 4.6<br />
Gen'l Gov't Balance/GDP -5.6 -4.3 -4.5 -4.7 -3.6 -2.8 -2.2 -3.3<br />
Gen'l Gov't Debt/GDP 38.2 46.4 52.8 60.2 58.4 55.3 54.0 53.8<br />
Gen'l Gov't Debt/Revenues 155.4 181.9 194.0 216.3 205.7 181.4 174.6 173.6<br />
Current Account Balance/GDP 0.8 0.9 -1.3 -1.7 -1.2 -1.0 -0.8 -0.5<br />
External Debt/Exports[1] 221.1 192.8 210.2 208.6 191.9 164.3 124.5 117.3<br />
External Vulnerability Indicator[2] 106.6 98.0 88.0 103.2 99.3 85.4 90.0 80.0<br />
[1] Current Account Receipts. [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Nonresident Foreign Currency Deposits Over One Year)/ Official Foreign<br />
Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of Colombia are:<br />
- An external position characterized by manageable current<br />
account deficits, although still high debt levels<br />
-Domestic reform programs that, if successful, could<br />
improve fiscal ratios<br />
- Strong financial support from multilateral institutions<br />
Credit Challenges<br />
Credit challenges of Colombia are:<br />
- Continuing the reversal in the earlier upward trend in<br />
public debt ratios<br />
- External debt ratios in excess of those observed in Barated<br />
countries<br />
-Continued problems with domestic security that affect<br />
investment<br />
Rating Rationale<br />
Colombia's Ba2 foreign-currency country ceiling reflects the<br />
presence of a high external debt burden (debt-to-exports in<br />
excess of 170%; debt service ratio of 35%). The increase<br />
reported in the public debt ratios during previous years has<br />
contributed to weaken Colombia's credit fundamentals,<br />
although it is possible that there will now be some improvement.<br />
Factors supporting Colombia's ratings include manageable<br />
current account deficits and a pristine payment record on<br />
external debt obligations.<br />
Rating Outlook<br />
The rating outlook incorporates concerns about the sustainability<br />
of any improvement in government debt ratios. The<br />
outlook also incorporates the challenges that the Uribe<br />
administration continues to face as it attempts to get approval<br />
of long-delayed structural reforms required to assure fiscal<br />
sustainability.<br />
What Could Change the Rating - UP<br />
– A sustained reduction in external debt ratios, as well as a<br />
reversal in the trend of the central government's fiscal deficit<br />
What Could Change the Rating - DOWN<br />
– The government's inability to continue an improvement in<br />
public debt ratios<br />
Recent Developments<br />
The government recently revised its fiscal forecast for 2005<br />
due to stronger tax collection, higher oil revenues, and the<br />
lower interest payments. The government now expects the<br />
consolidated public sector deficit to close at 1.6% of GDP,<br />
below the target agreed with the IMF of 2.5% of GDP.<br />
In the first half of the year 2005, this balance posted a surplus<br />
of 0.8% compared to a balance in the same period a year<br />
ago. The improvement came mainly from a lower deficit of<br />
the central government and a higher surplus of the decentralized<br />
sector. The central government deficit shrank to 2.3% of<br />
GDP in the January-June 2005 period from 2.5% of GDP in<br />
the year-earlier period, while the decentralized sector—<br />
mainly Ecopetrol—posted a surplus of 3.3% compared to a<br />
deficit of 2.5%. The success of lowering the central government<br />
deficit is mainly due to the constant increase in revenue,<br />
which continues to outpace the strong expenditure growth.<br />
Revenue and expenditure grew 14.4% and 11.2% respectively<br />
in the first half. Meanwhile, the improvement of the decentralized<br />
sector is mainly explained by the higher surplus of<br />
social security, which has benefited from an increase in transfers<br />
from the central government. The main risk going forward<br />
remains a major fiscal slippage as result of adverse<br />
economic conditions, such as higher interest rates or lower oil<br />
prices. The central government deficit remains very inflexible,<br />
and without the approval of key fiscal reforms it will be<br />
difficult for the government to be able to adjust expenditure<br />
under adverse economic conditions. The central government<br />
deficit is already expected to increase next year to as high as<br />
6.4% of GDP under favorable macroeconomic conditions.<br />
• 142 •
Council of Europe Development Bank<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
Subordinate<br />
Aa1<br />
Commercial Paper P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Pierre Cailleteau/Paris<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
Council of Europe Development Bank<br />
1997 1998 1999 2000 2001 2002 2003 2004<br />
Return on Earnings Assets (%) 0.87 0.79 0.77 0.70 0.62 0.68 0.60 0.74<br />
Interest Coverage Ratio (%) 1.09 1.07 1.08 1.07 1.06 1.07 1.08 1.11<br />
Loan Coverage Ratio (%)[1] 34.07 32.40 27.92 26.59 39.66 39.85 38.84 36.85<br />
Usable Equity/Loans (%)[2] 37.12 36.02 31.08 29.48 46.16 45.73 44.16 41.69<br />
Net Loans (US$ Mils) 6,451 7,470 7,779 7,855 7,605 9,805 12,506 14,664<br />
Liquid Assets/Debt(%) 41.8 45.0 38.6 41.3 36.0 36.9 39.8 42.8<br />
Total Reserves/Loans(%) 14.1 14.1 12.8 12.7 11.1 11.0 11.2 11.5<br />
[1] Usable capital plus callable capital of Aaa/Aa-rated countries as a % of loans. [2] Usable capital includes all capital payments received in freely convertible currencies plus all reserves<br />
plus unallocated net income.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of the Council of Europe Development Bank<br />
(CEB) include:<br />
- Sound financial management<br />
- Healthy capital base and strong support from member<br />
countries<br />
Credit Challenges<br />
Credit challenges facing the CEB include:<br />
- The bank remains more highly leveraged than other<br />
international financial institutions<br />
Rating Rationale<br />
The Aaa senior long-term debt rating of the Council of<br />
Europe Development Bank (CEB) reflects the institution’s<br />
prudent financial management, healthy capital base, and the<br />
commitment of its highly rated shareholders (90% of the subscribed<br />
capital is rated investment grade). In line with its multilateral<br />
peers, the CEB’s Aaa rating is also materially<br />
supported by the direct and indirect guarantees extended by<br />
its member states, which underwrite the subscribed capital<br />
and pledge additional callable capital. The subordinated debt<br />
rating is Aa1.<br />
The CEB provides long-term loans to its member countries<br />
to help deal with problems associated with migration,<br />
displaced populations, the impact of natural disasters, as well<br />
as regional economic and social disparities. In response to<br />
these changing priorities, the CEB has extended its original<br />
mandate to include social cohesion in Europe. Additionally,<br />
the CEB has been increasing its lending activities to transition<br />
economies of Central and Eastern Europe.<br />
Rating Outlook<br />
The rating outlook for the CEB is stable. While the bank’s<br />
callable capital supports the rating, the importance of this<br />
capital is counterbalanced by its small size relative to loans<br />
outstanding.<br />
A new prudential framework was introduced with the<br />
2005-2009 development plan. This framework is expressed in<br />
three main areas that begin with a capital adequacy ratio aiming<br />
to limit the actual credit risk of default to the CEB’s owns<br />
funds. The numerator of this ratio is the total of receivable<br />
future cash flows weighted by a default probability in function<br />
of the counterparty’s rating, while the denominator is made of<br />
available own funds, a ratio that provides a measure of the<br />
bank’s solvency. Within its new prudential framework, the<br />
bank also uses the risk asset coverage ratio, which should not<br />
exceed 66%. The monitoring of this ratio aims at limiting<br />
exposure to below-investment-grade assets.<br />
What Could Change the Rating - DOWN<br />
- Significant losses resulting from defaulting loans,<br />
although CEB has an unblemished repayment record, accompanied<br />
by the unlikely failure of shareholders fulfilling their<br />
commitments.<br />
Recent Results<br />
The CEB promotes sustainable social development through<br />
three sectorial lines of action, which include (i) strengthening<br />
social integration, (ii) developing human capital, (iii) and<br />
managing the environment. Under the 2005-2009 development<br />
plan, disbursement should be allocated as follows: 40%<br />
in favour of social integration, 30% for developing human<br />
capital, and 30% to responsible management of the environment.<br />
In 2004, the CEB’s net profits reached an historically high<br />
level of €115.2 million against €86.9 million in 2003.<br />
Because of its social mission, the bank divides all its profits<br />
between its own reserves and the Selective Trust Account<br />
(STA). The STA is a special instrument allowing the CEB to<br />
grant interest subsidies in favor of projects that comply with<br />
its statutory priorities. Additionally, almost €10 million have<br />
been granted as donations from the STA since its creation. In<br />
April 2005, the Governing Board agreed to allocate €10 million<br />
to the STA, bringing its total value to €67.4 million, the<br />
remaining €105.2 million being added to the general<br />
reserves.<br />
• 143 •
Czech Republic<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Czech Republic, Government of<br />
Outlook<br />
Government Bonds<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A1/P-1<br />
A1/P-1<br />
Stable<br />
A1<br />
Other Short Term P-1<br />
Analyst<br />
Phone<br />
Jonathan R. Schiffer/New York 1.212.553.1653<br />
Joan Feldbaum-Vidra/New York<br />
Vincent J. Truglia/New York<br />
Czech Republic<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 3.9 2.6 1.5 3.2 4.4 4.8 4.5<br />
CPI Inflation (%oya) 4.0 4.1 0.6 1.0 2.8 2.5 1.8<br />
General Government Balance/GDP -2.9 -2.1 -0.5 -5.0 -3.3 -2.7 -4.4<br />
General Government Debt/GDP 15.5 17.4 18.4 21.5 24.0 26.4 27.6<br />
General Government Debt/Revenues 42.6 47.3 49.2 56.0 62.0 65.8 68.9<br />
Current Account Balance/GDP -4.9 -5.4 -5.6 -6.3 -5.2 -3.9 -3.5<br />
External Debt/CA Receipts 38.8 36.8 36.6 38.5 42.3 37.5 35.6<br />
External Vulnerability Indicator[1] 100.9 89.7 59.6 63.3 82.3 81.5 69.0<br />
[1] (Short-term debt + Currently Maturing Long-Term Debt + Total Nonresident Deposits over one year)/Official Foreign Exchange Reserves.<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of the Czech Republic are:<br />
- Low public sector debt and very low foreign currency<br />
government debt<br />
- Large foreign direct and portfolio investment inflows,<br />
covering much if not all of the current account deficit<br />
- Low inflation<br />
Credit Challenges<br />
The credit challenges facing the Czech Republic are:<br />
- Medium-term structural reforms (pension, health care)<br />
- Lack of political consensus<br />
Rating Rationale<br />
<strong>Moody's</strong> upgrade of the Baa1 foreign currency country ceiling<br />
and foreign currency government bond rating of the<br />
Czech Republic to the same level as the government's local<br />
currency bond rating (A1) reflected the advanced economic<br />
and financial integration of the country with the European<br />
Union. As a result of this on-going process, the risk that a foreign<br />
currency crisis could lead to systemic interruption in foreign<br />
currency debt servicing by issuers domiciled in this<br />
country is continuously and significantly reduced. Elimination<br />
of all foreign currency transfer risk will occur only at<br />
time of entry into EMU, an event that will not occur until the<br />
end of the decade. The unification of the government bond<br />
ratings occurred simultaneously for several central European<br />
countries that were offered EU membership. The ratings for<br />
the Czech Republic are at the same level as those for Estonia<br />
and Hungary, one notch below those for Slovenia, and one<br />
notch above those for Poland, Latvia, and Slovakia.<br />
Rating Outlook<br />
External debt remains modest. However, due to the fiscal<br />
stance, local currency debt has risen substantially in recent<br />
years. If one includes state guarantees and debts of the socalled<br />
"transformation institutions," public sector debt is now<br />
"moderate," not "low." Nevertheless, the Czech Republic<br />
should have no difficulty servicing its debt burden. The ratings<br />
have a "stable outlook" at A1.<br />
What Could Change the Rating - UP<br />
In order for the ratings to move upwards, improvement in the<br />
fiscal deficit should continue. Pension and health care reform<br />
and public sector streamlining are key medium-term structural<br />
reforms. Changes in taxation rates (tax cuts affecting<br />
90% of taxpayers) have been legislated as of 1 November<br />
2005; better targeting of social welfare payments remains as<br />
an important short-term objective. Creating appropriate<br />
mechanisms to limit local government deficits is a key administrative<br />
reform.<br />
What Could Change the Rating - DOWN<br />
With demographic pressure building, privatization receipts<br />
due to diminish greatly, future EU inflows apportioned at<br />
minimum levels, NATO-related expenditures set to grow, and<br />
state guaranteed loans set to be called in the near future, an<br />
absence of structural reforms to address the fiscal deficit could<br />
lead eventually to growth in public debt and increases in borrowing<br />
costs. Such a scenario could place downward pressure<br />
on the ratings.<br />
Recent Developments/Results<br />
The Czech economy continues to perform well: the trade balance<br />
is in surplus, economic growth is solid, inflation remains<br />
low (although trending upwards), foreign investment continues<br />
to play a major role (particularly in the automotive industry),<br />
the consolidated budget deficit is coming in under target<br />
(-3 to -3.2% GDP), and official foreign exchange reserves are<br />
more than ample to meet debt servicing requirement. Public<br />
opinion polls suggest that the ruling Social Democrats<br />
(CSSD) have almost caught up to the opposition Civic Democrats<br />
(ODS) in terms of support in the June <strong>2006</strong> parliamentary<br />
elections. In the run-up to mid-<strong>2006</strong> elections, the fiscal<br />
stance will widen somewhat (-3.7% GDP) and inflation may<br />
rise (to 2.9% year-on-year in <strong>2006</strong> after 1.7% in 2005).<br />
• 144 •
Dominican Republic<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Dominican Republic, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B3/NP<br />
Caa1/NP<br />
Stable<br />
Government Bonds<br />
B3<br />
Analyst<br />
Phone<br />
Mauro Leos/New York 1.212.553.1653<br />
Luis Ernesto Martinez-Alas/New York<br />
Vincent J. Truglia/New York<br />
Dominican Republic<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 7.8 4.0 4.3 -0.4 2.2 5.0 4.5<br />
CPI Inflation, eop 9.0 4.4 10.5 42.7 28.7 2.0 2.5<br />
General Government Balance/GDP (%) -2.1 -1.9 -2.2 -4.6 -3.6 -1.2 -0.6<br />
General Government Debt/GDP (%) 24.4 22.6 24.0 44.3 40.6 32.9 35.6<br />
General Government Debt/Revenue (%) 155.8 139.2 164.5 336.0 232.9 170.5 182.5<br />
Current Account Balance/GDP (%) -5.2 -3.4 -3.7 6.3 7.6 2.0 0.5<br />
External Debt/Exports (%)[1] 32.4 38.4 41.4 51.4 52.3 46.4 43.2<br />
External Vulnerability Indicator[2] 158.0 118.4 246.7 876.2 254.3 130.6 107.7<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the Dominican Republic are:<br />
- Moderate external debt ratios<br />
- Diversified foreign exchange revenues (family remittances,<br />
tourism, exports from the Free Trade Zone)<br />
Credit Challenges<br />
Credit challenges for the Dominican Republic are:<br />
- A marked increase in the government's debt ratios<br />
- A low level of international reserves that accentuates the<br />
country's external financial vulnerability<br />
Rating Rationale<br />
The Dominican Republic's current foreign-currency ratings<br />
reflect the deterioration in various credit indicators stemming<br />
from successive banking and exchange rate crises. The presence<br />
of a low level of international reserves led to increased<br />
external vulnerability, even though the nation’s external debt<br />
ratios continue to denote a relatively moderate debt burden.<br />
While the debt ratios of the Dominican Republic appear<br />
low relative to its peer group, despite larger-than-anticipated<br />
increases in international reserves the country’s external<br />
liquidity ratios reveal a high degree of financial vulnerability<br />
when compared to similarly rated countries.<br />
Rating Outlook<br />
A stable outlook incorporates the results of a debt exchange<br />
that was successfully completed in early May with a high participation<br />
rate.<br />
The outlook incorporates both the "debt relief” that will be<br />
derived from the extension of maturities that was granted to<br />
the government, as well as evidence of an improved macroeconomic<br />
environment.<br />
Economic policy actions undertaken by the administration<br />
of President Leonel Fernandez have been effective in reversing<br />
trends that led to persistent deterioration in various financial<br />
indicators.<br />
Conservative fiscal and monetary policies have contributed<br />
to restoring the conditions necessary to maintain macroeconomic<br />
stability, although institutional and structural challenges<br />
remain.<br />
What Could Change the Rating - UP<br />
-An improved international reserve position that leads to a<br />
significant reduction in the country's external vulnerability<br />
ratio<br />
-Evidence of continued financial and exchange rate stability,<br />
coupled with strong export growth<br />
What Could Change the Rating - DOWN<br />
-The inability of the Fernandez administration to maintain a<br />
credible economic stabilization program supported by<br />
extended fiscal discipline.<br />
Recent Developments<br />
The terms of the debt exchange completed in early May<br />
incorporated: (1) no principal haircut, (2) no coupon reduction,<br />
(3) a five-year maturity extension, (4) partial (50%) capitalization<br />
of interest payments coming due in 2005 and <strong>2006</strong>,<br />
and (5) a semi-annual amortization schedule during the last<br />
five years of the life of the new bonds<br />
Bonds tendered came to $1.03 billion, the equivalent of<br />
94% of the DR’s the outstanding global bonds, compared to<br />
an original participation target of 85%. Of $500 million outstanding<br />
in the Global <strong>2006</strong>, $456 million was tendered. The<br />
equivalent figures for the Global 2013 were $600 million and<br />
$574 million, respectively.<br />
When the exchange was completed, the Dominican<br />
Republic delivered $456 million in new bonds due in 2011<br />
(9.50% coupon) and $574 million maturing in 2018 (9.04%<br />
coupon).<br />
The “willingness factor” of the current administration was<br />
evidenced in the decision to make a coupon payment due on<br />
its <strong>2006</strong> global before the debt exchange was completed and<br />
within the 30-day grace period.<br />
Conservative fiscal and monetary policies have served to<br />
reinforce a stable macroeconomic environment. The first<br />
review of the Stand-By agreement with the IMF has been<br />
completed and all quantitative performance criteria were met<br />
with comfortable margins in the first quarter of the year.<br />
Official information indicates that GDP increased at a 4%<br />
annual rate during the first quarter of 2005; 12-month inflation<br />
fell to 4.3% in April from 28.7% in December 2004. The<br />
exchange rate has stabilized at $29 pesos to the dollar and the<br />
average interest rate on central bank certificates has declined<br />
to 15% from 25.7% in December 2004.<br />
Net international reserves have reported a larger-thananticipated<br />
accumulation, coming to $1.1 billion by the end<br />
of April — gross international reserves stood at $1.4 billion —<br />
compared with $600 million in December 2004, $825 million<br />
for gross international reserves.<br />
• 145 •
Ecuador<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Ecuador, Government of<br />
Outlook<br />
Government Bonds -Fgn Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Caa1/NP<br />
Caa2/NP<br />
Stable<br />
Caa1<br />
Government Bonds -Dom Curr<br />
B3<br />
Analyst<br />
Phone<br />
Alessandra Alecci/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Ecuador<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP (% change) 2.8 5.1 3.4 2.7 6.9 3.3 3.0<br />
Inflation Rate (CPI, % change Dec/Dec) 91.0 22.4 9.4 6.1 2.0 3.5 3.0<br />
General Government Financial Balance/GDP (%)[1] 0.1 -1.1 -0.8 -0.9 -1.1 -0.7 -1.2<br />
General Government Debt/GDP (%)[1] 72.5 58.1 51.0 47.9 43.5 40.1 39.9<br />
General Government Debt/General Government Revenues[2]<br />
355.4 317.5 271.4 273.2 254.3 219.4 218.0<br />
Current Account Balance/GDP (%) 5.8 -3.2 -5.8 -1.3 -0.5 -0.9 0.5<br />
External Debt/CA Receipts[2] 181.2 202.3 215.8 187.8 162.5 147.4 141.8<br />
External Vulnerability Indicator[3] 519.6 764.7 1188.8 1015.7 757.5 802.3 1022.0<br />
[1] Central government [2] Total Current Account Receipts [3] (Short-Term Debt+Currently Maturing Long-Term Debt+Total Nonresident Deposits)/Official Foreign Exchange Reserves.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of Ecuador are:<br />
- Oil exports, which guarantee an inflow of foreign<br />
exchange and of revenues to the government<br />
- Steady dollar inflow from remittances<br />
Credit Challenges<br />
Credit challenges of Ecuador are:<br />
- Sustaining the government's fiscal performance<br />
- Increasing oil output capacity<br />
- Improving the management of the country's liquidity<br />
- An unstable political environment<br />
Rating Rationale<br />
The Caa1 foreign-currency country ceiling reflects Ecuador's<br />
poor track record in meeting its external obligations on<br />
time and in full. It also reflects the likelihood that the central<br />
government may be faced with insufficient international<br />
liquidity to cover its financing needs. In addition, the country's<br />
foreign-currency earning capacity remains vulnerable to<br />
the volatility of oil prices.<br />
Rating Outlook<br />
The stable outlook fully incorporates the expectation that the<br />
debt position of the country is likely to continue improving as<br />
the non-financial public sector balance remains in surplus.<br />
Crucial to the sustainability of the fiscal consolidation are the<br />
resources accruing to the government due to the recent<br />
increase in oil output by private companies. The government<br />
is accumulating part of these resources in a separate fund..<br />
Recent Events<br />
Refinancing risk has been significantly reduced – at least over<br />
the next fiscal year – by Ecuador’s successful tapping of the<br />
capital markets since the 1999 default on December 7th and<br />
by the extension of official lending to cover next year’s financing<br />
needs. Nonetheless, the current administration has<br />
relaxed fiscal policy in a number of important ways, a development<br />
which exposes the vulnerability of public finances to<br />
the oil market, leaving very little room for maneuvering if<br />
needed. In July, Congress ruled in favor of allocating a greater<br />
share of the oil windfall for social expenditures rather than<br />
debt reduction. In addition, while in the past oil revenues<br />
were classified as capital, they are now treated as current and<br />
therefore earmarked for transfers to local governments<br />
thereby adding pressure to expenditures. In light of the<br />
upcoming electoral cycle (presidential elections are in October<br />
<strong>2006</strong>), a less prudent fiscal policy could ultimately affect<br />
credit worthiness particularly in the event of an oil price<br />
downturn or should access to financing close once again.<br />
With oil prices still high, despite a more expansionary fiscal<br />
policy, Ecuador’s fiscal performance is continuing to deliver<br />
primary and overall surpluses at the non-financial public sector<br />
level, while the central government balances have<br />
remained essentially unchanged relative to previous quarters.<br />
Key debt indicators have continued to improve, in large part<br />
due to nominal GDP growth rather than an outright reduction<br />
of the debt stock. At the end of 2005, the total public<br />
debt/GDP ratio is expected to reach 40%, almost half the<br />
level posted in 2000. The pace of such improvement should<br />
moderate going forward, given that the borrowing constraint<br />
has – at least for now – been removed. On the external front,<br />
the impressive growth of oil exports has improved several key<br />
debt indicators, including debt to current account receipts.<br />
However, unlike some of Ecuador’s energy producing peers,<br />
the oil windfall has not translated into sizeable current<br />
account surpluses. Most of the gains in the oil balance have<br />
been offset by losses in the non-oil trade balance.<br />
• 146 •
El Salvador<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
El Salvador, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3/P-3<br />
Baa3/P-3<br />
Stable<br />
Government Bonds<br />
Baa3<br />
Analyst<br />
Phone<br />
Mauro Leos/New York 1.212.553.1653<br />
Luis Ernesto Martinez-Alas/New York<br />
Vincent J. Truglia/New York<br />
El Salvador<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 2.2 1.7 2.2 1.8 1.5 2.5 3.0<br />
CPI Inflation, eop 4.3 1.4 2.8 2.5 5.4 4.5 4.0<br />
General Government Balance/GDP (%) -2.4 -3.9 -3.7 -4.1 -2.8 -2.8 -2.5<br />
General Government Debt/GDP (%) 26.7 32.5 37.1 39.3 39.2 40.0 40.8<br />
General Government Debt/Revenue (%) 169.5 216.2 237.3 242.8 242.4 232.6 230.5<br />
Current Account Balance/GDP (%) -3.3 -1.1 -2.9 -4.9 -3.9 -4.2 -4.5<br />
External Debt/Exports (%)[1] 87.3 96.2 122.5 127.1 116.0 117.0 116.4<br />
External Vulnerability Indicator[2] 72.0 91.4 136.7 131.8 134.9 143.4 142.2<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of El Salvador are:<br />
- A favorable external debt profile<br />
- Family remittances as a reliable and stable source of foreign<br />
exchange revenues<br />
Credit Challenges<br />
Credit challenges for El Salvador are:<br />
- Low economic growth<br />
- The need to reverse the upward trend reported in external<br />
and government debt ratios<br />
Rating Rationale<br />
El Salvador's Baa3 foreign-currency country ceiling is supported<br />
by the government's commitment to macroeconomic<br />
stability and the presence of comprehensive structural<br />
reforms undertaken during the 1990's.<br />
Family remittances and maquiladora exports account for<br />
nearly two-thirds of current account revenues and represent a<br />
stable source of foreign currency earnings.<br />
External debt has reported a persistent increase in previous<br />
years with the ratio to current account revenues standing at an<br />
estimated to 117% in 2005. The ratio of government debt to<br />
GDP has increased as well going to 40% from 26% in the<br />
mid-1990's.<br />
Rating Outlook<br />
In the context of dollarization, the fiscal position is a critical<br />
factor for the medium-term credit outlook.<br />
The government faces significant fiscal challenges, including<br />
the need to finance the costs of pension reform.<br />
Maintaining a stable outlook will require a continued<br />
improvement in the fiscal accounts that translates into declining<br />
government debt ratios.<br />
A sustained increase in the tax burden is necessary to assure<br />
that primary balances will be consistent with a downward<br />
trend in the government's debt burden.<br />
What Could Change the Rating - UP<br />
- Restoring debt ratios to levels observed in the late 1990's<br />
What Could Change the Rating - DOWN<br />
-The inability of the government to reduce fiscal deficits and<br />
to reverse the upward trend observed in the debt ratios<br />
-A deterioration in the financial strength of the banking<br />
system<br />
Recent Developments<br />
Preliminary estimates reveal that El Salvador's fiscal performance<br />
will be better than initially anticipated. Based on figures<br />
available for November, official statistics indicate that<br />
government revenues are set to register an increase of nearly<br />
1% of GDP during 2005 on the back of measures that were<br />
introduced earlier in the year — tax revenues are expected to<br />
come to 13.5% of GDP.<br />
A strong revenue performance will be complemented by<br />
strict discipline on the spending side. These two elements<br />
should lead to an overall fiscal deficit of some 3% of GDP,<br />
including pension-related spending for 2% of GDP.<br />
In Moody’s opinion, a fiscal deficit of this order of magnitude<br />
will support only a modest decline in the government’s<br />
debt burden. Accordingly, the debt-to-GDP ratio is expected<br />
to come slightly below last year’s level of 39.2% .<br />
Despite positive developments on the fiscal side, the credit<br />
is still lacking in other areas.<br />
With GDP set to register annual growth of some 2.5% in<br />
2005, current conditions do not appear to be sufficient to<br />
conclude that the economy has already overcome the lowgrowth<br />
trap in which it was immersed in previous years.<br />
In this respect, Moody’s view is that the risks posed to the<br />
credit outlook by the presence of persistent low growth has<br />
not been removed altogether, yet.<br />
Moody’s recognizes that, to date, fiscal resolve has been the<br />
main factor behind the presence of stable government debt<br />
ratios, a critical element in terms of El Salvador's credit perspective.<br />
Yet, the need to underpin a downward trend in the government's<br />
debt ratio requires, in addition to a continued fiscal<br />
effort, the presence of more dynamic economic growth as a<br />
necessary condition to assure debt sustainability over time.<br />
• 147 •
European Bank for Reconstruction & Development<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
ST Issuer Rating P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Nina Ramondelli/New York 1.212.553.1653<br />
Joan Feldbaum-Vidra/New York<br />
Vincent J. Truglia/New York<br />
European Bank for Reconstruction & Devlpmnt.<br />
1998 1999 2000 2001 2002 2003 2004<br />
Return on Earning Assts (%) 2.06 1.14 1.65 1.49 1.54 1.89 1.76<br />
Interest Coverage Ratio (%) 1.80 1.43 1.46 1.51 1.97 3.00 2.72<br />
Risk Asset Coverage Ratio (%)[1][2] 415.1 118.9 342.6 318.6 356.7 573.4 492.1<br />
Usable Capital/Risk Assets (%)[2][3] 124.5 116.6 130.4 129.9 154.0 291.8 252.9<br />
Net Loans, US$ Million 5,568 6,023 5,887 6,926 8,672 10,554 13,338<br />
Liquid Assets/Debt (%) 84.5 84.7 88.2 75.3 68.3 67.5 61.7<br />
Total Reserves/Loans Outstanding (%) 5.79 7.66 14.94 18.35 21.27 21.20 22.92<br />
[1] Usable equity plus callable capital of Aaa/Aa-rated countries/Risk Assets. [2] Usable capital includes all capital payments received in freely convertible currencies less amounts required<br />
to maintain the value of currency holdings plus reserves plus unallocated net income. [3] Risk assets are defined as loans and share investments to countries rated below investment grade.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the European Bank for Reconstruction<br />
and Development (EBRD) are:<br />
-Solid capital structure<br />
-Strong shareholders' support<br />
-Preferred creditor status<br />
-Sound financial management<br />
Credit Challenges<br />
Credit challenges for the EBRD are:<br />
-Credit concentration in countries with challenging macroeconomic<br />
and operating environment<br />
-Balancing the Bank's prudent financial policies with its<br />
mandate to aid the transition to market economies of Central<br />
and Eastern European and CIS countries<br />
Rating Rationale<br />
<strong>Moody's</strong> Aaa issuer rating of the EBRD reflects the Bank's<br />
solid capital structure, strong support from both borrowing<br />
and nonborrowing member countries, and the institution’s<br />
preferred creditor status. While the very nature of the<br />
EBRD’s mandate exposes it to potentially high levels of credit<br />
risk and asset concentration, the Bank’s rating is firmly underpinned<br />
by its prudent capital and liquidity policies and the<br />
maintenance of conservative operational and lending guidelines.<br />
Member nations that represent 84% of capital are rated<br />
Aaa or Aa, and a number of other members are rated investment<br />
grade. Donor countries control over four-fifths of the<br />
voting power. Reflecting strong membership commitment to<br />
the institution, EBRD's authorized capital was doubled in<br />
1997 to €20 billion, and slightly over one-quarter is paid-in.<br />
In addition, the Bank’s good relationships with its borrowing<br />
countries, which collectively own around 12% of the institution,<br />
extend beyond loans as the EBRD also supplies various<br />
technical assistance programs, especially in financial sector<br />
and private enterprise development.<br />
The EBRD's capital levels are prudent. There is a 1:1 gearing<br />
level which limits the total amount of outstanding loans,<br />
share investments and guarantees to a maximum of 100% of<br />
its subscribed capital, reserves, and net income, but it is less<br />
than 50% utilized currently. As a result of steady reserve accumulation,<br />
conservative provisioning, and improved loan performance,<br />
impaired loans have fallen to 4% of reserves and<br />
provisions, from 30% at end-2001.<br />
The Bank’s liquidity requirements are also conservative,<br />
requiring that liquid assets (highly rated instruments of which<br />
30% mature in less than one year) cover at least 45% of the<br />
projected net cash requirements in the next three years, but in<br />
practice the Bank maintains a ratio of 90%. The EBRD maintains<br />
sound asset/liability management procedures and a<br />
sophisticated system of risk management.<br />
According to <strong>Moody's</strong> definition of liquid assets which<br />
includes all highly-rated investments plus cash, the EBRD is<br />
one of the most liquid multilateral development banks, with<br />
liquid assets equivalent to 73% of debt outstanding as of June<br />
2005.<br />
Rating Outlook<br />
<strong>Moody's</strong> Aaa rating of the EBRD is stable, reflecting its excellent<br />
capital support and membership, its preferred creditor<br />
status, and its prudent financial policies.<br />
What Could Change the Rating - DOWN<br />
EBRD's mandate to lend to transition countries undergoing<br />
prolonged systemic transformation and to the high-risk private<br />
sectors in those countries may expose the Bank to risks<br />
and crisis events which could significantly constrain its flexibility<br />
and result in substantial deterioration of its loan portfolio's<br />
risk profile.<br />
Recent Results<br />
The Bank continues to have an active role in financial intermediation<br />
in transition economies with a stronger focus on<br />
those at the earliest stages of development. It is engaging in<br />
more but smaller projects, partly due to this refocusing. The<br />
Bank committed to 129 projects last year, totaling €4.1 billion,<br />
the highest annual level signed to date. Over 65% of new<br />
investments in the first half of 2005 were in the earliest stage<br />
transition economies.<br />
Net income was a solid €298 million in 2004, down from<br />
2003 (€378 million), partly a consequence of increased general<br />
provisioning charges in line with the conservative policies<br />
of the Bank. In the first half of 2005, net profits were exceptionally<br />
strong at €542 million due to large gains from equity<br />
investments. Control over administrative expenses continues<br />
to be an important contributor to overall profitability. Favorable<br />
macroeconomic conditions continue to have a positive<br />
influence on the quality of the Bank's loan portfolio. Impaired<br />
assets have fallen to less than 1% of the portfolio, down from<br />
8.5% at end-1999.<br />
• 148 •
European Investment Bank<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
Commercial Paper P-1<br />
Other Short Term P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Kenneth Orchard/London 44.20.7772.5454<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
European Investment Bank<br />
1997 1998 1999 2000 2001 2002 2003 2004<br />
Return on Earnings Assets (%) 0.91 0.87 0.69 0.74 0.69 0.63 0.65 0.59<br />
Interest Coverage Ratio (%) 1.16 1.17 1.15 1.15 1.16 1.17 1.20 1.19<br />
Loan Coverage Ratio (%)[1] 62.70 56.74 73.37 67.08 61.59 59.28 79.77 78.58<br />
Usable Equity/Loans (%)[2] 15.19 14.15 12.74 12.07 11.61 11.72 11.47 12.35<br />
Net Loans (US$ Mils) 131,508 155,057 153,682 156,856 163,525 204,520 259,983 302,032<br />
Liquid Assets/Debt(%) 9.1 9.2 8.9 7.1 8.0 8.6 9.4 10.4<br />
Total Reserves/Loans(%) 11.3 10.7 8.8 8.5 8.4 8.6 7.8 8.7<br />
[1] Usable capital plus callable capital of Aaa/Aa-rated countries as a % of loans. [2] Usable capital includes all capital payments received in freely convertible currencies plus all reserves<br />
plus unallocated net income.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of the European Investment Bank include:<br />
• The quality of its assets and a strong capital base<br />
• Full support from its shareholders<br />
• Prudent financial policies and healthy capital adequacy<br />
Credit Challenges<br />
Credit challenge facing the European Investment Bank<br />
includes:<br />
• The continuing need to adapt to a changing European<br />
Union and its evolving priorities<br />
Rating Rationale<br />
Moody’s Aaa/Prime 1 ratings for the senior unsecured debt<br />
issued by the European Investment Bank (EIB) reflect the<br />
entity’s excellent asset quality as well as its prudent financial<br />
policies, healthy capital adequacy, conservative controls governing<br />
interest rate, asset/liability matching, foreign<br />
exchange, and maturity transformation risks. In common with<br />
other multilateral institutions, the EIB’s Aaa rating is also<br />
supported by the strong commitment of its shareholders —<br />
the 25 European Union (EU) member states — which underwrite<br />
the subscribed capital, pledge additional callable capital<br />
and guarantee all or part of the loans made by the Bank.<br />
Rating Outlook<br />
- The stable outlook on the ratings underlines the high quality<br />
of the Bank’s loan portfolio, the ongoing support of the<br />
EU member states and the Bank’s prudent financial policies.<br />
What Could Change the Rating - DOWN<br />
- Significant losses resulting from a sizeable increase in<br />
defaulting loans accompanied by the unlikely failure of shareholders<br />
to fulfil their commitments.<br />
Recent Developments<br />
The EIB’s profitability is constrained when compared to<br />
commercial institutions because it is a policy-driven public<br />
bank rather than a profit-maximising institution. The Bank’s<br />
loan intermediation margin is designed to cover its expenses.<br />
EIB’s profit is earned by deploying its own resources, and in<br />
2003, the annual profit in nominal terms was 4% higher at<br />
€1.52 billion compared to 2002.<br />
While operating expenses have been kept consistently low,<br />
profitability continued on a downward trend. The return on<br />
average assets have consistently declined, dropping to 0.65%<br />
in 2003 from 1.15% in 1995, and reflecting to a large extent<br />
the downward trend in long-term interest rates at which it<br />
deploys its own resources. However, the fact that international<br />
interest rates are likely to rise could change the trend.<br />
• 149 •
Export <strong>Finance</strong> and Insurance Corporation<br />
Sydney, New South Wales, Australia<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Bkd Senior Unsecured<br />
Aaa<br />
Bkd Commercial Paper P-1<br />
Bkd Other Short Term P-1<br />
Opinion<br />
Credit Strengths<br />
[1] Obligations guaranteed by Commonwealth of Australia.<br />
[2] National Interest Account underwritings borne by Commonwealth<br />
[3] Pivotal role in financing of Australia's exports<br />
[4] Strong track record of commercial operations - has never<br />
had to call on Commonwealth guarantee in over 40 years of<br />
operations<br />
Credit Challenges<br />
Maintains credit risk for Commercial Account underwritings<br />
Rating Rationale<br />
Moody’s high ratings on EFIC are based on the Commonwealth<br />
guarantee of EFIC’s debt and will remain in effect<br />
until all such debt has been extinguished.<br />
The Australian Trade Commission (Austrade) has been<br />
restructured by the government of the Commonwealth of<br />
Australia. Under the terms of the Export <strong>Finance</strong> and Insurance<br />
Corporation Act of 1991, Austrade’s export finance and<br />
insurance divisions will operate as a separate statutory corporation;<br />
that being the Export <strong>Finance</strong> and Insurance Corporation<br />
(EFIC).<br />
EFIC has assumed all liabilities and taken over all assets<br />
from Austrade automatically by operation of law. Accordingly,<br />
facilities governed by agreements entered into by Austrade<br />
Analyst<br />
Phone<br />
Patrick Winsbury/Singapore 65.6398.8328<br />
Deborah Schuler/Singapore 65.6398.8336<br />
Wei S. Yen/Hong Kong 852.2916.1106<br />
will automatically bind EFIC. No new agreements will be<br />
required. Existing commercial paper, bonds, swaps, and other<br />
obligations issued in the name of Austrade will be honored by<br />
EFIC and payment by EFIC is guaranteed by the Commonwealth<br />
under existing facility terms.<br />
Rating Outlook<br />
The rating outlook is stable, based on the Commonweal5th<br />
guarantee.<br />
What Could Change the Rating - UP<br />
Given that EFIC already maintains <strong>Moody's</strong> highest ratings<br />
of Aaa / P-1, there are no opportunities to raise the ratings.<br />
What Could Change the Rating - DOWN<br />
EFIC's ratings are based on those of the guarantee from the<br />
Commonwealth of Australia. The loss of that guarantee or<br />
the downgrading of the Australian sovereign ratings would<br />
therefore have a resultant negative impact on the ratings of<br />
EFIC.<br />
Recent Developments/Results<br />
Net profit for FY 2004 increased 11% to A$27.7 million,<br />
principally on an improved credit insurance result (including<br />
profit from the sale of its short-term export credit insurance<br />
business).<br />
• 150 •
FGIC Corporation<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
FGIC UK Limited<br />
Outlook<br />
Insurance Financial Strength -Dom Curr<br />
Financial Guaranty Insurance Company<br />
Outlook<br />
Insurance Financial Strength<br />
Grand Central Capital Trust I<br />
Outlook<br />
Bkd Preferred Stock<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa2<br />
Stable<br />
Aaa<br />
Stable<br />
Aaa<br />
Stable<br />
Aa2<br />
Grand Central Capital Trust II<br />
Outlook<br />
Stable<br />
Bkd Preferred Stock<br />
Aa2<br />
Grand Central Capital Trust III<br />
Outlook<br />
Stable<br />
Bkd Preferred Stock<br />
Aa2<br />
Grand Central Capital Trust IV<br />
Outlook<br />
Stable<br />
Bkd Preferred Stock<br />
Aa2<br />
Analyst<br />
Phone<br />
Arlene Isaacs-Lowe/New York 1.212.553.1653<br />
Deven Kapoor/New York<br />
Jack Dorer/New York<br />
FGIC Corporation (U.S. GAAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Total Revenue ($mil) 172 274 299 328 308 238<br />
Net Income ($mil) 105 157 195 217 213 171<br />
Pretax Operating Income / Revenue (%) 81.8 74.4 79.2 89.1 90.5 87.0<br />
Interest Coverage (x) - 14.7 na na na na<br />
Expense Ratio (%) 21.0 24.7 38.3 25.5 23.2 34.3<br />
Loss Ratio (%) (5.0) 3.4 (4.3) 0.4 1.8 4.4<br />
Return on Equity (%)[1] 10.8 8.6 9.8 10.2 10.6 8.3<br />
Total Assets ($mil) 3,653 3,422 2,967 3,247 2,877 2,836<br />
Total Debt ($mil) 323 323 227 0 0 0<br />
Shareholders' Equity ($mil) 2,030 1,918 1,743 2,288 2,007 2,030<br />
Financial Leverage (%)[2] 16.2 14.5 11.5 na na na<br />
[1] Operating return on equity = (Net income minus the after-tax impact of accounting for derivatives and foreign exchange) / average equity excluding accumulated other comprehensive<br />
income. ROE for first half of 2005 is annualized. [2] Financial leverage = Long-term debt / (long term debt + shareholders' equity - accumulated other comprehensive income)<br />
Opinion<br />
Credit Strengths<br />
• Aaa insurance financial strength rating of FGIC, its main<br />
operating company<br />
• Sustainable dividend income from FGIC to meet debt<br />
service<br />
Credit Challenges<br />
• Execution of FGIC's revised business strategy<br />
• Increase in leverage limits financial flexibility<br />
• Potential difference in investment horizons and objectives<br />
of members of the Investor Group<br />
Rating Rationale<br />
FGIC Corporation (FGIC Corp.) is the holding company for<br />
Financial Guaranty Insurance Company (FGIC), a primary<br />
financial guarantor with an insurance financial strength rating<br />
(IFSR) of Aaa. The Aa2 senior debt rating of FGIC Corporation<br />
reflects the insurance financial strength of its main operating<br />
company, and FGIC's ability to upstream dividends to<br />
adequately meet the holding company's debt service obligations.<br />
The rating also reflects the structural subordination of<br />
the holding company's unsecured creditors to insurance<br />
claims and other liabilities at the operating company level.<br />
In December 2003, FGIC Corp. and FGIC were sold by<br />
GE Capital to an investor group consisting of The PMI<br />
Group, the Blackstone Group, The Cypress Group, and<br />
CIVC Partners L.P (collectively the "Investor Group"). In<br />
conjunction with this change in ownership, FGIC, which traditionally<br />
focused primarily on lower risk municipal transactions,<br />
has developed and is executing a substantially revised<br />
business strategy to expand and diversify into business sectors<br />
similar to its monoline financial guarantor peers. Financial<br />
leverage has increased with the ownership change. FGIC<br />
Corp issued $227million as part of the initial financing for the<br />
buyout in 2003, which was replaced in early 2004 with the<br />
issuance of a $250 million 30-year note. Subsequently, the<br />
company completed an add-on offering of $75 million in late<br />
2004. At current leverage and rating levels, FGIC Corp. will<br />
be constrained from further debt issuance, and would need to<br />
secure capital from its investor group or initiate other capital<br />
strategies should additional funding be required. <strong>Moody's</strong><br />
expects that the holding company will maintain its strong<br />
pricing discipline and conservative risk management even as it<br />
grows its portfolio and navigates competitive hurdles.<br />
Although the investment horizons and objectives of particular<br />
members of the Investor Group may differ, <strong>Moody's</strong> believes<br />
that the Investor Group is supportive of the sustainability of<br />
the operating company's financial strength, which is essential<br />
to its franchise value.<br />
Rating Outlook<br />
The stable rating outlook is based on the expectation that<br />
management will be prudent in the execution of its revised<br />
business strategy.<br />
What Could Change the Rating - UP<br />
• <strong>Moody's</strong> does not foresee ratings improvement in light of<br />
the Aaa rating of the operating company and subordination of<br />
holding company debt to policyholders' claims<br />
What Could Change the Rating - DOWN<br />
• Hard and total capital ratios of operating company falling<br />
below 1.3x without corrective action<br />
• Deterioration of competitive environment and reduction<br />
in franchise value<br />
• Financial leverage above 16% and double leverage above<br />
120% without mitigating factors<br />
• Extensive diversification into higher risk businesses<br />
• Shifts in ownership structure that could reduce capital<br />
stability<br />
• 151 •
Financial Guaranty Insurance Company<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Parent: FGIC Corporation<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Stable<br />
Aa2<br />
FGIC UK Limited<br />
Outlook<br />
Stable<br />
Insurance Financial Strength -Dom Curr<br />
Aaa<br />
Analyst<br />
Phone<br />
Arlene Isaacs-Lowe/New York 1.212.553.1653<br />
Deven Kapoor/New York<br />
Jack Dorer/New York<br />
Financial Guaranty Insurance Company (SAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Gross Par Written ($mil) 35,291 59,513 42,355 47,947 40,406 27,910<br />
Net Income ($mil) 89 144 178 205 207 169<br />
Expense Ratio (%) 16.6 21.9 22.3 13.7 17.6 28.9<br />
Loss Ratio (%) -0.3 1.4 (1.8) 5.1 2.2 (0.4)<br />
Adjusted NPO ($mil)[1] 254,303 242,177 213,883 202,395 180,829 159,373<br />
Market Share (%)[2] 12.7 12.3 11.8 12.5 13.3 13.5<br />
Hard Capital ($mil) 3,419 3,189 2,787 2,875 2,701 2,614<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 74.4 76.0 76.7 70.4 67.0 61.0<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[3] na 20.2 16.1 16.4 17.9 17.5<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[3] na 84.2 66.8 67.0 76.2 72.3<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[3] na 1.56 1.92 2.07 1.90 2.19<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[3] na 1.46 1.78 1.93 1.75 1.95<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• Strong capital base<br />
• High quality insured portfolio driven by historical focus<br />
on US municipal sectors<br />
• Conservative reputation and established franchise<br />
Credit Challenges<br />
• Execution risks for substantially revised business strategy<br />
• Entering into highly competitive business segments<br />
• Divergence in investment objectives and holding horizons<br />
of Investor Group members<br />
Rating Rationale<br />
The Aaa insurance financial strength rating (IFSR) of Financial<br />
Guaranty Insurance Company (FGIC) reflects the company's<br />
strong capital base, established franchise and existing<br />
earnings stream. The rating also considers a substantial strategic<br />
shift for FGIC, which is seeking to increase returns by<br />
expanding its existing business lines into segments where the<br />
guarantor has traditionally been underrepresented. <strong>Moody's</strong><br />
recognizes that there are execution challenges associated with<br />
the firm’s shifting strategy, although FGIC’s solid book of low<br />
risk business and well-established reputation in its traditional<br />
target markets (primarily within the U.S. municipal sector)<br />
help to mitigate such challenges. FGIC is a wholly owned<br />
subsidiary of FGIC Corporation (FGIC Corp.)<br />
In December 2003, FGIC and FGIC Corp., which were<br />
previously wholly owned subsidiaries of General Electric<br />
Capital, were sold to an investor group consisting of The PMI<br />
Group, the Blackstone Group, The Cypress Group, and<br />
CIVC Partners L.P. (collectively the "Investor Group"). In<br />
conjunction with this change in ownership, FGIC developed<br />
and is now executing a substantially revised business strategy<br />
that entails greater diversification into business sectors, similar<br />
to its monoline financial guarantor peers. Several members<br />
of the senior management team are new to the firm but have<br />
deep experience within the industry and have worked<br />
together in the past. The firm is targeting structured transactions<br />
which are susceptible to competition from other established<br />
monolines, as well as from senior/sub structures.<br />
Another area of focus is the high growth and increasingly<br />
competitive international markets. FGIC's challenges will be<br />
in building underwriting expertise and risk management<br />
capabilities in these new areas and gaining market acceptance<br />
beyond its historically narrow focus. Incorporated into<br />
<strong>Moody's</strong> rating is the expectation that FGIC will maintain<br />
strong pricing discipline and conservative risk management as<br />
it grows its portfolio and navigates competitive hurdles.<br />
Although the investment horizons and objectives of particular<br />
members of the Investor Group may differ, <strong>Moody's</strong> believes<br />
that the Investor Group is supportive of the firm operating at<br />
a level consistent with its Aaa rating, which is essential to its<br />
franchise value.<br />
Rating Outlook<br />
FGIC's stable rating outlook is based on the expectation that<br />
management will be prudent in the execution of its revised<br />
business strategy.<br />
What Could Change the Rating - DOWN<br />
- Failure to expand the firm’s reach in structured and international<br />
markets<br />
- Extensive diversification into higher risk businesses<br />
- Failure to attain a 3-year-average holding company operating<br />
ROE of 12% over the intermediate term<br />
- Hard and total capital ratios falling below 1.3x without<br />
corrective action<br />
- Shifts in ownership structure that could reduce capital<br />
stability<br />
• 152 •
Financial Security Assurance Holdings Ltd.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Senior Unsecured<br />
Aa2<br />
Parent: Dexia Credit Local<br />
Outlook<br />
Stable<br />
Bank Deposits<br />
Aa2/P-1<br />
Bank Financial Strength B+<br />
Issuer Rating<br />
Aa2<br />
Senior Unsecured<br />
Aa2<br />
Key Indicators<br />
Subordinate<br />
Aa3<br />
Jr Subordinate -Dom Curr<br />
Aa3<br />
Commercial Paper P-1<br />
Other Short Term -Dom Curr P-1<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Dagmar H. Silva/New York<br />
Jack Dorer/New York<br />
Financial Security Assurance Holdings Ltd. (U.S. GAAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Total Revenue ($mil) 474 796 632 420 379 279<br />
Net Income ($mil) 156 364 291 181 210 63<br />
Pretax Operating Income / Revenue (%) 43.4 58.4 59.5 51.5 71.2 24.2<br />
Interest Coverage (x) 16.2 18.2 12.4 8.7 17.0 5.1<br />
Expense Ratio (%) 34.1 30.2 31.8 31.6 38.9 40.7<br />
Loss Ratio (%) 5.0 5.0 9.5 20.6 4.0 4.9<br />
Return on Equity (%)[1] 13.5 14.9 14.1 14.7 13.8 4.8<br />
Total Assets ($mil) 19,476 17,081 12,410 7,027 4,309 3,149<br />
Total Debt ($mil) 430 430 430 430 330 230<br />
Shareholders' Equity ($mil) 2,673 2,550 2,168 1,868 1,636 1,466<br />
Financial Leverage (%)[2] 13.9 15.3 17.5 19.9 17.3 14.1<br />
[1] Operating return on equity = (Net income minus the after-tax impact of accounting for derivatives and foreign exchange) / average equity excluding accumulated other comprehensive<br />
income. ROE for first half of 2005 is annualized. [2] Financial leverage = Long-term debt / (long term debt + shareholders' equity - accumulated other comprehensive income)<br />
Opinion<br />
Credit Strengths<br />
• Leading global provider of financial guaranty insurance<br />
• High quality, well diversified insurance portfolio with<br />
nominal liquidity needs<br />
• Strong risk adjusted capitalization, predictable core earnings<br />
• Strong parent helps franchise and provides formal and<br />
implied support<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Some risk concentration in certain sectors such as pooled<br />
corporate risks and consumer ABS<br />
Rating Rationale<br />
The Aaa Insurance Financial Strength rating (IFSR) of Financial<br />
Security Assurance Inc. (FSA) and the Aa2 senior debt<br />
rating of its parent, Financial Security Assurance Holdings<br />
Ltd., reflect the limited risk characteristics of the group's core<br />
financial guaranty business, its conservative underwriting<br />
strategy, strong surveillance and loss mitigation expertise, and<br />
good balance of credit enhancement experience in both the<br />
municipal finance and structured finance markets. FSA's<br />
insurance business has shown steady growth over the last few<br />
years, firmly establishing the firm as one of the leading participants<br />
in the broadening universe of financial guarantors. As a<br />
member of the Dexia group, FSA has improved its distribution<br />
capabilities and has a relative advantage in the European<br />
markets. The company also benefits from its ownership by a<br />
strong parent.<br />
FSA is participating in all segments of the financial guaranty<br />
market, focusing on low risk transactions or, when possible,<br />
using layered loss reinsurance to further reduce the risk<br />
of some exposures. The US municipal and structured markets<br />
will continue to represent the bulk of FSA's outstanding<br />
insured portfolio, but given the relative maturity of these<br />
markets, much of the company's future growth is expected to<br />
come from outside of the United States, most notably in<br />
Europe. Such international opportunities often comprise<br />
large project financings that have higher risk characteristics<br />
than FSA's traditional underwriting, but nevertheless remain<br />
consistent with the risk tolerance of a Aaa company.<br />
The financial guaranty industry is currently witnessing<br />
lower volume as a result of a combination of cyclical downturn<br />
in demand and new competition, following three years of<br />
highly profitable growth. While FSA reported an 11%<br />
decline in PV premium generation in the first half of 2005<br />
compared to the same prior year period, it is Moody’s opinion<br />
that FSA’s strong embedded earnings from its outstanding<br />
insurance and investment portfolios should mitigate the earnings<br />
consequences of any short-term decrease in business.<br />
However, a longer lasting trough in production could test the<br />
firm's pricing and underwriting discipline.<br />
Rating Outlook<br />
<strong>Moody's</strong> outlook for FSA's Aaa Insurance financial strength<br />
rating and FSA Holding's Aa2 senior debt rating is stable.<br />
What Could Change the Rating - UP<br />
<strong>Moody's</strong> does not foresee ratings improvement in light of the<br />
Aaa rating of the operating company and subordination of<br />
holding company debt to policyholders' claims.<br />
What Could Change the Rating - DOWN<br />
• A sustained decrease in the operating company's hard and<br />
total capital ratios below 1.3x without corrective action<br />
• Financial leverage above 16% and or double leverage<br />
above 120% without mitigating factors<br />
• Deterioration in the competitive environment or reduction<br />
in franchise value<br />
• An extensive diversification into higher risk businesses.<br />
Recent Developments/Results<br />
FSA's second quarter 2005 operating income excluding the<br />
mark-to-market gains associated with the firm's CDS exposure,<br />
was $87 million, 7% higher than in 1Q05 and 9%<br />
higher than in 2Q04.<br />
• 153 •
Financial Security Assurance Inc.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Parent: Financial Security Assurance Holdings Ltd.<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Stable<br />
Aa2<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Dagmar H. Silva/New York<br />
Jack Dorer/New York<br />
Financial Security Assurance Inc. (SAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Gross Par Written ($mil) 53,762 113,901 84,333 109,728 114,225 62,632<br />
Net Income ($mil) 149 242 263 195 173 114<br />
Expense Ratio (%) 35.5 26.8 21.3 20.9 37.1 59.1<br />
Loss Ratio (%) (0.2) 5.0 3.7 15.1 4.0 (0.5)<br />
Adjusted NPO ($mil)[1] 363,997 335,395 307,692 280,019 223,474 161,533<br />
Market Share (%)[2] 17.3 16.9 16.9 17.6 16.6 13.8<br />
Hard Capital ($mil) 4,518 4,339 3,929 3,405 2,865 2,495<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 80.6 77.3 78.3 82.2 78.0 64.7<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[3] na 20.6 22.1 22.0 19.9 23.7<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[3] na 68.2 75.4 79.7 76.1 94.3<br />
Hard Capital Ratio (Hard Capital / 99.9% Losses)(x)[3] na 1.85 1.72 1.54 1.68 1.64<br />
Total Capital Ratio(Total Capital / 99.99% Losses)(x)[3] na 1.77 1.62 1.37 1.51 1.45<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• Leading global provider of financial guaranty insurance<br />
• High quality, well diversified insurance portfolio with<br />
nominal liquidity needs<br />
• Strong risk adjusted capitalization, predictable core earnings<br />
• Strong parent helps franchise and provides formal and<br />
implied support<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Some risk concentration in certain sectors such as pooled<br />
corporate risks and consumer ABS<br />
Rating Rationale<br />
The Aaa Insurance Financial Strength rating (IFSR) of Financial<br />
Security Assurance Inc. (FSA) and the Aa2 senior debt<br />
rating of its parent, Financial Security Assurance Holdings<br />
Ltd., reflect the limited risk characteristics of the group's core<br />
financial guaranty business, its conservative underwriting<br />
strategy, strong surveillance and loss mitigation expertise, and<br />
good balance of credit enhancement experience in both the<br />
municipal finance and structured finance markets. FSA's<br />
insurance business has shown steady growth over the last few<br />
years, firmly establishing the firm as one of the leading participants<br />
in the broadening universe of financial guarantors. As a<br />
member of the Dexia group, FSA has improved its distribution<br />
capabilities and has a relative advantage in the European<br />
markets. The company also benefits from its ownership by a<br />
strong parent.<br />
FSA is participating in all segments of the financial guaranty<br />
market, focusing on low risk transactions or, when possible,<br />
using layered loss reinsurance to further reduce the risk<br />
of some exposures. The US municipal and structured markets<br />
will continue to represent the bulk of FSA's outstanding<br />
insured portfolio, but given the relative maturity of these<br />
markets, much of the company's future growth is expected to<br />
come from outside of the United States, most notably in<br />
Europe. Such international opportunities often comprise<br />
large project financings that have higher risk characteristics<br />
than FSA's traditional underwriting, but nevertheless remain<br />
consistent with the risk tolerance of a Aaa company.<br />
The financial guaranty industry is currently witnessing<br />
lower volume as a result of a combination of cyclical downturn<br />
in demand and new competition, following three years of<br />
highly profitable growth. While FSA reported an 11%<br />
decline in PV premium generation in the first half of 2005<br />
compared to the same prior year period, it is Moody’s opinion<br />
that FSA’s strong embedded earnings from its outstanding<br />
insurance and investment portfolios should mitigate the earnings<br />
consequences of any short-term decrease in business.<br />
However, a longer lasting trough in production could test the<br />
firm's pricing and underwriting discipline.<br />
Rating Outlook<br />
<strong>Moody's</strong> outlook for FSA's Aaa Insurance financial strength<br />
rating and FSA Holding's Aa2 senior debt rating is stable.<br />
What Could Change the Rating - DOWN<br />
• A substantial deterioration of portfolio characteristics or<br />
underwriting practices<br />
• A sustained decrease in hard and total capital ratios below<br />
1.3 times without corrective action<br />
• Failure to maintain three-year average holding company<br />
operating ROE above 12%<br />
• An extensive diversification into higher risk businesses<br />
• Deterioration in the competitive environment or product<br />
demand.<br />
• Meaningful weakening of parent's credit fundamentals.<br />
Recent Developments/Results<br />
FSA's second quarter 2005 operating income excluding the<br />
mark-to-market gains associated with the firm's CDS exposure,<br />
was $87 million, 7% higher than in 1Q05 and 9%<br />
higher than in 2Q04.<br />
• 154 •
France<br />
Ratings and Contacts<br />
Category<br />
France, Government of<br />
Outlook<br />
Government Bonds -Dom Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Pierre Cailleteau/Paris 33.1.53.30.10.20<br />
Sara Bertin-Levecq/Paris<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
France<br />
1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 3.3 4.1 2.1 1.2 0.8 2.3 1.5 1.8<br />
CPI Inflation (%oya) 1.2 1.6 1.4 2.3 2.2 2.1 2.0 2.1<br />
General Government Revenue/GDP 51.5 50.9 50.8 50.0 49.8 50.4 50.9 50.8<br />
General Government Expenditure/GDP 53.3 52.3 52.3 53.2 53.9 54.0 54.2 54.2<br />
General Government Balance/GDP -1.7 -1.4 -1.5 -3.2 -4.1 -3.7 -3.2 -3.5<br />
Gross General Government Debt/GDP 58.6 57.2 56.8 58.8 63.2 65.1 66.5 67.1<br />
Current Acct. Bal./GDP 2.8 1.3 1.6 1.9 0.9 -0.4 -1.0 -1.2<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of the Republic of France are:<br />
- Large and diversified economic base<br />
- Stable political institutions and macro policy framework<br />
Credit Challenges<br />
Credit challenges facing the country are:<br />
- Rigidities in the labour market, exacerbated by a slow<br />
economic pace<br />
- High structural fiscal expenditures, suggesting the necessity<br />
to reform social security payments, pension benefits and<br />
the public sector<br />
- Difficulty in achieving social reform due to vested interests<br />
Rating Rationale<br />
The Aaa ratings assigned to the long-term debt obligations of<br />
the French government reflect the country's large and diversified<br />
economic base, its stable political institutions and a prudent<br />
macroeconomic policy framework.<br />
Structural weaknesses, particularly with regard to the relatively<br />
inflexible labour market – with high direct and indirect<br />
labour costs, and the resulting high level of structural unemployment<br />
– have negative consequences on the ability to raise<br />
growth potential and sustain high standards of living in light<br />
of the important costs that come with an ageing population.<br />
The large burden of social-security payments, in the context<br />
of unfavorable demographics, points therefore to lasting fiscal<br />
pressures. As a result, there is a pronounced need for continued<br />
structural reform in the labour market, pension benefits<br />
and health care.<br />
Rating Outlook<br />
The rating outlook for France is stable: the country is rich<br />
and its economy resilient. Yet, the debt-to-GDP ratio<br />
increased at the end of 2002 for the first time in five years,<br />
reaching almost 59%, and kept going up to almost 64% in<br />
2003, to 65.6% in 2004 and probably above 66% in 2005.<br />
This trend is in a large part attributable to cyclical factors that<br />
do not affect the rating. However, there is also a structural<br />
inertia, which, if it were to persist for a long period, and<br />
through business cycles, could exert pressure on the ratings.<br />
What Could Change the Rating - DOWN<br />
- A substantial long-term increase in the debt to GDP ratio<br />
Recent Developments<br />
France is confronted with a delicate economic and financial<br />
situation, which combines with political and social malaise.<br />
Economic growth is modest, fiscal accounts are gradually<br />
deteriorating, unemployment remains high, and manifestations<br />
of social and political discontent during elections or in<br />
the streets abound.<br />
In the aftermath of the rejection of the referendum on the<br />
EU constitution on May 29, the President has called Mr de<br />
Villepin to form a new government, whose Minister of Interior<br />
is Mr Sarkozy — leader of the majority party in the parliament<br />
and a strong contender for the future presidential<br />
election. The central mission of the new government is to<br />
obtain a decline in the unemployment rate, widely perceived<br />
as the major cause of the dissatisfaction that led to the vote<br />
against the constitution. The government must reform the<br />
economy while respecting the "French social model" — and<br />
more generally combating unpopular manifestations of globalization,<br />
as underscored by calls to "economic patriotism".<br />
This new political impetus takes place at a time the economy<br />
is growing only modestly (growth for 2005 should be<br />
around 1.5%), the external accounts show unusual signs of<br />
weakness after a decade of celebrated competitiveness, and<br />
the situation of public finances has provoked alarmist declarations<br />
from the Minister of finances and the creation of a task<br />
force headed by Mr Pébereau on the public debt. The fiscal<br />
target deficit (2.9% of GDP) appears broadly achievable in<br />
2005 only for the reason that EDF will make a 0.4% of GDP<br />
payment to the General government aimed at covering future<br />
shortfalls related to the transfer of EDF pension obligations<br />
into the general system.<br />
In these conditions, French public finances remain on a<br />
deteriorating trend, even though, from a longer-term perspective,<br />
budget sustainability has been structurally enhanced<br />
by the recent reform of the French pension system, and, to a<br />
lesser degree, by the reform of health care. <strong>Moody's</strong> nonetheless<br />
feels that the critical issue of raising growth potential is<br />
severely constrained by the difficulty to reform the labour<br />
market.<br />
• 155 •
Hong Kong<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A1/P-1<br />
A1/P-1<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Thomas J. Byrne/New York<br />
Vincent J. Truglia/New York<br />
Hong Kong<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (% change) 10.2 0.5 1.9 3.2 8.1 5.0 4.0<br />
Inflation (% change Dec/Dec) -3.8 -1.6 -3.0 -2.6 -0.4 1.5 1.1<br />
Gen. Gov. Balance/GDP -4.9 -5.5 -7.2 -5.3 -1.5 -1.1 -1.1<br />
Gen. Gov. Primary Balance/ GDP -4.9 -5.5 -7.2 -5.3 -1.5 -1.1 -1.1<br />
Gen. Gov. Debt/GDP 0.0 0.0 0.0 0.0 2.0 1.9 1.8<br />
Gen. Gov. Debt/Gen. Gov. Revenue 0.0 0.0 0.0 0.0 11.2 10.6 10.6<br />
Opinion<br />
Credit Strengths<br />
Hong Kong has the following credit strengths.<br />
— Strong external position: high current-account surpluses,<br />
large net international investment position<br />
— Almost no government debt and substantial fiscal<br />
reserves<br />
— Excellent financial-market infrastructure that supports<br />
HK's position as an international financial center<br />
— Important role in international trade with China<br />
Credit Challenges<br />
Hong Kong has the following credit challenges.<br />
— Exchange rate regime that may be incompatible with<br />
continued fiscal deficits due to effects on market confidence<br />
—Increasing concentration of trade and investment with<br />
China. So far, this has been a strength, but should there be an<br />
economic downturn or political shock in China, the effects on<br />
Hong Kong are uncertain.<br />
Rating Rationale<br />
Hong Kong's increasing economic and financial integration<br />
with the rest of China indicates that its foreign currency debt<br />
ceiling should be closely linked to China's rating, which is A2.<br />
Hong Kong's foreign currency ratings are one notch higher<br />
than China's because of Hong Kong's strong external indicators,<br />
its separate currency, and its strong institutional structure.<br />
The government's domestic currency rating is based on the<br />
lack of government debt and the large fiscal reserves. Fiscal<br />
deficits that will last for several years are causing these<br />
reserves to be drawn down, but the government still has further<br />
revenue-enhancing options it can implement in the<br />
future. Although the government may resort to debt issuance<br />
this year to maintain fiscal reserves, the net financial position<br />
would not be affected.<br />
Hong Kong now appears to be out of its six-year period of<br />
deflation, which was brought about by increased integration<br />
with Guangdong Province, by declining property prices, and<br />
by the fixed exchange rate under the currency board system.<br />
Recent data indicate that deflation may be ending, however.<br />
Deflation had caused some to conclude that the currency peg<br />
would be changed, but recent data indicate that such pressure<br />
has diminished.<br />
Hong Kong's external position remains strong, however,<br />
with one of the largest net international investment positions<br />
of any country or territory and continuing current account<br />
surpluses. The latest figures on the net international investment<br />
position showed that it had strengthened quite significantly<br />
to more than 150% of GDP.<br />
<strong>Moody's</strong> ratings, therefore, reflect Hong Kong's external<br />
financial strength, but they also recognize the close connection<br />
between Hong Kong and China on both the political and<br />
economic fronts.<br />
Rating Outlook<br />
The outlook for Hong Kong's foreign currency ceilings is stable,<br />
as is the outlook for the government's Aa3 domestic currency<br />
rating. <strong>Moody's</strong> believes that, despite the decline in the<br />
fiscal reserves, the lack of government net debt and the ability<br />
to finance further deficits using the reserves justify a the stable<br />
outlooks.<br />
The stable outlook on the foreign currency ceilings mirrors<br />
the outlook on China's corresponding ratings. Hong Kong's<br />
legal status and its increasing integration with China mean<br />
that the ratings will continue to be linked.<br />
What Could Change the Rating - UP<br />
Hong Kong's foreign currency ratings could move up if<br />
financial stability is maintained and the Chinese rating also<br />
moves up. <strong>Moody's</strong> notes that the strength of the balance of<br />
payments and external financial position compare favorably<br />
with other similarly rated issuers.<br />
What Could Change the Rating - DOWN<br />
The rating could come under downward pressure should<br />
there be a loss of confidence on the part of investors that led<br />
to capital outflows and a weakened external financial position.<br />
While this seems unlikely, such a scenario could conceivably<br />
develop if the exchange rate regime were to come under pressure<br />
or was changed in a way that did not maintain investor<br />
confidence. Instability in China that led to a Chinese downgrade<br />
could also affect HK's ratings.<br />
Recent Developments<br />
The Chief Executive announced in his policy address a proposal<br />
to double the number of seats in Legco and the size of<br />
the electoral committee that elects the CE. While this will<br />
allow somewhat more participation in the electoral process, it<br />
does not change the balance between directly elected seats<br />
and constituency seats. It also does not satisfy those in HK<br />
who advocate direct election of the chief executive. The<br />
changes had to take into account the position of the National<br />
People's Congress on these issues.<br />
During the first six months of the fiscal year, both revenues<br />
and expenditures declined, but the fiscal balance (after subtracting<br />
borrowings from revenues) improved somewhat. It<br />
appears that the government may achieve consolidated and<br />
operating surpluses earlier than the targeted years of FY<br />
2007-08 and 2008-09, respectively.<br />
• 156 •
IBRD (World Bank)<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Senior Unsecured<br />
Jr Subordinate<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Aaa<br />
Aaa<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Mary O'Donnell/New York<br />
Vincent J. Truglia/New York<br />
IBRD (World Bank)<br />
2000 2001 2002 2003 2004 2005<br />
Return on Earning Assets 1.44 0.89 1.45 2.17 1.30 1.09<br />
Interest Coverage Ratio (x) 1.30 1.18 1.44 1.91 1.69 1.51<br />
Risk-Asset Coverage Ratio[1][2] 168.95 174.88 172.26 182.90 211.68 228.61<br />
Usable Capital/Risk Assets 38.16 40.20 42.70 48.40 49.68 61.66<br />
Net Loans 116,550 114,792 116,536 112,195 106,105 101,392<br />
Liquid Assets/Debt 22.62 22.69 22.37 26.88 29.87 26.89<br />
Total Reserves/Loans Outstanding 18.27 19.42 21.35 24.79 20.93 28.12<br />
[1] Usable equity plus callable capital of countries with Aaa or Aa ratings/Risk Assets. [2] Risk assets defined as loans to countries considered by <strong>Moody's</strong> to be below investment grade.<br />
Opinion<br />
Credit Strengths<br />
The IBRD has the following credit strengths:<br />
— Solid capital structure<br />
—Preferred creditor status, aiding asset quality<br />
—Sound financial policies<br />
—Shareholder support<br />
Credit Challenges<br />
The IBRD faces the following credit challenge:<br />
— Asset quality should there be simultaneous financial crises<br />
in several large borrowers<br />
Rating Rationale<br />
The bank is very strong in terms of Moody’s capital adequacy<br />
measures. Despite financial turmoil in several large borrowing<br />
countries during the past several fiscal years, the Bank's<br />
convertible currency paid-in capital, total reserves, and callable<br />
capital of Aaa/Aa countries continued to comfortably<br />
exceed what Moody’s regards as the Bank's true risk assets —<br />
loans to countries rated below investment grade. Following<br />
the Asian financial crisis, this ratio deteriorated, although<br />
always remaining strong, and it has recovered since.<br />
Aside from paid in capital, the Bank has an additional, large<br />
cushion in the form of callable capital that provides substantial<br />
protection to bond holders. The IBRD has never had<br />
recourse to this capital, but could do so in the event of stress.<br />
Conservative asset/liability management policies greatly<br />
reduce financial risks, and these policies complement the low<br />
credit risk of the Bank's loan portfolio resulting from its preferred<br />
creditor status. Preferred creditor status has meant that<br />
most countries give priority to repaying their obligations to<br />
the IBRD and, should they miss payments, eventually make<br />
up arrearages.<br />
The IBRD has never declared a loan loss, although nonaccruals<br />
have sometimes persisted. At the end of the last<br />
financial year, loans on non-accrual were $3.2 billion, but<br />
loan-loss provisions were $3.5 billion.<br />
Despite the Bank's good record on asset quality, policies<br />
are in place to mitigate credit risk. One of these is the limit on<br />
lending to a single borrower, currently at $13.5 billion.<br />
The IBRD's policies on liquidity are a further credit<br />
strength. Liquid assets must be at least equal to the highest<br />
consecutive six months of debt service plus half of projected<br />
net loan disbursements during the coming fiscal year. Thus,<br />
the Bank is insulated from potential market disruptions that<br />
might affect its funding.<br />
Combined, these factors enhance the Bank's creditworthiness.<br />
The Bank's financial strength, in addition to support<br />
from Aaa/Aa shareholders, gives it unique access to world<br />
markets — permitting it to undertake financial innovations<br />
that reduce the cost of borrowed funds.<br />
Rating Outlook<br />
The outlook remains stable. The institution’s strong capital<br />
base and reliable income stream should allow it to withstand<br />
crises in developing countries without impairing its ability to<br />
service its obligations. The value of preferred creditor status<br />
has recently been demonstrated in Argentina, which so far has<br />
continued to make payments. Should this situation change,<br />
however, <strong>Moody's</strong> believes the bank could withstand the<br />
impact without affecting its ability to meet its obligations.<br />
What Could Change the Rating - DOWN<br />
In a scenario where several of the largest borrowers were in<br />
default at the same time and looked unlikely to resume payments<br />
to the Bank, <strong>Moody's</strong> believes that the IBRD could<br />
take a number of steps to reinforce its capital position, including<br />
a capital increase. If such an increase were deemed unfeasible,<br />
ultimately a call on capital would provide protection to<br />
bondholders as a last resort. Debt obligations of the IBRD<br />
would still be honored. However, such a scenario, while<br />
unlikely, could lead to a lower rating.<br />
Recent Developments<br />
The IBRD's operating income, which Moody’s feels is a better<br />
reflection of underlying trends than reported income after<br />
FAS 133 adjustments, declined again to $1.3 billion, down<br />
from $1.7 billion in FY2004 and $3.0 billion in FY2003. The<br />
swing in operating income is basically attributed to the<br />
decrease in the release of provisions for losses on loans and<br />
guarantees as well as lower income from loans. Over the<br />
medium term, the outlook for the Bank’s profits in normal<br />
circumstances should be good, as loan volume should continue<br />
to expand—albeit most likely at a gradual pace—and as<br />
higher loan rates make themselves more fully felt. The<br />
decline in operating income in the last fiscal year does not<br />
have any rating implications.<br />
• 157 •
India<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa3/NP<br />
Ba2/NP<br />
Analyst<br />
Phone<br />
Kristin Lindow/New York 1.212.553.1653<br />
Joan Feldbaum-Vidra/New York<br />
Vincent J. Truglia/New York<br />
India [1]<br />
2000/01 2001/02 2002/03 2003/04 2004/05F 2005/06F <strong>2006</strong>/07F<br />
Real GDP Growth (%oya) 4.4 5.8 4.0 8.5 6.9 7.1 6.5<br />
CPI Inflation (% change, end-March) 5.6 4.8 3.8 3.4 4.0 6.0 5.5<br />
General Government Balance/GDP (%) -10.6 -11.0 -11.1 -10.6 -10.1 -10.4 -9.9<br />
General Government Debt/GDP (%) 79.5 85.8 91.5 93.6 95.4 96.3 96.3<br />
General Government Debt/Revenues (%) 422.5 453.0 453.5 463.5 460.5 464.0 458.6<br />
Current Acct. Bal./GDP (%) -0.8 0.7 1.2 1.8 -0.9 -2.8 -3.5<br />
External Debt/Current Account Receipts (%) 127.2 121.4 109.7 93.8 78.8 70.2 64.6<br />
External Vulnerability Indicator[2] 72.2 52.3 54.7 48.3 34.4 34.9 29.2<br />
[1] Fiscal years beginning April 1 [2] (Short-term External Debt + Currently Maturing Long-Term Debt + Nonresident Deposits Over One Year)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of India are:<br />
– Healthy external liquidity supported by nonresident<br />
remittances and non-debt creating capital inflows<br />
– Continental-sized economy, with strong underlying<br />
growth momentum<br />
Credit Challenges<br />
The credit challenges for India are:<br />
– Weak government finances and debt and an inadequate<br />
physical and social infrastructure<br />
– Economic reform hobbled by coalition politics, bureaucratic<br />
inefficiencies, and vested interest groups<br />
– Tensions with neighbors and nuclear rivals Pakistan and<br />
China continue to waste resources, despite recent improvement<br />
in economic and political relations<br />
Rating Rationale<br />
India's foreign currency debt is rated Baa3, reflecting an<br />
external payments capacity that is consistent with its rating<br />
peers. <strong>Moody's</strong> believes this capacity is more than adequate to<br />
withstand potential shocks, including problems that could<br />
derive from its weak fiscal situation and unfortunate compromises<br />
related to coalition politics. A rating constraint is the<br />
poor condition of the public finances as reflected in high government<br />
debt to GDP ratios and interest payments that consume<br />
over one-third of the general government's annual<br />
revenues, although central government results have improved<br />
markedly in recent years. Deficits are almost entirely funded<br />
locally, plus the share of external debt in the government's<br />
total debt is modest and much of that debt was contracted at<br />
concessional terms. Accordingly, India's domestic currency<br />
rating is Ba2, or two notches lower than its foreign currency<br />
rating.<br />
Rating Outlook<br />
The outlook on India's Baa3 foreign currency rating is stable.<br />
However, a negative outlook on the government's Ba2 local<br />
currency rating reflects heavy public debt and debt servicing<br />
requirements relative to the country's rating peers.<br />
What Could Change the Rating - UP<br />
–A significant improvement in general government debt<br />
dynamics could stabilize the domestic debt rating and ease<br />
potential spillover risks for the external position.<br />
What Could Change the Rating - DOWN<br />
–Failure to narrow the fiscal deficit, a long-term deceleration<br />
in growth, or a sustained reversal of foreign capital inflows<br />
would have negative implications for the ratings, as would a<br />
serious flare-up on the regional political scene.<br />
Recent Developments/Results<br />
Coalition politics have hobbled progress on economic<br />
reforms since the change in government in May 2004, mainly<br />
but not exclusively due to the government's dependence on<br />
the reform-averse Communist Party Marxist (CPI-M) for<br />
parliamentary support. Additional strains are being created by<br />
the unusual power-sharing formula within the Congress<br />
Party, which the CPI-M has exploited. This interference<br />
could slow success in bringing in more foreign direct investment,<br />
which is one area that had been showing substantive<br />
progress. Ironically, in these many-party coalitions of often<br />
disparate economic and political philosophies, such ostensible<br />
supporters sometimes prove to be more obstructive than the<br />
actual opposition within parliament.<br />
In spite of the dissension within the government, several<br />
positive developments should be highlighted. First, the central<br />
government budget outturn in FY2004/05 was better<br />
than projected for the second consecutive year, thanks to<br />
healthy revenue gains and controlled spending. Details of the<br />
state governments' outcome lag considerably, however, so it is<br />
not possible to extrapolate the better result to the general<br />
government level with any certainty. Then again, although<br />
the central government budget is showing some slippage this<br />
fiscal year, the implementation of the state-level VAT in most<br />
states and jurisdictions from the start of the current fiscal year<br />
could still lead to an improvement in the overall deficit.<br />
Another favorable development is continued robust economic<br />
growth of 7% or more, roughly in line with our expectations.<br />
Strong domestic demand, especially credit-driven<br />
consumer spending, pushed up growth to a 10% rate in the<br />
first quarter of the fiscal year. Exports have also picked up,<br />
although imports are growing faster because of energy costs,<br />
in addition to the sustained vibrancy of the service economy.<br />
Finally, after a surge in service exports in the final quarter of<br />
2004/05 brought the current account deficit down below 1%<br />
of GDP for the year as a whole, the trade deficit has widened<br />
to record high levels mainly because of energy import costs.<br />
Nevertheless, the external payments position remains quite<br />
comfortable and in line with the country's foreign currency<br />
rating peers.<br />
• 158 •
Indonesia<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Indonesia, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Positive<br />
B2/NP<br />
B3/NP<br />
Positive<br />
Government Bonds<br />
B2<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Thomas J. Byrne/New York<br />
Vincent J. Truglia/New York<br />
Indonesia<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP (% change) 4.9 3.5 3.7 4.1 5.1 6.0 5.0<br />
Inflation (CPI, % change Dec/Dec) 9.3 12.5 10.0 5.1 6.4 8.0 8.8<br />
General Gov. Financial Balance/GDP -1.2 -2.4 -1.3 -1.7 -1.3 -1.6 -1.3<br />
General Gov. Debt /GDP[1] 100.3 90.9 80.3 66.5 54.0 49.4 43.8<br />
General Gov. Debt /Revenues[1] 678.8 508.5 501.2 399.1 304.9 272.1 243.9<br />
Current Acct. Bal./GDP 5.5 4.3 3.8 3.4 1.3 1.6 0.8<br />
External Debt/ CA Receipts[2] 189.2 200.4 188.4 188.2 170.5 133.4 123.6<br />
External Vulnerability Indicator[3] 100.8 103.5 61.2 53.4 58.8 65.0 53.7<br />
[1] GG Debt includes guarantees [2] Current Account Receipts [3] (Short-Term Debt + Currently Maturing Long-Term Debt + Total Nonresident Deposits)/Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Indonesia's credit strengths include the following.<br />
—Increased political stability compared to the 1997-2000<br />
period, demonstrated by the 2004 elections<br />
—Recent progress in privatization and disposal of assets<br />
—Diversified economy that helps reduce volatility<br />
—Improving external financial position<br />
Credit Challenges<br />
Indonesia faces the following credit challenges.<br />
—High government debt and overall external debt levels<br />
—Political divisions that hinder policy implementation<br />
—Low levels of investment that limit long-term growth<br />
Rating Rationale<br />
<strong>Moody's</strong> upgraded Indonesia in September 2003 to reflect the<br />
improved external financial position and strengthening government<br />
debt ratios. While there has been improvement in<br />
these areas, risks related to potential shocks from political<br />
developments or terrorism remain.<br />
The Megawati government added some stability and made<br />
progress in reforms, but political challenges remain. Nonetheless,<br />
the smooth running of the elections in 2004 and the<br />
coming to office of Indonesia's first democratically elected<br />
president were significant milestones. On the external front,<br />
Indonesia decided not to renew its IMF agreement in 2004,<br />
meaning that it is repaying debt to that organization on a net<br />
basis , as well as to the World Bank. Also, it means that Indonesia<br />
will not be eligible for a Paris Club rescheduling. This<br />
appears manageable, but any shock to confidence that led to<br />
an outflow of private capital could be problematic.<br />
The ratio of public sector debt to GDP has fallen fairly<br />
sharply in the past three years, partly because of a strengthening<br />
of the rupiah, but basically because the government has<br />
run only modest budget deficits.<br />
Rating Outlook<br />
The outlook for the ratings is positive, based on increased<br />
political stability, progress made in asset sales, improved (but<br />
still weak) external liquidity, and fiscal performance. The government's<br />
debt ratios have improved considerably, and<br />
<strong>Moody's</strong> expects this trend to continue.<br />
What Could Change the Rating - UP<br />
Indonesia's rating could move upward if the new government<br />
is able to implement its ambitious reforms designed to<br />
improve the investment environment. These include judicial<br />
reform, increased infrastructure investment, anti-corruption<br />
measures, and labor market reforms. A resultant increase in<br />
investment, both foreign and domestic, would also support a<br />
possible move upward in the rating. Export performance will<br />
also be important.<br />
What Could Change the Rating - DOWN<br />
The rating would come under downward pressure if there<br />
were a major shock to confidence emanating from political<br />
developments or if the balance of payments deteriorated,<br />
resulting in a major decline in international reserves. Over the<br />
longer term, continued low investment and low growth could<br />
jeopardize Indonesia's improving political stability, so a lack<br />
of direct investment inflows is also an important factor.<br />
Recent Developments<br />
Prices for gasoline, diesel, and kerosene were upped significantly-and<br />
more than markets and the populace expected—on<br />
October 1. This indicates that the government is serious<br />
about eliminating fuel subsidies over the next couple of years,<br />
thereby making more resources available for infrastructure<br />
and social programs. <strong>Moody's</strong> has for some time believed that<br />
on the fiscal front Indonesia has not faced a major problem,<br />
but the reduction in fuel subsidies (and their likely gradual<br />
elimination) means that the government can concentrate<br />
more on expenditures that will boost economic growth. This<br />
is critical for the medium-term outlook for the country.<br />
Monetary policy has also been tightened, and it seems<br />
likely that Bank Indonesia will take further steps if they are<br />
warranted to prevent rupiah weakness. The major risk is to<br />
international reserves, which have fallen considerably in<br />
recent months, if monetary policy does not respond adequately<br />
to rising inflation and investor sentiment. BI's flexibility<br />
is being reduced by the fall in reserves.<br />
• 159 •
Inter-American Development Bank<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Sr Unsec Bank Credit Facility<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
ST Issuer Rating P-1<br />
Key Indicators<br />
Other Short Term P-1<br />
Analyst<br />
Phone<br />
Nina Ramondelli/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Inter-American Development Bank<br />
1999 2000 2001 2002 2003 2004<br />
Return on Average Earning Assets (%) 1.2 1.6 1.8 1.3 3.8 1.3<br />
Interest Coverage Ratio (%) 1.3 1.3 1.4 1.4 2.5 1.5<br />
Risk Asset Coverage Ratio (%) 168.9 189.2 177.5 163.8 157.1 164.7<br />
Total Equitiy to Loans Ratio (%) - 30.3 30.5 30.9 33.0 36.1<br />
Net Loans (US$ Mil.) 37,386 40,563 43,527 46,397 50,472 49,643<br />
Liquid Assets/Debt Ratio (%) 34.0 33.4 27.6 30.2 30.2 27.9<br />
Total Reserves/ Loans Outstanding Ratio (%) 19.9 20.0 20.5 21.4 25.3 28.5<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of the Inter-American Development Bank<br />
(IDB) are:<br />
-Sound financial management<br />
-Strong commitment from non-borrowing shareholders<br />
-Callable capital<br />
-Preferred creditor status<br />
Credit Challenges<br />
Credit challenges for the IDB are:<br />
-Credit concentration in high-risk countries with volatile<br />
macroeconomic environments.<br />
-Balancing a development mandate with sound financial<br />
practices and reasonable profitability.<br />
Rating Rationale<br />
Moody’s Aaa rating for the long-term debt of the IDB reflects<br />
the conservative capital structure imposed by the bank’s financial<br />
policies. The Bank has adopted a capital adequacy policy<br />
and associated lending rate methodology to more closely<br />
align its risk management methods and procedures with current<br />
international banking practices. The policy uses the ratio<br />
of total equity to loans as a benchmark to measure capital adequacy.<br />
The new measure of capital adequacy takes into<br />
account the Bank's total equity, which is comprised of<br />
reserves, paid-in capital and the allowance for loan losses, less<br />
net receivable from members, local currency cash, prepaid<br />
pension benefit costs and the cumulative effect of SFAS 133<br />
and currency transaction adjustments.<br />
A strong capital base and sound financial management also<br />
support the rating. IDB has always generated a profit. The<br />
bank’s most important challenges are balancing concentrated<br />
credit risk with reasonable profitability, and responding to the<br />
financial needs of the borrowing countries within the development<br />
mandate of its founding charter.<br />
Rating Outlook<br />
The Aaa rating outlook remains stable for the IDB, given its<br />
ample capital base, its owners’ credit quality and support, and<br />
the IDB’s preferred-creditor status with the countries to<br />
which it lends.<br />
What Could Change the Rating - DOWN<br />
Downward pressure on the rating may appear if more than<br />
one of the largest debtors to the bank were to go into non-<br />
accrual and the member countries failed to take the necessary<br />
actions to preserve the financial health of the Bank.<br />
Recent Events<br />
The IDB is the main source of multilateral development<br />
financing for Latin America and the Caribbean, particularly<br />
in the smaller and poorer countries. The equivalent dollar<br />
value of new loan approvals in 2004 was $5.3 billion compared<br />
with $6.1 billion in 2003 and $4.0 billion in 2002. This<br />
is a reflection of the capacity of the Bank to respond promptly<br />
to the changing financial needs and demands from borrowing<br />
member countries. The pattern of disbursements also reflects<br />
those changing needs. Total disbursements for the year 2004<br />
amounted to $3.8 billion compared with $8.4 billion in 2003<br />
and $5.8 billion in 2002.<br />
Total gross loans outstanding as of December 31, 2004<br />
amounted to $49.8 billion, slightly below the level at the end<br />
of 2003, reflecting net repayments of emergency loans and<br />
prepayments. About 22% of the loan portfolio is denominated<br />
in currencies other than US dollars. Close matching of<br />
the currency composition of loans and debt makes the Bank<br />
practically immune to exchange rate risk. At year-end 2004,<br />
Brazil remained the Bank's largest borrower, followed by<br />
Argentina. Brazil (B1), Mexico (Baa1), and Argentina(Caa1)<br />
accounted for 53.2% of the Bank's exposure in 2004, broadly<br />
unchanged from previous years.<br />
The primary objective of the Bank's borrowing policy is to<br />
obtain the necessary resources to finance its lending program<br />
at the lowest possible cost for its borrowing members. The<br />
medium- and long-term borrowings of the Bank consist of<br />
loans, notes and bonds. The Bank has a short-term borrowing<br />
facility, under which discount notes are issued in amounts not<br />
less than $100,000 and maturities up to 360 days. The Bank<br />
has established uncommitted lines of credit. In the event,<br />
however unlikely, of the Bank being unable to access capital<br />
markets, its $13.2 billion portfolio of liquid assets may allow<br />
the Bank to stay out of the market for approximately one year.<br />
At the end of 2004, the IDB total outstanding debt, before<br />
swaps, amounted to $46.8 billion down from $50.3 billion in<br />
2003, reflecting lower cash flow requirements. The solid<br />
financial position of the Bank is supported by more than 40<br />
years of net income accumulation.<br />
• 160 •
International <strong>Finance</strong> Corporation<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Outlook<br />
Stable<br />
Issuer Rating<br />
Aaa<br />
Senior Unsecured<br />
Aaa<br />
Other Short Term P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Mary O'Donnell/New York<br />
Vincent J. Truglia/New York<br />
International <strong>Finance</strong> Corporation [1]<br />
1999 2000 2001 2002 2003 2004 2005<br />
Assets (US$ Mil.) 19,847 22,756 23,386 24,727 26,756 26,940 28,723<br />
Equity (US$ Mil.) 5,344 5,733 6,095 6,304 6,789 7,782 9,798<br />
Brwgs+Gts./Subscr Cap+Acc Earn (X) 2.33 2.61 2.55 2.67 2.60 2.13 1.60<br />
Loss Res/Loans (%) 14.46 14.79 16.68 21.88 18.22 14.02 9.91<br />
Return on Average Assets (%)[2] 1.22 1.69 1.42 0.84 1.77 3.50 6.95<br />
Return on Average Equity (%)[2] 3.81 5.66 4.79 2.77 5.89 11.27 20.22<br />
Interest Coverage Ratio (X) 1.37 1.47 1.36 1.49 3.15 8.04 7.52<br />
[1] Data for fiscal years which end June 30. [2] Using net income.<br />
Opinion<br />
Credit Strengths<br />
Credit strengths of the IFC are the following.<br />
- Strong capital base<br />
- Very high liquidity<br />
- Strong asset quality, based on historical performance and<br />
preferred creditor status<br />
- Shareholder support<br />
Credit Challenges<br />
Credit challenges for the IFC are the following.<br />
- Potential emerging market debt problems, as exemplified<br />
by the Argentine crisis. If generalized, this could seriously<br />
affect asset quality.<br />
Rating Rationale<br />
Moody’s Aaa rating of the International <strong>Finance</strong> Corporation<br />
(IFC), a part of the World Bank Group, is based on its prudent<br />
capital adequacy and liquidity policies, active member<br />
support, and preferred creditor status. These factors should<br />
continue to support the rating despite the financial and economic<br />
turmoil that has afflicted several of the countries to<br />
which the IFC is exposed and which has led to a substantial<br />
increase in the non-performing loan ratio since FY1997. The<br />
NPL ratio came down from a high of over 16% in FY2003 to<br />
11.5% in FY2004, about where it was five years ago. This<br />
shift demonstrates not only the improvement of the global<br />
economic situation, but also the success of the IFC 's measures<br />
to improve its portfolio.<br />
The IFC is a profitable supranational agency organized as a<br />
joint stock company with sovereign owners, primarily serving<br />
private sector companies but guided by a mission to mobilize<br />
private investment in support of economic development. The<br />
basic business – lending to and investing in private companies<br />
in developing country economies – is inherently high risk, but<br />
the risk is cushioned by strong capital and reserves as well as<br />
by the preferential treatment accorded from shareholder governments.<br />
Transfer risk, for example, is reduced by host government<br />
policies granting the IFC and its clients special<br />
access to foreign exchange.<br />
Because the IFC's mission is very different from other multilateral<br />
lenders, which lend to governments, it is structured<br />
differently. For example, the organization does not have "callable<br />
capital," which is an element in <strong>Moody's</strong> rating of the<br />
World Bank, for example. Thus, the IFC's rating is based<br />
more on the Corporation's ability to withstand a fairly high<br />
level of non-performing loans in its portfolio, something<br />
which does not occur in other multilateral lenders.<br />
In addition, the IFC's rating depends on <strong>Moody's</strong> evaluation<br />
of the organization's risk management capabilities, since<br />
it takes considerably more risk than other multilaterals. The<br />
record of the organization to date has been good, with the<br />
level of write-offs being very low.<br />
The ability of the IFC to transcend payments difficulties in<br />
borrowing countries has been illustrated in the present case of<br />
Argentina. While a number of its borrowers were severely<br />
affected by the economic situation in the country and, therefore,<br />
could not continue to service their debts, the IFC still<br />
had a higher proportion of its borrowers that continued to<br />
make payments than did most other foreign lenders. The<br />
Argentine government specifically allowed companies in the<br />
country access to foreign exchange that was not allowed to<br />
other companies.<br />
The IFC is conservatively leveraged, with a 2.4:1 ratio of<br />
outstanding debt and commitments to capital at the end of<br />
FY2004. Since 1993, the corporation has controlled its offbalance<br />
sheet risk through use of a risk-weighted capital adequacy<br />
ratio. At fiscal year end 2004, this ratio stood at 48.2%<br />
against the minimum of 30% required by policy.<br />
Rating Outlook<br />
The outlook is stable. The IFC’s credit strengths should continue<br />
to allow it to withstand financial problems in the countries<br />
in which its borrowers are located.<br />
What Could Change the Rating - DOWN<br />
The IFC's Aaa rating is solid. However, should there be a<br />
generalized emerging market debt crisis that affected several<br />
of the organization's largest exposures, <strong>Moody's</strong> would have<br />
to examine the rating. This would depend upon the countries<br />
involved, the IFC's portfolio in those countries, and the<br />
financial condition of the IFC at that time. At present, it<br />
seems unlikely that such a scenario will develop, but it cannot<br />
be ruled out completely.<br />
Recent Developments/Results<br />
The IFC, along with the World Bank, has launched a new initiative<br />
to alleviate poverty by supporting grassroots business<br />
organizations (GBOS) through packages of funding and technical<br />
assistance. The first two countries to receive assistance<br />
under this program are in Cambodia and Kenya.<br />
Operating income may come in at a record level when figures<br />
are published for the 2004-05 fiscal year.<br />
• 161 •
Israel<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Israel, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2/P-1<br />
A2/P-1<br />
Stable<br />
Government Bonds<br />
A2<br />
Analyst<br />
Phone<br />
Jonathan R. Schiffer/New York 1.212.553.1653<br />
Joan Feldbaum-Vidra/New York<br />
Vincent J. Truglia/New York<br />
Israel<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 7.5 -0.9 -0.8 1.3 4.4 5.0 4.2<br />
CPI Inflation (%, eop) 0.0 1.9 6.5 -1.9 1.2 2.0 1.8<br />
General Government Balance/GDP (%) -2.0 -3.9 -4.2 -6.2 -4.4 -4.0 -3.5<br />
Gross Geneneral Government Debt/GDP (%) 90.9 95.9 104.4 106.5 105.7 103.5 101.0<br />
Gross Geneneral Government Debt/Revenue (%) 187.8 195.3 208.4 228.1 227.8 225.0 224.4<br />
Current Account Balance/GDP (%) -1.2 -1.7 -1.4 0.1 0.8 0.4 0.4<br />
External Debt/Exports (%)[1] 115.3 131.7 141.1 139.7 125.8 117.5 102.6<br />
External Vulnerability Indicator (%)[2] 113.5 115.5 119.8 112.1 113.6 111.0 108.3<br />
[1] Current Account Receipts. [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of the State of Israel are:<br />
- Robust market institutions and civil society<br />
- Proactive economic policy decision-makers<br />
- Highly educated and skilled labor force<br />
- Active financial support from Jewish Diaspora<br />
- Financial support from and military alliance with USA<br />
Credit Challenges<br />
The credit challenges for the State of Israel are:<br />
- Economic dependence on and high volatility of global<br />
high technology sector<br />
- Highly fragmented political system leading to unwieldy<br />
coalition governments<br />
- Geopolitical challenge from Palestinian Authority,<br />
supported in varying degrees by surrounding states<br />
- Containing fiscal deficit<br />
- Reducing large, burdensome domestic debt<br />
Rating Rationale<br />
In recent years, cuts in public sector wages and employment<br />
and social welfare entitlements, accelerated income tax reductions,<br />
privatization of various firms - most recently in banking<br />
and telecommunications, introduction of competition into<br />
natural monopoly sectors, and pension reform have been elements<br />
in a radical assault by the Ministry of <strong>Finance</strong> on<br />
Israel's generous welfare state and large public sector. While<br />
this strong structural reform program — if given time to work<br />
— would improve substantially Israel's medium-to-long term<br />
economic performance, it has also given rise to increases in<br />
income inequalities and poverty. Along with Israel's withdrawal<br />
from Gaza in advance of cessation of terrorist acts<br />
against Israel by various Palestinian groups, these policies<br />
have sparked a realignment in Israeli politics that may end up<br />
undermining both the macroeconomic policies and structural<br />
reforms of the former Sharon-Netanyahu team.<br />
Rating Outlook<br />
The outlooks for all Israeli ratings are "stable," given: the current<br />
regional military balance, the strong external (financial)<br />
support extant in the event of crisis from both the Jewish<br />
Diaspora and the USA government, and the willingness and<br />
ability of various Israeli governments - including the current<br />
one - to trim fiscal expenditures and budget deficits when and<br />
as necessary to maintain macroeconomic stability.<br />
It should be noted that data on various public sector debt<br />
ratios are more healthy than they appear due to the large concessionary<br />
element in Israeli foreign currency debt (a substantial<br />
proportion of which is either US government-guaranteed<br />
or willingly purchased at sub-market terms by supporters of<br />
the State of Israel).<br />
What Could Change the Rating - UP<br />
Upward pressure on the ratings could occur if investment<br />
picks up, if structural reforms continue to be implemented<br />
successfully and show positive economic results, and if the<br />
geopolitical situation remains such that investor and consumer<br />
uncertainties are allayed.<br />
What Could Change the Rating - DOWN<br />
If structural reforms falter and if the new politics post-March<br />
elections prompt increases in transfer payments and fiscal deficits<br />
— causing debt levels to revert to an upward trend, this<br />
could eventually place downward pressure on the ratings.<br />
Recent Developments/Results<br />
Israel's creditworthiness in the financial and economic<br />
spheres is strengthening: growth at an annualized rate was<br />
above 4.5% GDP in 3Q05; inflation has picked up a little<br />
with a weakened shekel but still remains reasonable; the 2005<br />
budget will come in below target (-3.4% of GDP), while -<br />
pending electoral results and policies - the <strong>2006</strong> budget deficit<br />
may hit -3% GDP; a multi-year tax plan has been approved<br />
that will reduce the overall tax burden, establish uniform tax<br />
rates in capital markets, and expand the tax base; a crucial<br />
structural reform (the so-called "Bachar reform") will encourage<br />
competition in financial services by separating providential<br />
and mutual funds from banks and by establishing a<br />
regulatory framework for professional investment and pension<br />
consultancies and for all financial institutions in Israel.<br />
Continuation of these trends is now less certain due to an<br />
impending realignment of Israeli politics: Prime Minister<br />
Sharon has quit his party (Likud). Together with his likeminded<br />
followers and parliamentarians, he seems ready to<br />
form a center-left political party that will weaken both Likud<br />
and Labor and that may pursue vigorously not only more<br />
conciliatory peacemaking with the Palestinians — marked by<br />
unilateral withdrawals from the "West Bank " before any disarming<br />
of Palestinian terrorist groups — but also more lax fiscal<br />
policies aimed at curbing growing income inequalities and<br />
poverty. Both these policies could be carried out in association<br />
with a more left-leaning Labor party under the new leadership<br />
of Mr. Amir Peretz.<br />
• 162 •
Italy<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Italy, Government of<br />
Outlook<br />
Stable<br />
Government Bonds<br />
Aa2<br />
Commercial Paper -Dom Curr P-1<br />
Other Short Term P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Alexander Kockerbeck/Frankfurt 49.69.707.30.700<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
Italy<br />
1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 1.7 3.0 1.8 0.4 0.3 1.2 0.2 1.5<br />
CPI Inflation (% end of period) 1.7 2.5 2.7 2.5 3.5 2.7 2.3 2.2<br />
General Government Revenue/GDP 47.1 46.2 46.0 45.6 46.1 45.3 44.9 44.6<br />
General Government Expenditure/GDP 48.8 47.0 49.2 48.3 49.3 48.6 49.2 48.8<br />
General Government Balance/GDP -1.7 -0.8 -3.2 -2.7 -3.2 -3.2 -4.3 -4.2<br />
Gross General Government Debt/GDP 115.5 111.4 110.9 108.3 106.8 106.5 108.2 108.3<br />
Current Acct. Bal./GDP 0.7 -0.5 -0.1 -0.8 -1.3 -0.8 -1.3 -1.7<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Italy are:<br />
- Its Euro zone membership<br />
- Slow but ongoing decline in the ratio of government debt<br />
to GDP<br />
Credit Challenges<br />
Credit challenges for Italy are:<br />
- A very high level of general government debt<br />
- A lack of competitiveness affecting potential GDP growth<br />
- A lack of sustainable fiscal consolidation<br />
Rating Rationale<br />
In May 2002, the Republic of Italy’s long-term ratings were<br />
upgraded to Aa2 from Aa3, reflecting chiefly the ongoing<br />
decline in the ratio of government debt to GDP (to 10.8.3 in<br />
2005 from a peak of 123.8% in 1995), as the country’s public<br />
finances benefited from macroeconomic convergence with<br />
the rest of the European Union. Due to the high debt ratios<br />
the questions of potential output and output growths are<br />
important. A rate of growth above the 2% potential output<br />
would allow the country to generate a healthy primary surplus<br />
and to decrease the debt ratio. Even so it is very important to<br />
highlight that potential growth does not put the Aa2 rating<br />
under pressure over the medium term. Effectively as it was<br />
noticed at the time of the May 2002 upgrade, Moody’s<br />
believes that due to the wealth of the Italian state and the constraint<br />
imposed by the European commission, the debt ratio<br />
will be maintained more or less constant.<br />
Rating Outlook<br />
The stable outlook reflects the constraints of the still very<br />
high level of public debt and the stagnant real GDP growth<br />
rate. Expenditure reforms implying sustainable and credible<br />
fiscal consolidation have been very limited. Moreover, Italy<br />
has been decreasing its reliance on one-off measures which<br />
implied a deterioration of its fiscal deficit. We are not expecting<br />
long lasting credible fiscal reforms prior to the spring<br />
<strong>2006</strong> elections. Without these reforms it will be very difficult<br />
for Italy to decrease its tax burden, tackle structural reforms,<br />
fulfil the Maastricht criteria and put its debt ratios on a significant<br />
and sustainable downward trend.<br />
What Could Change the Rating - UP<br />
A sustainable and sharp decrease in the debt ratio, reflecting a<br />
sustainable and credible fiscal adjustment.<br />
What Could Change the Rating - DOWN<br />
A fundamental change in trends towards an increase in general<br />
government debt ratios.<br />
Recent Developments<br />
Italy has been facing a very low growth rate of real GDP<br />
for the last 3 years, due to cyclical factors. It was only 0.4% in<br />
2002 , 0.3% in 2003 and 1.2% in 2004. <strong>Moody's</strong> is forecasting<br />
a growth rate of 0.2% for 2005.<br />
Fiscal deficit has been deteriorating. Following the reclassification<br />
by Eurostat of some banks advance on tax revenues,<br />
the Italian deficit in 2003 and 2004 has been reevaluated to<br />
just above 3%. The 2005 deficit should be above 4%. The<br />
increase in fiscal deficit is linked to the low growth rate and to<br />
the fact that Italy is relying less on one-off measure to finance<br />
its deficit. We are not expecting a sharp amelioration for <strong>2006</strong><br />
due to the electoral cycle. Due to the fiscal situation and the<br />
low rate of growth, we are expecting for the debt over GDP<br />
ratio to increase in 2005. It does not put the rating under<br />
pressure at this point, as <strong>Moody's</strong> believe that the increase<br />
does not represent a non-reversible long term trend causing a<br />
deterioration of the probability of default.<br />
• 163 •
Kuwait<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Kuwait, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2/P-1<br />
A2/P-1<br />
Stable<br />
Issuer Rating<br />
A2<br />
Analyst<br />
Phone<br />
Tristan Cooper/London 44.20.7772.5454<br />
Mary O'Donnell/New York 1.212.553.1653<br />
Vincent J. Truglia/New York<br />
Kuwait<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%) 1.9 0.7 -0.5 9.7 6.7 5.4 3.6<br />
CPI Inflation (%, eop) 1.5 1.1 0.9 1.1 2.6 3.5 3.0<br />
Gen'l Gov't Balance/GDP (%) 40.3 17.6 19.2 16.9 21.9 28.9 27.0<br />
Gen'l Gov't Debt/GDP (%) 36.2 37.2 31.6 24.9 19.4 14.2 12.4<br />
Gen'l Gov't Debt/Revenues (%) 46.9 58.6 50.5 43.1 31.3 22.4 19.9<br />
Current Account Balance/GDP (%) 39.8 24.4 11.2 20.4 33.9 45.1 45.2<br />
External Debt/Exports (%)[1] 34.8 47.5 59.7 43.3 31.6 24.3 23.3<br />
External Vulnerability Indicator (%)[2] 79.6 56.6 77.5 99.1 94.2 87.4 80.4<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Kuwait include:<br />
- Relatively high GDP per capita<br />
- Fourth largest oil reserves in the world<br />
- Wide fiscal and external current account surpluses<br />
- Substantial net foreign asset position<br />
- Strong relations with the US and other G8 countries<br />
Credit Challenges<br />
Credit challenges for Kuwait include:<br />
- High dependence on oil exports<br />
- Under-developed non-oil and private sectors<br />
- Rigidities in the labour market for nationals<br />
- Lack of clarity surrounding succession to the emirship<br />
- Risk of contagion from regional geopolitical instability<br />
Rating Rationale<br />
Kuwait’s issuer ratings for long-term government bonds stand<br />
at A2, a relatively high investment grade rating. Kuwait’s rating<br />
is supported by the country’s robust GDP per capita,<br />
which approximated $16,100 in 2004 on a PPP basis, similar<br />
to that of Hungary (A1) or Estonia (A1). Kuwait is able to<br />
achieve this level of prosperity primarily through its substantial<br />
hydrocarbons endowment. Kuwait has the fourth largest<br />
oil reserves in the world and is a major oil exporter while having<br />
a small population (around 2.8 million). Owing to its high<br />
level of oil exports per capita, Kuwait has historically run wide<br />
fiscal and external current account surpluses, which has<br />
enabled both the public and private sectors to accumulate<br />
substantial net foreign assets.<br />
Kuwait's political institutions are relatively well developed.<br />
The directly elected parliament was established in 1963 and<br />
acts as an effective check on the power of the executive,<br />
thereby increasing the government’s accountability (albeit at<br />
the cost of slowing down the legislative process). Furthermore,<br />
Kuwait’s press and judiciary are considerably freer and<br />
more independent that those of other states in the region.<br />
Kuwait enjoys close relations with the US (which is strongly<br />
committed to protecting Kuwait's sovereignty), other G8<br />
countries, and its regional neighbours.<br />
Kuwait’s rating is constrained by a number of factors.<br />
These include a high dependence on volatile oil exports. Also,<br />
because of its vast oil wealth, Kuwait has been slower than<br />
some other GCC states to develop its non-oil sector through<br />
encouraging private activity and attracting foreign investment.<br />
This has resulted in a bloated public sector, which<br />
employs over 90 percent of the labour force of Kuwaiti<br />
nationals. Although it depresses the unemployment rate<br />
among nationals, a generous government hiring policy masks<br />
persistent rigidities in the labour market. There remains a<br />
wide differential in wage expectations, productivity and motivation<br />
between Kuwaiti and expatriate workers. Expatriates<br />
continue to compose over 95% of the private sector work<br />
force.<br />
There remains a risk that a deterioration of the political situation<br />
in Iraq or the wider region could have a negative<br />
impact. There is also a risk that radical domestic or foreign<br />
elements could launch violent attacks in Kuwait, although we<br />
would expect any such campaign of violence to be swiftly contained.<br />
A lack of clarity surrounding the path of succession to<br />
the emirship is an additional source of political uncertainty.<br />
Rating Outlook<br />
The outlook on Kuwait’s ratings is Stable. Prospects for the<br />
oil sector remain bright, with prices likely to remain robust<br />
and production capacity to increase gradually over the<br />
medium term. However, we expect non-oil activity to continue<br />
to be stifled by an overbearing bureaucracy and remaining<br />
barriers to foreign investment.<br />
What Could Change the Rating - UP<br />
A significant acceleration of diversification through the active<br />
promotion of the private sector and the attraction of foreign<br />
investment. A marked improvement of the political situation<br />
in Iraq and the abatement of wider regional political tensions.<br />
What Could Change the Rating - DOWN<br />
A prolonged period of low oil prices, such that the fiscal and<br />
external current accounts came under sustained pressure,<br />
leading to the depletion of net foreign assets. A significant<br />
deterioration in the domestic or regional political environment.<br />
Recent Developments/Results<br />
Further evidence has emerged of divisions within the ruling<br />
family surrounding the issue of succession to the emirship. In<br />
October 2005, Sheikh Salem al-Ali al-Sabah, head of the<br />
National Guard and a senior member of the ruling family,<br />
openly called for the establishment of a new ruling family<br />
committee to support the leadership. Both the emir and the<br />
crown prince are elderly and frail and the emir has yet to clarify<br />
the line of succession, which is widely expected to pass to<br />
the prime minister, who is also in his seventies.<br />
• 164 •
MBIA Inc.<br />
Armonk, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Senior Unsecured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aa2<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Ranjini Venkatesan/New York<br />
Jack Dorer/New York<br />
MBIA Inc. (U.S. GAAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Total Revenue ($mil) 1,092 1,954 1,710 1,524 1,421 1,238<br />
Net Income ($mil) 386 843 825 585 570 525<br />
Pretax Operating Income / Revenue (%) 49.2 54.3 57.2 55.7 53.9 53.2<br />
Interest Coverage (x) 13.2 16.6 18.0 14.5 14.7 13.6<br />
Expense Ratio (%) 23.4 22.2 23.2 24.5 26 30.2<br />
Loss Ratio (%) 10.2 10.0 10.0 10.5 11.1 11.7<br />
Return on Equity (%)[1] 13.5 14.8 14.8 13.7 13.4 13.8<br />
Total Assets ($mil) 34,797 33,036 30,301 18,796 16,172 13,830<br />
Total Debt ($mil) 1,373 1,391 1,079 1,033 853 939<br />
Shareholders' Equity ($mil) 6,576 6,559 6,150 5,369 4,653 4,094<br />
Financial Leverage (%)[2] 18.1 18.3 15.6 17.2 15.2 16.6<br />
Market Value Equity ($mil) 8,042 8,821 8,587 6,431 7,956 7,347<br />
[1] Operating return on equity = (Net income minus the after-tax impact of accounting for derivatives and foreign exchange) / average equity excluding accumulated other comprehensive<br />
income. ROE for first half of 2005 is annualized. [2] Financial leverage = Long-term debt / (long term debt + shareholders' equity - accumulated other comprehensive income)<br />
Opinion<br />
Credit Strengths<br />
• Largest global provider of financial guaranty insurance<br />
• High quality and well diversified insured portfolio with<br />
nominal liquidity needs<br />
• Strong risk adjusted capitalization, predictable earnings<br />
• Highly transparent risks and business strategy<br />
• Strong underwriting and surveillance capabilities coupled<br />
with an improved focus on risk weighted pricing and risk<br />
management<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Risk concentration in some volataile sectors (Airlines,<br />
consumer ABS)<br />
• Strong competition from mature rivals and new entrants<br />
across insured sectors and from alternative forms of execution<br />
Rating Rationale<br />
<strong>Moody's</strong> Aaa Insurance Financial Strength Rating (IFSR) for<br />
MBIA Insurance Corporation (MBIA) and Aa2 senior debt<br />
rating of its parent, MBIA Inc., reflect the group's strong<br />
franchise value of its core financial guaranty business and consistent<br />
profitability, its highly diversified and low risk insured<br />
portfolio, and its strong claims paying resources. MBIA has<br />
demonstrated disciplined underwriting, strong surveillance<br />
and loss mitigation expertise. Portfolio risk management has<br />
also been an important focal point of the firm's strategy over<br />
the past several years. This strategy has helped MBIA to<br />
improve its risk profile and reduced risk concentrations in<br />
certain sectors such as health care, despite recent credit deterioration<br />
in some sectors.<br />
MBIA's insurance business has shown steady growth over<br />
the last few years, but has recently been negatively affected by<br />
a combination of a cyclical downturn in demand from the<br />
peak levels reached in 2003, and new competition. While the<br />
US municipal and structured markets will continue to represent<br />
the bulk of MBIA's outstanding insured portfolio, much<br />
of the company's future growth is expected to come from outside<br />
of the United States, most notably Europe. The firm’s<br />
strong embedded earnings from its outstanding insurance and<br />
investment portfolios are greatly mitigating the earnings consequences<br />
of a short-term decrease in business, although a<br />
longer lasting trough in production would most likely test the<br />
firm’s pricing and underwriting discipline.<br />
Rating Outlook<br />
Moody’s outlook for MBIA Inc.’s Aa2 senior debt rating is stable.<br />
However, successful resolution of the regulatory investigations<br />
is a necessary condition to maintenance of existing<br />
ratings and rating outlooks.<br />
What Could Change the Rating - UP<br />
• <strong>Moody's</strong> does not foresee ratings improvement in light of<br />
the Aaa rating of the operating company and subordination of<br />
holding company debt to policyholders' claims.<br />
What Could Change the Rating - DOWN<br />
• Substantial and uncorrected deterioration of portfolio characteristics<br />
or underwriting practices<br />
• Deterioration of competitive environment and reduction<br />
in franchise value<br />
• Rating pressures on the main operating company<br />
• Maintaining financial leverage above 16% without the<br />
benefit of mitigating factors<br />
• Failure to maintain three-year average holding company<br />
operating ROE above 12%.<br />
• Significant diversification in higher risk businesses<br />
Recent Developments/Results<br />
The SEC along with the staffs of the New York AG, US<br />
Attorney’s office for the Southern District of New York and<br />
New York Insurance Department began their investigations<br />
in November 2004 covering five major issues. The Wells<br />
Notice issued by the SEC and the potential civil charges proposed<br />
by the NY AG appear to focus primarily on the<br />
AHERF reinsurance transactions. Moody’s notes that the<br />
third quarter results reported by MBIA provide some insights<br />
into the expected terms of the settlement. Based on its estimate<br />
of aggregate penalties and disgorgement related to the<br />
settlement, MBIA accrued $75 million in expenses. Additionally,<br />
MBIA restated the accounting for the remaining AHERF<br />
related agreements to report the $100 million received from<br />
the reinsurers as deposits rather than reinsurance.<br />
• 165 •
MBIA Insurance Corporation<br />
Armonk, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Stanislas Rouyer/New York 1.212.553.1653<br />
Ranjini Venkatesan/New York<br />
Jack Dorer/New York<br />
MBIA Insurance Corporation (SAP Statistics)<br />
H1 2005 2004 2003 2002 2001 2000<br />
Gross Par Written ($mil) 64,676 112,311 122,309 139,729 121,896 104,998<br />
Net Income ($mil) 320 773 669 618 571 544<br />
Expense Ratio (%) 22.1 16.9 12.8 15.8 13.4 22.1<br />
Loss Ratio (%) 10.8 17.0 9.2 9.4 9.3 6.2<br />
Adjusted NPO ($mil)[1] 587,427 592,699 577,413 533,607 466,701 431,185<br />
Market Share (%)[2] 29.6 30.3 31.0 33.0 34.5 37.6<br />
Hard Capital ($mil) 11,573 11,193 10,861 9,597 8,615 7,825<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 50.8 53.0 53.2 55.6 54.2 55.1<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[3] na 49.6 39.6 40.7 32.1 33.7<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[3] na 140.1 125.1 126.4 114.6 122.7<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[3] na 1.35 1.50 1.42 1.62 1.48<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[3] na 1.30 1.46 1.36 1.52 1.39<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] Credit Quality Ratio, Tail Risk Ratio, Hard Capital Ratio and Total Capital Ratio are <strong>Moody's</strong> model ratios. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• Largest global provider of financial guaranty insurance<br />
• High quality and well diversified insured portfolio with<br />
nominal liquidity needs<br />
• Strong risk adjusted capitalization, predictable earnings<br />
• Highly transparent risks and business strategy<br />
• Management's commitment to Aaa rating reflects sensitivity<br />
of franchise to rating<br />
Credit Challenges<br />
• Mature US market and tight credit spreads could hurt<br />
demand for credit enhancement<br />
• Sensitivity of insurance portfolio to credit cycle with<br />
some large single risk exposures<br />
• Risk concentration in some volatile sectors (Airlines, consumer<br />
ABS)<br />
• Adverse outcome with respect to the ongoing regulatory<br />
investigations could impact the financial flexibility and standing<br />
of the company<br />
Rating Rationale<br />
<strong>Moody's</strong> Aaa Insurance Financial Strength Rating (IFSR) for<br />
MBIA Insurance Corporation (MBIA) and Aa2 senior debt<br />
rating of its parent, MBIA Inc., reflect the group's strong<br />
franchise value of its core financial guaranty business and consistent<br />
profitability, its highly diversified and low risk insured<br />
portfolio, and its strong claims paying resources. MBIA has<br />
demonstrated disciplined underwriting, strong surveillance<br />
and loss mitigation expertise. Portfolio risk management has<br />
also been an important focal point of the firm during the past<br />
several years. More recently the portfolio quality has been<br />
negatively impacted due to significant stress is certain sectors<br />
such as manufactured housing and airlines; however the capital<br />
ratios remain healthy.<br />
Relative to the 2000-2003 period, demand for financial<br />
guaranty insurance has been generally lackluster during the<br />
last 18 months although there have some bright spots such as<br />
domestic municipal and MBS underwriting. Moody’s believes<br />
that although the US municipal and structured markets will<br />
continue to represent the bulk of the industry’s and MBIA's<br />
outstanding insured portfolio, much of the future growth is<br />
expected to come from outside of the United States, most<br />
notably Europe. MBIA’s strong embedded earnings from its<br />
outstanding insurance and investment portfolios are greatly<br />
mitigating the earnings consequences of a short-term<br />
decrease in business, although a longer lasting trough in production<br />
would most likely test pricing and underwriting discipline.<br />
Rating Outlook<br />
Moody’s outlook for MBIA’s Aaa insurance financial strength<br />
rating is stable. However, successful resolution of the regulatory<br />
investigations is a necessary condition to maintenance of<br />
existing ratings and rating outlooks.<br />
What Could Change the Rating - DOWN<br />
• Material unfavorable findings from the ongoing regulatory<br />
investigations<br />
• Substantial and uncorrected deterioration of portfolio<br />
characteristics or underwriting practices<br />
• Deterioration in competitive environment or product<br />
demand<br />
• Hard and Total Capital ratios falling below 1.3x without<br />
corrective action<br />
• Failure to maintain three-year average holding company<br />
operating ROE above 12%<br />
• Significant diversification in higher risk businesses<br />
Recent Developments<br />
The SEC along with the staffs of the New York AG, US<br />
Attorney’s office for the Southern District of New York and<br />
New York Insurance Department began their investigations<br />
in November 2004 covering five major issues. The Wells<br />
Notice issued by the SEC and the potential civil charges proposed<br />
by the NY AG appear to focus primarily on the<br />
AHERF reinsurance transactions. Moody’s notes that the<br />
third quarter results reported by MBIA provide some insights<br />
into the expected terms of the settlement. Based on its estimate<br />
of aggregate penalties and disgorgement related to the<br />
settlement, MBIA accrued $75 million in expenses. Additionally,<br />
MBIA restated the accounting for the remaining AHERF<br />
related agreements to report the $100 million received from<br />
the reinsurers as deposits rather than reinsurance.<br />
• 166 •
México<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Mexico, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1/P-2<br />
Baa1/P-2<br />
Stable<br />
Government Bonds<br />
Baa1<br />
Analyst<br />
Phone<br />
Luis Ernesto Martinez-Alas/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
México<br />
1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 3.7 6.6 -0.2 0.8 1.4 4.4 3.0 3.4<br />
Inflation, eop 12.3 9.0 4.4 5.7 4.0 5.2 3.5 3.7<br />
Gen'l Gov't Balance/GDP -1.1 -0.9 -0.5 -1.7 -1.0 -0.9 -0.4 -0.3<br />
Gen'l Gov't Debt/GDP 35.9 28.9 28.3 29.2 29.2 25.0 22.8 22.6<br />
Gen'l Gov't Debt/Revenues 198.3 151.7 144.4 152.3 147.0 125.0 111.6 110.8<br />
Current Account Balance/GDP -2.9 -3.2 -2.8 -2.1 -1.3 -1.1 -1.2 -1.7<br />
External Debt/Exports[1] 105.2 81.5 83.6 83.2 82.5 72.8 66.1 61.3<br />
External Vulnerability Indicator[2] 155.7 179.2 129.6 115.5 95.4 75.2 78.0 60.2<br />
[1] Current Account Receipts. [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Nonresident Foreign Currency Deposits Over One Year)/ Official Foreign<br />
Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Mexico are:<br />
- Political consensus on the importance of maintaining fiscal<br />
discipline<br />
- Key measures of debt vulnerability and liquidity are<br />
strong and not expected to change<br />
- Deepening links with the US economy reflected in a<br />
common business cycle<br />
Credit Challenges<br />
Credit challenges for Mexico are:<br />
- Strengthening and broadening the fiscal revenue base<br />
- Large economic and social infrastructure needs<br />
Rating Rationale<br />
In <strong>Moody's</strong> view, Mexico's default risk for the government's<br />
foreign- and domestic-currency debt obligations are the<br />
same. As such, the ratings are primarily underpinned by the<br />
strength of public finance. The ratings also continue to benefit<br />
from the country's increasing integration into the North<br />
American economy primarily through the North American<br />
Free Trade Agreement (NAFTA) as well as from skilled overall<br />
debt management. The widespread consensus on the<br />
importance of sound financial policies is also a key supporting<br />
factor. However, Mexico still faces large economic and social<br />
infrastructure needs. Further strengthening and broadening<br />
of the government's non-oil revenues and improving and fostering<br />
private sector investment will be important to boost<br />
growth.<br />
Rating Outlook<br />
The stable outlook for the government's foreign and domestic<br />
currency ratings reflects <strong>Moody's</strong> view that no significant<br />
improvement in medium-term fiscal performance is expected.<br />
It also fully incorporates the expectation that the Mexican<br />
authorities' long-held practice of adjusting public spending to<br />
adverse revenue shocks will be maintained. The outlook also<br />
balances the embedded strengths associated with the dynamism<br />
of the external sector in the context of NAFTA against<br />
the still-unaddressed challenges on the fiscal front.<br />
What Could Change the Rating - UP<br />
A rise in the government foreign and domestic bond rating<br />
would require a significant strengthening of public finance<br />
and progress in fiscal consolidation.<br />
What Could Change the Rating - DOWN<br />
Indications of deterioration in the political consensus on the<br />
need to maintain fiscal discipline could place downward pressure<br />
on the rating. Difficulties in cutting spending in the<br />
event of declining oil revenues would be a cause of concern, as<br />
would recourse to borrowing in such an event.<br />
Recent Developments<br />
Economic growth is decelerating from the 4.4% pace posted<br />
in 2004. Output rose 2.8% in the first half of the year (y/y),<br />
although the latest central bank survey points to an increase<br />
of 3.5% in 2005 as a whole on the expectation of a rebound in<br />
agriculture and manufacturing in the second half of the year,<br />
the latter driven by the pickup in US industrial output. In the<br />
meantime, the disinflation process in on track, with CPI inflation<br />
expected to fall to below 4% by end-2005.<br />
On the fiscal front, with high oil prices continuing to<br />
underpin revenues, the general government deficit will move<br />
closer to balance this year, while the overall public sector borrowing<br />
requirement — including off balance sheet payments<br />
for public investment projects and bank restructuring — is<br />
likely to fall a bit further to perhaps 2% of GDP. Political<br />
noise is bound to increase as the country approaches the July<br />
<strong>2006</strong> presidential elections, but no major pressure on government<br />
finances is expected. More importantly, the thrust of<br />
policies is not expected to change no matter who wins the<br />
elections. With regards to the external accounts, with oil<br />
exports rising by over 30% in the first half of the year, the<br />
current account deficit will remain below 2% of GDP and the<br />
country's already ample international reserves position will<br />
continue to grow.<br />
The overall deceleration in economic activity brings<br />
growth back in line with the sluggish pace posted from 1998-<br />
2003 — a pace that is well below the average for similarly<br />
rated countries. This development speaks to the need for<br />
structural reforms in tax policy, energy, labor markets and the<br />
judicial system in order to boost domestic savings and investment,<br />
which are key to place Mexico on a dynamic growth<br />
path.<br />
• 167 •
Norway<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Norway, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa/P-1<br />
Aaa/P-1<br />
Stable<br />
Government Bonds -Dom Curr<br />
Aaa<br />
Analyst<br />
Phone<br />
Kristin Lindow/New York 1.212.553.1653<br />
Alexandra V. Mousavizadeh/New York<br />
Vincent J. Truglia/New York<br />
Norway<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth Rate 2.8 2.6 1.4 0.4 2.9 3.1 3.3<br />
Mainland GDP Growth Rate 2.5 2.4 1.7 0.7 3.5 4.0 3.2<br />
General Government Balance/GDP 15.6 13.6 9.3 7.6 11.4 13.7 14.3<br />
Non-oil Fiscal Budget Balance/Mainland GDP -1.6 -0.1 -5.1 -5.3 -6.1 -5.1 -5.5<br />
Primary Balance/GDP 17.1 15.4 11.1 9.5 12.9 14.9 15.5<br />
Gross General Government Debt/GDP 33.5 32.6 39.4 49.4 40.4 34.3 34.0<br />
Gross General Government Debt/Revenue 60.8 59.6 73.3 91.9 73.3 61.3 56.6<br />
Current account Balance/GDP 15.6 15.4 12.8 12.8 13.5 16.4 15.2<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of Norway are:<br />
– Government is a net creditor with substantial foreign<br />
assets and large ongoing fiscal surpluses<br />
– Well-managed fiscal and monetary policy assures macroeconomic<br />
stability<br />
– Incomes are evenly distributed at high average levels<br />
– Political system is stable and consensus-oriented<br />
Credit Challenges<br />
The credit challenges for Norway are:<br />
– An ageing population will shrink an already underutilized<br />
labor force<br />
– Intense popular pressure on government to spend more<br />
oil revenue<br />
– External competitiveness is weakening in non-oil sectors<br />
– Hydrocarbons production has peaked and will decline<br />
rapidly within five years<br />
Rating Rationale<br />
Norway's foreign currency country ceilings are Aaa/Prime 1.<br />
The government's financial position is extremely healthy<br />
even compared to many other advanced industrialized countries,<br />
most of which are facing similar demographic pressures<br />
but which already have sizeable net liabilities instead of net<br />
assets. This favorable situation – plus the expectation that<br />
considerably more assets will be acquired through oil and gas<br />
sales over the coming twenty years – represents a strong starting<br />
point even though both the ageing and resource depletion<br />
challenges loom ahead.<br />
Rating Outlook<br />
The rating outlook is stable. Although the budget is likely to<br />
continue to utilize oil revenues slightly in excess of the government's<br />
self-imposed guideline, the Government Petroleum<br />
Fund — now being renamed as the Government<br />
Pension Fund — is still accumulating sizeable assets. In addition,<br />
reforms to the public pension system getting underway<br />
in <strong>2006</strong> should help to address some of the financial pressures<br />
exerted by the ageing labor force on the pay-as-you-go pension<br />
system. In turn, these changes will improve the longerterm<br />
sustainability of the generous social welfare framework.<br />
What Could Change the Rating - DOWN<br />
Norway's strong financial position is likely to be sustained<br />
indefinitely as long as its income and assets are managed<br />
responsibly.<br />
Recent Developments/Results<br />
A left-leaning Labor Party-led coalition formed a new government<br />
following the September 12 general elections. In<br />
mid-November, the new fiscal authorities proposed some<br />
minor changes to the <strong>2006</strong> budget that had been first presented<br />
by the outgoing center-right government before leaving<br />
office. The amendments included some tax and excise<br />
increases that will be used mainly to help fund child care at<br />
the local government level, but importantly they did not alter<br />
the plan to implement the final leg of the tax reform lowering<br />
marginal income tax rates next year. They also left intact the<br />
decision to proportionately lower the reliance on petroleum<br />
income to finance the structural, non-oil budget deficit relative<br />
to what was used in the past four years. The <strong>2006</strong> budget<br />
forecasts that the net cash flow from petroleum and gas activities<br />
will be 20% higher than in 2005 solely because of price<br />
effects, so the <strong>2006</strong> budget surplus including oil income is<br />
expected to rise to NOK 257 billion (€33 billion at current<br />
exchange rates). Should these projections be realized, the<br />
Petroleum Fund is likely to balloon to nearly NOK 1.7 trillion<br />
by yearend <strong>2006</strong> from just over NOK 1 trillion at the end<br />
of 2004.<br />
Growth picked up its pace further as expected in 2005,<br />
largely due to strong domestic demand and positive terms of<br />
trade effects, with mainland GDP up by roughly 4%. Private<br />
consumption and oil- and housing-related investment led the<br />
way. The rise in investment in the oil sector has decelerated,<br />
however, compared to 2004. Should this slowdown continue<br />
into <strong>2006</strong>, mainland GDP growth is likely to drop to about<br />
3%.<br />
According to the latest Inflation Report from the Norges<br />
(central) Bank, labor markets continue to develop favorably,<br />
with steady increases in employment not yet leading into significant<br />
wage pressures. <strong>Finance</strong> Ministry forecasts put the<br />
average unemployment rate at 4.1% in <strong>2006</strong>. High capacity<br />
utilization and tightening labor markets, however, have raised<br />
some concerns about future inflation prospects. The central<br />
bank has hiked interest rates modestly a few times this year in<br />
response to these circumstances, although inflation is still well<br />
below its 2.5% target, and additional increases are likely in<br />
<strong>2006</strong>. The monetary tightening should contribute to slower<br />
growth in household spending next year by restraining credit<br />
demand.<br />
• 168 •
Oman<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1/P-2<br />
Baa1/P-2<br />
Analyst<br />
Phone<br />
Tristan Cooper/London 44.20.7772.5454<br />
Mary O'Donnell/New York 1.212.553.1653<br />
Vincent J. Truglia/New York<br />
Oman<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%) 5.5 7.5 2.6 2.0 5.6 5.7 7.1<br />
CPI Inflation (%, eop) -0.9 -0.6 -0.3 0.2 0.7 0.9 0.8<br />
Gen'l Gov't Balance/GDP (%) 12.0 7.3 5.7 6.0 7.9 15.8 13.6<br />
Gen'l Gov't Debt/GDP (%) 24.7 23.6 17.4 16.4 15.2 12.0 10.3<br />
Gen'l Gov't Debt/Revenues (%) 52.2 51.8 39.2 36.1 31.8 22.5 19.8<br />
Current Account Balance/GDP (%) 15.8 9.4 6.7 4.0 1.8 11.6 12.1<br />
External Debt/Exports (%)[1] 60.4 53.9 43.3 34.9 30.5 25.4 24.4<br />
External Vulnerability Indicator (%)[2] 79.2 100.8 125.0 58.2 51.1 44.5 40.1<br />
[1] Current Account Receipts [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Oman include:<br />
- Rising GDP per capita<br />
- Robust non-oil growth<br />
- Government is a significant net creditor<br />
- Relatively low external debt<br />
- Domestic political stability and strong international relations<br />
Credit Challenges<br />
Credit challenges for Oman include:<br />
- Economic reliance on volatile hydrocarbon exports<br />
- Oil and gas reserves are relatively limited in size and<br />
expensive to produce<br />
- Rising government expenditure may be limiting fiscal<br />
flexibility<br />
- Relatively high unemployment<br />
- Risk of contagion from regional geopolitical instability<br />
Rating Rationale<br />
Moody’s rates Oman’s country ceiling for long-term foreign<br />
currency bonds at Baa1 (raised from Baa2 in October 2005).<br />
Oman’s rating is supported by the country’s gradually rising<br />
GDP per capita, which approached $16,000 in 2004 in PPP<br />
terms, a similar level to that of Estonia or Hungary. It<br />
remains, however, considerably below that of some other<br />
hydrocarbon exporters in the region such as Qatar or the<br />
United Arab Emirates. The government’s economic policies<br />
remain generally sound and have contributed to robust nonhydrocarbon<br />
growth, which has averaged 7.5% per annum in<br />
real terms over the past five years.<br />
The government’s historically prudent fiscal policy is<br />
apparent in its low and declining level of debt and rising<br />
assets. We estimate that the general government’s net asset<br />
position climbed to around 22% of GDP at end-2004. The<br />
country’s external position is also strong. Current account<br />
surpluses since 2000 have led to the accumulation of foreign<br />
assets by both the public and private sectors while the external<br />
debt burden has continued to decline. Oman’s rating is likewise<br />
bolstered by the country’s high level of transparency<br />
(particularly when compared to some other GCC states) and<br />
its stable and conducive domestic political environment.<br />
Oman also enjoys strong relations with neighbouring states,<br />
the US, and other G8 countries.<br />
Oman’s rating is constrained by a number of factors, which<br />
include a significant economic reliance on volatile hydrocarbon<br />
exports, which generate the bulk of fiscal revenue and<br />
external current account receipts. Although hydrocarbon<br />
export volumes are projected to rise over the next few years as<br />
the recent decline in oil production is reversed and a third<br />
LNG train comes on line, Oman’s oil and gas reserves are relatively<br />
limited in size and expensive to produce, constraining<br />
the potential for further significant increases in hydrocarbon<br />
export capacity over the longer term. There is also a risk that<br />
recent large increases in fiscal expenditure could be limiting<br />
the government’s ability to respond to a potential sustained<br />
fall in oil prices. Meanwhile, the limited capacity of the government<br />
to absorb new job seekers and rigidities in the labour<br />
market for nationals have resulted in a relatively high level of<br />
unemployment among the indigenous work force.<br />
Although Oman has historically been isolated from<br />
regional geopolitical instability, there remains a risk that a<br />
deterioration in the regional political environment could have<br />
a negative impact. The most immediate political risk seems to<br />
be the risk of infiltration by Islamist militants, who could<br />
launch attacks against government or foreign targets in<br />
Oman. However, we consider this risk to be low and, in any<br />
case, would expect any such violence to be limited and to be<br />
swiftly contained.<br />
Rating Outlook<br />
While we expect the government to continue with its efforts<br />
to diversify the economy away from hydrocarbons by promoting<br />
the development of tourism and other non-hydrocarbon<br />
sectors, the economy will remain vulnerable to a potential<br />
downturn in international energy prices.<br />
What Could Change the Rating - UP<br />
Over the longer term, a sustained period of high oil prices and<br />
the maintenance of fiscal and external current account surpluses<br />
leading to the further accumulation of net assets. Further<br />
rapid and sustained growth of the non-hydrocarbon<br />
sector that would reduce the economy's reliance on oil and<br />
gas exports. The abatement of regional political tensions.<br />
What Could Change the Rating - DOWN<br />
A prolonged period of low oil prices such that the fiscal and<br />
external current accounts came under sustained pressure leading<br />
to the depletion of assets and the accumulation of debt. A<br />
significant deterioration in the regional or domestic political<br />
environment.<br />
Recent Developments/Results<br />
The further increase in oil and gas export prices during 2005<br />
is likely to have resulted in a significant widening of the fiscal<br />
and external current account surpluses, despite continued<br />
strong growth in government expenditure and imports.<br />
• 169 •
Panama<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1/P-2<br />
Baa2/P-2<br />
Analyst<br />
Phone<br />
Alessandra Alecci/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Panama<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP (% change) 2.7 0.3 2.2 4.3 6.2 5.5 6.5<br />
Inflation (CPI, % change Dec/Dec) 0.7 0.0 1.8 1.7 1.5 2.0 1.5<br />
Gen. Gov't Balance/GDP -0.8 -2.4 -3.4 -4.8 -5.0 -3.6 -2.9<br />
Gen. Gov't Debt/GDP[1] 66.5 71.1 69.4 67.3 72.6 67.9 62.5<br />
Gen. Gov't Debt/Revenues[1] 270.4 299.1 305.1 301.9 352.5 273.6 238.2<br />
Current Account Balance/GDP -5.8 -1.4 -0.8 -3.4 -8.0 -10.8 -10.6<br />
External Debt/CA Receipts[2] 66.4 79.4 88.4 75.1 89.7 86.5 81.2<br />
External Vulnerability Indicator[3] 124.0 101.7 130.1 87.0 134.0 85.0 113.8<br />
[1] Central Gov't Debt [2] Current Account Receipts [3] (Short-Term External Debt + Currently Maturing Long-Term External Debt +Nonresident Foreign Currency Deposits)/Official Foreign<br />
Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Panama are:<br />
- Full financial integration with the rest of the world<br />
- Specialization in service exports which guaranteed a<br />
steady source of income<br />
- Relative macroeconomic stability compared to regional<br />
peers<br />
Credit Challenges<br />
Credit challenges for Panama are:<br />
- A relatively inflexible budget structure with a large share<br />
of current expenditures<br />
- Public debt-to-GDP ratios in excess of 65% of GDP, with<br />
a large share owed to bondholders<br />
- A poor track record of fiscal responsibility<br />
Rating Rationale<br />
Panama's credit ratings are supported by a service sector that<br />
provides a steady source of foreign income and has served to<br />
shield the economy from the volatility observed in other<br />
countries in the region. Proficient debt management has been<br />
effective in improving the debt profile through debt swaps<br />
and buyback operations. The ratings are constrained by a<br />
government debt ratio of some 70% of GDP. The government's<br />
Ba1 rating does not constrain those of other domestic<br />
issuers. Panama's foreign-currency country ceiling is Baa1.<br />
The large gap between the government bond ratings and the<br />
foreign-currency country ceiling reflects the low convertibility<br />
risk given that the country’s long history of dollarization.<br />
Rating Outlook<br />
A stable credit outlook incorporates the expectation that the<br />
Torrijos administration will be able and willing to carry out<br />
the adjustments required to assure a sustained reduction in<br />
public indebtedness. Improved near-term growth prospects<br />
and moderate refinancing needs during 2005 and <strong>2006</strong> support<br />
a stable credit outlook as well. The need to address fundamental<br />
fiscal issues, such as the reform of the public<br />
pension system, represents an important challenge whose resolution<br />
will have a strong influence on the credit outlook.<br />
What Could Change the Rating - UP<br />
A sustained and significant downward trend in public debt<br />
ratios<br />
What Could Change the Rating - DOWN<br />
Inability or unwillingness to achieve a reduction in the fiscal<br />
deficit. Lack of progress in the implementation of a comprehensive<br />
reform of the pension system<br />
Recent Developments<br />
Recent official estimates suggest that the deficit will come in<br />
around 3.6% of GDP this year, close to expectations and well<br />
below the 5.0% registered in 2004. The improvement is<br />
mostly due to a surge in revenues following the fiscal reform<br />
approved in early 2005. The government expects the fiscal<br />
consolidation to continue next year, as the full impact of the<br />
reform will be reaped in <strong>2006</strong>. The recently submitted <strong>2006</strong><br />
budget calls for a stronger adjustment, which would bring the<br />
deficit to 2.9% of GDP. This is yet another sign of the government’s<br />
strong commitment to restoring fiscal sustainability.<br />
Public debt to GDP ratios should decline to 63% by the<br />
end of <strong>2006</strong>, a considerable improvement from the 73% level<br />
recorded in 2004. Authorities have continued to access the<br />
domestic and external markets to fund the fiscal shortfall.<br />
Financing needs for this year have already been met through<br />
pre-financing operations, though additional issuance is anticipated<br />
in <strong>2006</strong> in order to cover next year’s needs.<br />
Growth has been surprising on the upside this year, despite<br />
a fiscal contraction and a temporary downturn in construction<br />
activity. Real GDP grew by 6.2% during the first half of 2005<br />
notwithstanding a high base of comparison, boosted by<br />
exports and private consumption. Official growth forecasts<br />
have been revised to 5.0%-6.0%. A favorable growth scenario<br />
should further contribute to the improvement of debt ratios.<br />
The pension reform is still a pending item on the government's<br />
agenda. After approving the reform in June, a backlash<br />
from various segments of segments of society and increased<br />
social tensions led the government to delay the implementation<br />
of the new regime until the end of this year, until a consensus<br />
solution is found. From a credit perspective, the<br />
significance of pension reform goes well beyond its near-term<br />
implications, which are relatively minor, and rests instead on<br />
its dual role as a fundamental complement of fiscal reform<br />
and a necessary condition for a stable medium-term outlook.<br />
The road ahead will be difficult, even though the ruling PRD<br />
holds a solid majority in the National Assembly. Another bout<br />
of social tensions and the risk for a significant watering down<br />
of the reform cannot be ruled out.<br />
• 170 •
Philippines<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Philippines, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Negative<br />
B1/NP<br />
B1/NP<br />
Negative<br />
Government Bonds<br />
B1<br />
Analyst<br />
Phone<br />
Thomas J. Byrne/New York 1.212.553.1653<br />
Alessandra Alecci/New York<br />
Vincent J. Truglia/New York<br />
Philippines<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 4.4 1.8 4.3 4.7 6.1 5.0 4.8<br />
Inflation (CPI, % change) 4.3 6.1 4.2 3.1 8.6 7.0 6.0<br />
General Government Balance (% GDP) -4.0 -4.0 -5.3 -4.6 -3.8 -3.3 -2.9<br />
General Government Debt (% GDP) 64.6 65.7 71.1 78.0 77.4 75.4 70.4<br />
Current Acct. Bal. (% GDP) 8.2 1.9 5.7 1.8 2.4 2.6 1.6<br />
Foreign Curr. Debt (% Current Account Receipts) 115.9 138.5 130.1 131.1 123.0 117.0 114.0<br />
External Vulnerability Indicator[1] 82.7 95.1 88.0 91.8 92.4 91.2 87.5<br />
[1] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Support factors for the Philippines' ratings include:<br />
-An adequate level of official foreign exchange reserves<br />
-A stable export base<br />
-Large income inflows from overseas workers<br />
-A flexible exchange rate policy<br />
Credit Challenges<br />
Rating risks include:<br />
-High government debt<br />
-Structural fiscal revenue weakness<br />
-A large public sector deficit<br />
-Waning export dynamism<br />
-BOP capital account vulnerability to shocks<br />
-Underlying political and social tensions<br />
Rating Rationale<br />
The ratings downgrade in February 2005 was prompted by<br />
concerns that the large build-up in government and external<br />
debt leaves the Philippines vulnerable to shocks, which may<br />
be transmitted between budgetary and external accounts,<br />
despite recent efforts by the government and legislature to<br />
enact fiscal reforms.<br />
Although the relatively long debt maturity profile mitigates<br />
fiscal pressures in the near term, more vigorous policies will<br />
need to be implemented to ensure long-run stability of the<br />
country's finances. Government debt ratios remain at relatively<br />
high levels, and revenue performance remains weak<br />
despite recent improvement.<br />
Support to the balance of payments is provided by a flexible<br />
exchange rate policy coupled with a stable export base, in<br />
which foreign firms play a large role, and sizable income<br />
inflows from overseas workers.<br />
Rating Outlook<br />
The outlook change in July to negative from stable was<br />
prompted by heightened political turmoil which may jeopardize<br />
<strong>Moody's</strong> expectation of gradual improvement in the fiscal<br />
accounts over the near-term horizon, and place additional<br />
pressure on public sector imbalances and indebtedness. Even<br />
assuming a best case scenario for fiscal reform, the ratio of<br />
government debt to revenue will likely remain between 450%<br />
and 500% of GDP in 2005 and <strong>2006</strong>, a level that is well above<br />
that of similarly rated countries.<br />
The loss in export dynamism is widening the trade deficit<br />
and reducing the current account surplus. This, together with<br />
reliance on the international capital market for public-sector<br />
deficit financing, is placing pressure on the balance of payments.<br />
Foreign equity investment inflows have not been large<br />
enough to offset such pressures. The maintenance of ample<br />
official foreign exchange reserves may become more challenging,<br />
especially if confidence factors become volatile.<br />
What Could Change the Rating - UP<br />
A fundamental strengthening of both the fiscal and external<br />
payments positions would be necessary to improve the rating.<br />
Reduced fiscal vulnerability, such as by decreased reliance on<br />
external financing would help alleviate pressure on both the<br />
fiscal and external fronts. Substantial and sustained improvement<br />
in revenue performance, the elimination of operating<br />
losses and restructuring of the National Power Corporation<br />
and reduced reliance on foreign financing of the public sector<br />
deficit would also be positive factors. A more predictable and<br />
stable political environment would likely help improve the<br />
investment climate and reduce volatility in the capital account<br />
of the balance of payments.<br />
What Could Change the Rating - DOWN<br />
Downward pressure would arise from a shift in the current<br />
account balance into a deficit that cannot be financed by longterm<br />
capital inflows; a significant drop in official foreign<br />
exchange reserves; a deterioration in political conditions<br />
adversely affecting investment and capital flows, or the government's<br />
inability to maintain domestic security. Downward<br />
pressure would also come from failure to implement effectively<br />
and sustain a vigorous program of tax and power sector<br />
reforms.<br />
Recent Developments<br />
The Supreme Court lifted its Temporary Restraining Order<br />
on the Value Added Tax Reform Law (EVAT) effective<br />
November 1, more than five months after President Macapagal-Arroyo<br />
had signed the law into effect. Despite this delay,<br />
the national government budget deficit is on track to come in<br />
below the 2005 target of P180 billion, about 3.3% of GDP.<br />
Overseas Filipino worker remittances surged 28% in the<br />
first eight months of 2005 compared with the same period in<br />
2004, to $7 billion—equal to 18% of current account receipts<br />
and 11% of GDP—largely owing to enhanced inflows<br />
through commercial bank channels. In contrast, exports grew<br />
by only 4% in the first eight months of 2005, year-on-year.<br />
External borrowing helped to push gross international<br />
reserves to a record $18.6 billion end-September, up from<br />
$16.2 billion end-2004.<br />
• 171 •
Poland<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Poland, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A2/P-1<br />
A2/P-1<br />
Stable<br />
Government Bonds<br />
A2<br />
Analyst<br />
Phone<br />
Jonathan R. Schiffer/New York 1.212.553.1653<br />
Joan Feldbaum-Vidra/New York<br />
Vincent J. Truglia/New York<br />
Poland<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP (% change) 4.0 1.0 1.4 3.8 5.3 3.5 4.3<br />
Inflation (CPI, % change Dec/Dec) 8.5 3.6 0.8 1.7 4.3 2.0 1.9<br />
General Gov. Financial Balance/GDP -3.0 -5.0 -5.9 -5.4 -4.7 -4.5 -3.4<br />
General Gov. Debt /GDP 39.3 39.7 45.1 50.2 48.8 48.4 48.1<br />
General Gov. Debt /Revenues 103.4 103.6 117.3 125.6 121.0 119.5 111.2<br />
Current Acct. Bal./GDP -6.1 -2.9 -2.6 -2.0 -1.5 -0.3 -0.6<br />
External Debt/ CA Receipts[1] 136.4 126.4 136.9 135.9 124.0 105.4 92.3<br />
External Vulnerability Indicator[2] 71.6 98.0 98.7 126.5 137.2 115.4 91.8<br />
[1] Total Current Account Receipts. [2] (Short-Term Debt + Currently Maturing Long-Term Debt + Total Nonresident Deposits)/Official Foreign Exchange Reserves.<br />
Opinion<br />
Credit Strengths<br />
The credit strengths of the Republic of Poland are:<br />
- A fundamental decline in core inflation and an<br />
entrenched reduction in inflationary expectations<br />
- Consistently strong export performance based upon<br />
microeconomic restructuring<br />
- Strong public debt indicators and proactive debt<br />
management policies<br />
Credit Challenges<br />
The credit challenges facing the Republic of Poland are:<br />
- A need to tighten fiscal policies<br />
- A need to restructure some heavy industrial sectors<br />
- A need to reduce the high level of unemployment<br />
Rating Rationale<br />
<strong>Moody's</strong> upgraded the Baa1 foreign currency country ceilings<br />
and the foreign currency government bond rating of the<br />
Republic of Poland to the same level as the government's<br />
local currency bond rating of A2. The unification of the government's<br />
foreign and domestic currency ratings reflects the<br />
advanced economic and financial integration of the country<br />
with the European Union, as evidenced by the recent accession<br />
to the EU. As a result, the risk of a foreign currency crisis<br />
that could lead to systemic interruption in foreign currency<br />
debt-servicing by issuers domiciled in this country has been<br />
reduced. Elimination of all foreign currency transfer risk will<br />
occur only at time of entry into EMU. The unification of the<br />
government bond ratings occurred simultaneously for seven<br />
other central European countries offered EU membership.<br />
Poland's ratings are now at a level with those of Latvia, Slovakia,<br />
and Israel; they are one notch above Lithuania and Korea,<br />
and one notch below Czech Republic, Estonia, and Hungary.<br />
Rating Outlook<br />
Poland’s medium-term prospects for economic growth coupled<br />
with the beneficial consequences of completed structural<br />
reform and incorporation into the EU combine to make the<br />
rating outlook stable. Debt maturity structure is favorable;<br />
debt servicing requirements are not onerous. Foreign currency<br />
reserves are high. The current account deficit is small.<br />
What Could Change the Rating - UP<br />
The key to Poland's rating lies in an improvement in fiscal<br />
performance. Obvious target areas are rural pensions, health<br />
and education, and social welfare transfers. Poland's competitiveness<br />
as measured by unit labor costs remains strong and<br />
underpins improvement in the current account data. Conclusion<br />
of restructuring of some key heavy industrial sectors will<br />
boost further economic efficiency. Faster privatization,<br />
altough unlikely, would have a positive affect on the rating.<br />
What Could Change the Rating - DOWN<br />
If a lack of reforms in the fiscal area and a prolonged European<br />
slowdown pushed the fiscal deficit and public debt figures<br />
substantially higher over several years, this would place<br />
some downward pressure on the ratings. Poland's high unemployment<br />
rate brings a large burden on public finances and on<br />
potential growth rates.<br />
Recent Developments/Results<br />
Poland's recent elections have resulted in an minority government<br />
led by the "Law and Justice" party, dependent upon support<br />
from smaller nationalist/populist parties. Although the<br />
country's macrofundamentals (with the exception of the budget)<br />
remain strong, the new government is inherently unstable<br />
and likely to be ineffectual. The budget deficit will<br />
probably widen and recourse may be made to more opaque<br />
off-budget funding, privatization will probably slow, and foreign<br />
direct investment may not be encouraged. Entrance into<br />
EMU is not a high priority for the new government and may<br />
slip into the next decade. The global interest rate environment<br />
combined with looser macroeconomic policy may eventually<br />
weaken the zloty.<br />
• 172 •
Portugal<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Portugal, Government of<br />
Outlook<br />
Stable<br />
Government Bonds<br />
Aa2<br />
Commercial Paper<br />
NR<br />
Other Short Term P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Alexander Kockerbeck/Frankfurt 49.69.707.30.700<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
Portugal<br />
1997 1998 1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%y/y) 4.2 4.7 3.9 3.8 2.0 0.5 -1.2 1.2 0.4 0.8<br />
CPI Inflation (%y/y) 1.9 2.2 2.2 2.8 4.4 3.7 3.3 2.5 2.2 2.7<br />
General Government Revenue/GDP 39.6 39.3 40.9 40.8 40.5 41.8 43.3 43.5 41.7 42.8<br />
General Government Expenditure/GDP 43.0 42.3 43.7 43.7 44.8 44.6 46.1 46.5 47.7 47.8<br />
General Government Balance/GDP -3.4 -3.0 -2.8 -2.9 -4.3 -2.8 -2.8 -3.0 -6.0 -5.0<br />
Gross General Government Debt/GDP 56.8 52.7 52.0 51.2 53.6 56.1 57.7 59.4 65.9 69.8<br />
Current Account Balance/GDP -6.4 -7.4 -9.1 -10.8 -10.5 -8.2 -6.1 -7.8 -9.5 -9.7<br />
Opinion<br />
Credit Strengths<br />
Portugal's credit strengths are:<br />
• Real income convergence with Euro zone partners<br />
• Fiscal consolidation and market reform efforts<br />
Credit Challenges<br />
Portugal's credit challenges are:<br />
• Imbalances in goods, services and labor markets<br />
• Future fiscal burdens from aging population<br />
• High structural (social security) expenditures<br />
• Moderate productivity growth<br />
• High private sector debt levels<br />
Rating Rationale<br />
The government of Portugal's Aa2 rating reflects increasing<br />
but reasonable general government debt ratio, substantive<br />
progress in economic management, and structural reforms in<br />
the goods, services and labor markets, all of which are supporting<br />
economic growth, higher employment, and convergence<br />
of real income and price levels with the Euro zone.<br />
Rating Outlook<br />
The government's Aa2 bond rating has a stable outlook.<br />
Portugal is expected to continue real income convergence<br />
with the Euro zone. Cyclical factors have worsened structural<br />
weaknesses. These structural weaknesses have also slow down<br />
the convergence process. Fiscal deficits have been substantial<br />
since 2001, generating an increase in the debt ratios. Tax revenues<br />
decreased significantly due to economic weakness and a<br />
tax reform which has not been sufficiently matched by structural<br />
spending cuts. Primary current government expenditure<br />
continued to grow at a strong pace, driven by the wage bill,<br />
high transfer payments to sub sovereign entities, social security,<br />
healthcare, and education. Through tax hikes and spending<br />
cuts authorities try to better control public accounts.<br />
Authorities have implemented a National Stability Pact and<br />
intend to further cut back high public spending on personnel<br />
(wage freeze), to curb current primary expenditure growth.<br />
Portugal must also face future fiscal burdens, such as increasing<br />
public pension liabilities. There is consensus among all<br />
major political forces about the necessity of reforms. .<br />
What Could Change the Rating - UP<br />
Ongoing improvement in the government's fiscal position<br />
Further reduction of the relative size of government debt<br />
Institutional changes in budgetary rules and procedures<br />
Implementation of further reforms in products and labor<br />
market and in public administration<br />
Convergence to the average European income level<br />
What Could Change the Rating - DOWN<br />
Persistent deterioration in the government's fiscal position<br />
Lack of reforms in public administration and in product<br />
and labor markets,<br />
No convergence to the average European income level<br />
Increase of the relative size of government debt<br />
Recent Developments<br />
The government is under intense pressure to cut its deficit,<br />
which is expected to reach 6% in 2005, the highest deficit<br />
among countries of the Eurozone. In order to respect the<br />
timetable given by the European Commission to the Portuguese<br />
government in July 2005, the authorities will continue<br />
to reduce the deficit until it reaches 3%, in 2008.<br />
Due to expected anaemic growth conditions going forward,<br />
fiscal stabilisation will be derived from the budget rather than<br />
from an increase of tax revenues linked to an expanding tax<br />
base. The sluggish growth rate in 2005 could generate a<br />
decrease in the tax base and a further decline of tax revenues.<br />
On the expenditure side of the budget, one issue facing Portugal<br />
is the wage bill linked to the substantial number of civil<br />
servants.<br />
On 17 October 2005, the government presented its draft<br />
budget for <strong>2006</strong> which proposes to cut the deficit to -4.8 % of<br />
GDP given a GDP growth estimate of 1.1%, and an estimated<br />
oil price of US$65/bbl. These assumptions are more<br />
conservative than those of international observers. In order to<br />
attain the planned reduction of the deficit, expenditures<br />
should be cut by €2 billion.<br />
• 173 •
Qatar<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Qatar, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
A1/P-1<br />
A1/P-1<br />
Stable<br />
Government Bonds<br />
A1<br />
Analyst<br />
Phone<br />
Tristan Cooper/London 44.20.7772.5454<br />
Mary O'Donnell/New York 1.212.553.1653<br />
Vincent J. Truglia/New York<br />
Qatar<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%) 9.1 4.5 7.3 8.7 11.6 10.1 6.5<br />
CPI Inflation (%, eop) 1.5 0.8 1.3 4.5 5.9 4.5 3.5<br />
Gen'l Gov't Balance/GDP (%) 7.2 3.4 7.6 4.1 12.5 15.9 15.1<br />
Gen'l Gov't Debt/GDP (%) 54.8 57.1 47.1 41.5 32.9 22.9 20.0<br />
Gen'l Gov't Debt/Revenues (%) 142.0 162.1 118.4 116.7 68.8 50.6 45.5<br />
Current Account Balance/GDP (%) 18.1 19.9 16.6 28.9 41.3 54.1 56.6<br />
External Debt/Exports (%)[1] 137.9 114.6 115.9 85.3 71.4 50.3 46.6<br />
External Vulnerability Indicator (%)[2] 382.6 337.5 219.4 175.3 117.2 88.7 81.0<br />
[1] Current Account Receipts. [2] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/ Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Qatar include:<br />
-High GDP per capita<br />
-World’s third largest proven gas reserves<br />
-Rapidly expanding gas and gas-based exports<br />
-Market-oriented economic policies<br />
-Ongoing political reform<br />
Credit Challenges<br />
Credit challenges for Qatar include:<br />
-Relatively high, albeit declining level of external debt<br />
-Vulnerability to swings in world energy prices<br />
-Apparent asset price bubble and inflationary pressure<br />
-Poor transparency and statistics<br />
-Possible contagion from regional geopolitical instability<br />
Rating Rationale<br />
Qatar's A1 long-term ratings reflect the country’s high and<br />
increasing prosperity. Qatar has one of the highest levels of<br />
GDP per capita in the world and this is likely to increase further<br />
over the medium term as the country’s gas and gas-based<br />
exports expand. Qatar has the third largest proven gas<br />
reserves in the world, with a population of only around<br />
800,000. The magnitude of the country’s hydrocarbon<br />
exports have enabled the country to run sizeable fiscal and<br />
external current account surpluses in recent years despite high<br />
levels of investment. Meanwhile, the authorities are committed<br />
to promoting the non-hydrocarbon and private sectors<br />
through liberal, market-oriented policies.<br />
This strong economic performance comes amid significant<br />
ongoing political reform. A new constitution, issued by the<br />
Emir in June 2004, became law in June 2005. This will,<br />
among other things, establish a new partially elected unicameral<br />
parliament, elections for which are expected within the<br />
next two years.<br />
Qatar’s ratings are constrained by a number of factors. The<br />
economy remains highly reliant on hydrocarbon production<br />
and exports. This exposes the economy to potential swings in<br />
international energy prices, although the fiscal and external<br />
current accounts are less sensitive to a downturn in energy<br />
prices than those of other hydrocarbon exporting countries.<br />
Qatar has a relatively high level of external debt compared to<br />
other GCC member states, although this level has declined<br />
markedly since its peak in 1998 and is on a downward trend.<br />
We are also concerned by the apparent emergence of an asset<br />
price bubble in the equity and real estate markets and the<br />
recent rise in inflation. The poor quality, scope, and timeliness<br />
of official data acts as an impediment to economic analysis.<br />
Furthermore, although Qatar has historically been relatively<br />
isolated from regional geopolitical instability, there<br />
remains a risk that a deterioration in the regional political<br />
environment could have a negative impact. As in other GCC<br />
states, there is a risk that radical domestic or foreign elements<br />
could launch attacks against government or foreign targets (a<br />
theatre frequented by foreigners was attacked in Doha in<br />
March, 2005). However, we would expect any such violence<br />
to be limited in scope and to be swiftly contained.<br />
Rating Outlook<br />
The outlook on Qatar’s ratings is Stable. We expect the government<br />
to continue with its efforts to simultaneously expand<br />
the volume and variety of the country’s hydrocarbon exports<br />
while continuing to promote the non-hydrocarbon and private<br />
sectors. This will take place amid continuing progress in<br />
political reform. However, Qatar will remain exposed potentially<br />
to swings in international energy prices and any deterioration<br />
in the regional geopolitical environment.<br />
What Could Change the Rating - UP<br />
Over the long term, a significant improvement in the regional<br />
political environment coupled with sustained high hydrocarbon<br />
export prices, which would allow the government to further<br />
accumulate foreign assets as a cushion against any<br />
potential downturn in such prices.<br />
What Could Change the Rating - DOWN<br />
A prolonged period of low oil prices causing sustained pressure<br />
on the fiscal and external current accounts and the depletion<br />
of the government's foreign assets. A significant<br />
deterioration in regional or domestic politics.<br />
Recent Developments<br />
Further increases in hydrocarbon export prices and production<br />
so far during 2005 are likely to have resulted in a widening<br />
of the fiscal and external current account surpluses,<br />
accelerating the accumulation of foreign assets by both the<br />
public and private sectors.<br />
• 174 •
Rio de Janeiro, City of<br />
Brazil<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Issuer Rating<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Ba3<br />
Analyst<br />
Phone<br />
Debra Roane/New York 1.212.553.1653<br />
Ross Culverwell/New York<br />
Yves Lemay/New York<br />
Rio de Janeiro, City of<br />
Debt Indicators (As of 12/31) 1999 2000 2001 2002 2003 2004<br />
Gross Direct Debt (R$. Millions) 4,070 4,564 5,150 6,822 6,692 7,523<br />
as % of Total Revenues[1] 109.0 97.6 96.0 109.0 97.0 98.6<br />
Financial Indicators (As of 12/31)[2] 2000 2001 2002 2003 2004 2005B<br />
Financing Surplus (Deficit) R$. Millions[3] 284.8 1,000.1 7.2 (116.3) 364.0 92.1<br />
As % of Total Revenue<br />
Financing Surplus (Deficit) 6.1 18.6 0.1 (1.7) 4.8 1.0<br />
Financing Surplus (Deficit) excl. CAPEX[4] 14.9 24.8 13.0 12.7 14.7 17.9<br />
Intergovernmental Revenues 45.4 42.8 39.6 38.2 41.2 40.6<br />
Interest Expense 6.3 4.7 6.1 6.2 5.7 4.3<br />
% Growth in Own Source Revenues 20.1 (2.5) 12.8 5.2 16.4<br />
Economic Indicators (As of 12/31) 1999 2000 2001 2002<br />
GDP per capita, as % of that of Brazil 161.2 153.3 146.5 138.6<br />
[1] 1999 revenue figure is for Direct Administration, while subsequent years are for consolidated government (Direct and Indirect Administrations). [2] Data is for consolidated government<br />
(Direct and Indirect Administrations. [3] Total revenues minus total expenditures, excluding principal payments [4] Total revenues less total expenditures, excluding principal payments and<br />
capital expenditures.<br />
Opinion<br />
Credit Strengths<br />
The City of Rio de Janeiro’s credit strengths include:<br />
—Satisfactory financial performance supported by prudent<br />
fiscal management<br />
—Operating surpluses that allow city to internally finance<br />
significant portion of capital expenditures<br />
—Large, diverse economic base supports growth in tax revenues<br />
Credit Challenges<br />
The City of Rio de Janeiro’s credit challenges include:<br />
—Moderately high, but manageable debt burden<br />
—Exposure of debt profile to adverse movements in inflation<br />
and foreign exchange rates<br />
—Expenditure pressures related to large social service and<br />
infrastructure demands<br />
—Rigidity of expenditure base minimizes fiscal flexibility<br />
Rating Rationale<br />
The City of Rio de Janeiro's foreign currency issuer rating<br />
was upgraded to Ba3 from B1 following the upgrade of the<br />
foreign currency country ceiling of the Republic of Brazil to<br />
Ba3 from B1.<br />
The City's credit quality reflects satisfactory financial performance<br />
characterized by annual operating surpluses that<br />
allow the city to finance most of its capital expenditures internally.<br />
The city has also registered financing surpluses in all<br />
but one of the past five years. These trends contrast with an<br />
earlier period of fiscal deficits and reflect favorable revenue<br />
trends and prudent fiscal management.<br />
The refinancing of the City's debt with the federal government<br />
in the late 1990s halted the rapid rise in the stock of<br />
debt related to the practice of rolling over principal and capitalizing<br />
interest in a high interest rate environment. Subsequently,<br />
in 2001 and 2002 the debt stock ocontinued to grow,<br />
largely reflecting the impact of the depreciation of Brazil’s<br />
currency on debt payable in or indexed to the US dollar, and<br />
the impact of price trends on inflation-indexed debt. More<br />
recently, appreciation of the domestic currency and lower<br />
inflation have led to an easing in the debt burden. New borrowing<br />
has remained minimal in recent years due to favorable<br />
fiscal trends, but also due to federal restrictions imposed as<br />
part of the debt refinancing agreement of 1999.<br />
As Brazil's second largest city, Rio has a large and diversified<br />
service-based economy which provides support for the<br />
generation of own-source revenues, reducing its reliance on<br />
transfers from senior levels of government.<br />
Rating Outlook<br />
The stable outlook for Rio de Janeiro's Ba3 foreign currency<br />
issuer rating reflects the city's favorable fiscal performance<br />
despite cost pressures related to growing social service and<br />
infrastructure demands and a fairly rigid expenditure base.<br />
Expectations that the city's debt burden will remain manageable<br />
also support the outlook.<br />
What Could Change the Rating - UP<br />
Further improvement in the city's financial performance<br />
including continued generation of financing surpluses and an<br />
easing in the City's debt burden could result in an upgrade in<br />
the rating.<br />
What Could Change the Rating - DOWN<br />
A downward revision in the country ceiling of Brazil would<br />
result in a downgrade in the City’s foreign currency issuer rating.<br />
In addition, although not expected, a deterioration in the<br />
City's financial performance resulting in recurrent, sizeable<br />
financing deficits and a significant rise in the debt burden<br />
would also erode credit quality.<br />
Recent Developments<br />
In 2004 the City registered a financing surplus (including<br />
interest payments, excluding borrowing and principal payments)<br />
equivalent to 4.8% of revenues, a significant improvement<br />
over the small financing deficit of -1.7% of revenues<br />
produced in 2003. This positive outcome reflected the impact<br />
of stronger growth in the economy on both tax revenues and<br />
intergovernmental transfers that are based on growth in state<br />
revenues, while current expenditures grew at a slower rate. A<br />
reduction in capital expenditures also contributed to the<br />
larger surplus. For 2005 the city has budgeted a smaller<br />
financing surplus, equivalent to 1% of revenues; however, this<br />
result assumes a near-doubling in capital spending as compared<br />
with the prior year. The city's debt burden has been<br />
fairly stable in recent years, with debt to consolidated revenues<br />
at 99% in 2004.<br />
• 175 •
Spain<br />
Ratings and Contacts<br />
Category<br />
Moody’s Rating<br />
Spain, Government of<br />
Outlook<br />
Stable<br />
Government Bonds<br />
Aaa<br />
Other Short Term -Dom Curr P-1<br />
Key Indicators<br />
Analyst<br />
Phone<br />
Alexander Kockerbeck/Frankfurt 49.69.707.30.700<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
Spain<br />
1997 1998 1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%y/y) 3.8 4.5 4.7 5.1 3.5 2.7 3.0 3.1 3.4 3.2<br />
CPI Inflation (%y/y) 1.9 1.8 2.2 3.5 2.8 3.6 3.1 3.1 3.6 3.3<br />
General Government Revenue/GDP 38.4 37.9 38.4 38.5 38.4 38.7 38.5 38.9 39.0 39.2<br />
General Government Expenditure/GDP 41.6 41.0 39.6 39.4 38.9 39.0 38.6 39.0 38.8 39.1<br />
General Government Balance/GDP -3.2 -3.1 -1.2 -0.9 -0.5 -0.3 -0.1 -0.1 0.2 0.1<br />
Gross General Government Debt/GDP 66.3 63.9 62.2 59.9 56.3 53.2 49.4 46.9 44.2 41.9<br />
Current Account Balance/GDP 0.1 -1.3 -2.8 -3.8 -4.5 -3.9 -4.2 -5.9 -7.4 -8.3<br />
Opinion<br />
Credit Strengths<br />
• Continuing improvement in the fiscal position<br />
• Institutional changes in budgetary rules<br />
• Prudent fiscal policies and balanced budget<br />
• Structural reforms in labor and other markets<br />
• Ongoing convergence with Eurozone average income<br />
Credit Challenges<br />
• Lack of competition in some service activities<br />
• High unemployment, low productivity<br />
• Social systems need to adapt to demographic costs<br />
Rating Rationale<br />
The rating for the Spanish Treasury’s foreign- and domesticcurrency<br />
denominated bond obligations was raised to Aaa in<br />
December 2001. In May 1998 the ceiling for ratings of foreign-currency<br />
denominated debt of issuers domiciled in Spain<br />
had already been raised to Aaa, the country ceiling of the<br />
Eurozone, prompted by the admission of Spain into the<br />
European Monetary Union (EMU). Spain’s Aaa rating is<br />
backed by continuing improvement in the government’s fiscal<br />
position within EMU and by institutional changes in budgetary<br />
rules and processes that will sustain that improvement in<br />
the future. The government's policy mix of spending control<br />
and deregulation has managed to reduce the general government<br />
deficit from 6.7% of GDP in 1995 to nearly balanced<br />
budgets since 2001. This substantial improvement has been<br />
achieved mainly by means of lower public expenditures relative<br />
to GDP, with reductions in interest payments and public<br />
consumption playing a key role. Prudent fiscal policies and<br />
macroeconomic management – along with structural reforms<br />
in labor and other markets – are likely to lead to sustained<br />
growth in output and employment. This should allow further<br />
reduction of the relative size of government debt, even in<br />
periods of global economic weakness, and underpin Spain’s<br />
convergence to the average European income level.<br />
Rating Outlook<br />
The Spanish Treasury’s Aaa bond rating has a stable outlook.<br />
Nonetheless, important challenges remain, which the government<br />
has only started to address to guarantee sustainable<br />
development. The continuing decline in the working age<br />
population, together with an increase in the old-age dependency<br />
ratio, will lead to growing future pension liabilities<br />
which must be taken into account. There are further agerelated<br />
expenditures which will increasingly weigh on budgets,<br />
such as healthcare costs. Competition and inflation control<br />
and labor market efficiency will be important factors for<br />
Spain to reduce regional disparities and to keep alive a virtuous<br />
circle of wage restraint, solid GDP and employment<br />
growth and fiscal consolidation. The switch from an employment<br />
to a more innovation driven economy is a further challenge.<br />
Also, distortions in the housing market need to be<br />
tackled in the face of high private household indebtedness and<br />
potential risks of housing market correction.<br />
What Could Change the Rating - UP<br />
Spain’s ratings are well positioned in the Aaa category, the<br />
highest on Moody’s rating scale.<br />
What Could Change the Rating - DOWN<br />
Given Spain’s very solid fiscal situation, only a substantial<br />
change in fiscal policy towards large deficit spending and a<br />
decisive trend change towards high public debt generation<br />
would seem able to put Spain's Aaa status into question.<br />
Recent Developments<br />
GDP growth is robust and may reach more than 3% in 2005,<br />
reflecting strong domestic demand but also substantial negative<br />
growth contribution from net external demand. There<br />
are transitory elements (weak tourism), cyclical factors (strong<br />
domestic demand recovery) and structural issues (declining<br />
international competitiveness due to inflation and productivity<br />
gaps, with labor-intensive growth) behind this development.<br />
Housing price inflation is substantial and poses a risk to<br />
the sustainability of the economic growth pattern. Authorities'<br />
plans include measures to diversify foreign trade and to<br />
enhance productivity through investment in R&D and education.<br />
Tax cuts and solid employment growth support private<br />
consumption and household saving (especially long-term saving<br />
for retirement), helping to ease future pressures on the<br />
public pension system. Recent tax measures intend to raise<br />
labor market participation, and especially female employment.<br />
Robust social security contributions reflect ongoing<br />
employment growth and immigration. Together with indirect<br />
tax revenues they support solid general government budgets.<br />
The 0.3% deficit in 2004 is due to one-off measures such as<br />
the assumption of state-owned Railway Network Company’s<br />
debt by the central government and the inclusion of public<br />
television (RTVE) in the general government sector, which<br />
were partly offset by higher-than-expected revenues. Therefore,<br />
authorities’ plan to return to budgets slightly in surplus<br />
from 2005 on seems realistic. The new Socialist-led government,<br />
which took over power in 2004, seems committed to<br />
continue the reform and consolidation path. Within an overall<br />
benign fiscal scenario the debt ratio seems to remain on a<br />
declining path and has fallen below 50% in 2004.<br />
• 176 •
Thailand<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Thailand, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa1/P-2<br />
Baa1/P-2<br />
Stable<br />
Government Bonds<br />
Baa1<br />
Analyst<br />
Phone<br />
Thomas J. Byrne/New York 1.212.553.1653<br />
Alessandra Alecci/New York<br />
Vincent J. Truglia/New York<br />
Thailand<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%oya) 4.6 1.9 5.7 6.8 6.2 5.8 6.0<br />
CPI Inflation (%oya) 1.4 0.8 1.6 1.8 2.9 3.0 2.5<br />
General Government Balance/GDP -2.2 -2.6 -2.8 0.4 0.3 0.0 0.2<br />
General Government Debt/GDP 23.2 24.7 31.0 27.5 26.7 24.6 22.4<br />
General Government Debt/Revenues 153.2 163.1 199.1 164.7 151.4 134.3 120.2<br />
Current Account Balance/GDP 7.6 5.4 5.5 5.6 4.5 3.3 4.7<br />
External Debt/CA Receipts 92.1 83.8 69.6 52.9 42.3 36.6 30.8<br />
External Vulnerability Indicator[1] 73.6 80.7 67.8 59.4 40.1 37.0 36.6<br />
[1] (Short-Term Debt + Currently Maturing Long-Term Debt)/Official Foreign Exchange Reserves.<br />
Opinion<br />
Credit Strengths<br />
Support factors include:<br />
-international reserve build up and external debt reduction<br />
-export competitiveness<br />
-fiscal consolidation<br />
-improved policies<br />
Credit Challenges<br />
Areas of concern include:<br />
-consistency of fiscal consolidation policy with public<br />
spending programs<br />
-residual weakness in the financial sector<br />
-weak, but improving, governance structures<br />
-political unrest in the southern provinces<br />
Rating Rationale<br />
Thailand’s Baa1 foreign currency country ceiling for bonds<br />
and notes and the Baa1 foreign currency country ceiling for<br />
bank deposits reflect the significant degree of improvement in<br />
external liquidity and policy performance since the 1997 crisis.<br />
Institutional and regulatory reforms, coupled with large<br />
public fund injections, have stabilized the financial system.<br />
Thailand’s Baa1 rating for baht-denominated government<br />
securities takes into account the country's capability for fiscal<br />
prudence as well as the elimination of large budget deficits.<br />
However, public debt remains relatively high owing to financial<br />
sector losses.<br />
Rating Outlook<br />
The most recent rating change in November 2003 was<br />
prompted by a substantial reduction in external debt (including<br />
prepayment of outstanding IMF loans), export competitiveness,<br />
a build up in international reserves and improved<br />
fiscal, monetary and exchange rate policies. These factors<br />
provide considerable leeway to manage external shocks.<br />
Policy emphasis on domestic-demand driven economic<br />
growth will not place excessive pressure on the balance of<br />
payments, but the high oil intensity of the Thai economy has<br />
had negative disturbances.<br />
Regarding the government's local currency rating,<br />
although revenue mobilization has improved, it remains relatively<br />
low in relation to government debt. Social welfare and<br />
public infrastructure initiatives of the Thaksin administration<br />
are not expected to destabilize the fiscal position.<br />
What Could Change the Rating - UP<br />
Upward rating pressure would come from the maintenance of<br />
the much strengthened external payments position and a<br />
competitive export sector, coupled with more progress in fiscal<br />
consolidation and financial sector restructuring.<br />
What Could Change the Rating - DOWN<br />
A weakening of external competitiveness or deterioration in<br />
the domestic investment environment that induces a loss of<br />
international reserves or build up in external debt, unsustainable<br />
fiscal programs, or a setback in the reduction of contingent<br />
liabilities embedded in the financial sector—such factors<br />
would exert negative rating pressure.<br />
Recent Developments/Results<br />
GDP growth in Q3 2005 accelerated to 5.3%; the Bank of<br />
Thailand expects that growth will most likely be 4.5-4.8% for<br />
2005 and 5.0-5.5% in <strong>2006</strong>. Headline CPI edged down to<br />
5.9% in November, but core inflation has held steady at<br />
around 2.3-2.4%. Fiscal revenues have remained buoyant,<br />
increasing 14.3% FY2005. The rather large current account<br />
deficit in the first half of 2005 has been tempered by small<br />
monthly surpluses since then through October. Official international<br />
reserves edged up to $51.9 billion in mid-December<br />
2005 from $49.8 billion at end-December 2004.<br />
• 177 •
Trinidad & Tobago<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Trinidad & Tobago, Government of<br />
Outlook<br />
Government Bonds -Fgn Curr<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Baa2/P-3<br />
Baa2/P-3<br />
Stable<br />
Baa2<br />
Government Bonds -Dom Curr<br />
Baa1<br />
Analyst<br />
Phone<br />
Alessandra Alecci/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Trinidad & Tobago<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 7.3 4.3 6.8 13.2 6.5 7.0 8.0<br />
CPI Inflation, eop 3.6 3.2 4.3 3.0 5.6 5.5 4.5<br />
Gen. Gov. Financial Balance/GDP (%)[1] -0.6 0.7 -0.2 1.2 0.3 0.3 0.0<br />
General Government Debt/GDP (%)[1] 44.4 43.2 41.3 37.3 31.3 28.9 25.7<br />
General Government Debt/Revenue (%)[1] 186.8 165.2 162.1 141.9 115.3 93.6 76.8<br />
Current Account Balance/GDP (%) 6.7 4.7 0.9 8.7 14.6 12.4 11.4<br />
External Debt/CA Receipts (%)[2] 37.9 37.7 37.6 32.4 21.0 18.6 17.3<br />
External Vulnerability Indicator[3] 19.5 3.3 3.6 3.6 7.8 2.1 5.3<br />
[1] Central Government [2] Current Account Receipts [3] (Short-Term External Debt + Currently Maturing Long-Term External Debt)/Official Foreign Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Trinidad and Tobago include:<br />
- Sizeable energy exports, which guarantee a steady inflow<br />
of foreign exchange and revenues to the government.<br />
- A relatively low foreign-currency debt burden.<br />
- Substantial foreign direct investment directed at increasing<br />
energy exports.<br />
Credit Challenges<br />
Credit challenges for Trinidad and Tobago include:<br />
-A narrow, albeit diversifying, export base.<br />
-Vulnerability to international energy markets.<br />
- Containing fiscal spending and contingent liabilities.<br />
Rating Rationale<br />
Trinidad and Tobago's long-term foreign currency country<br />
ceiling reflects a relatively low external debt burden supported<br />
by a dynamic and diversifying energy export base and<br />
prudent debt management. The rating incorporates the<br />
expectation that the government will contain expenditure<br />
pressures in order to protect the economy from future downturns<br />
in the energy cycle.<br />
Rating Outlook<br />
The outlook for Trinidad and Tobago's ratings is stable, balancing<br />
vulnerabilities to external shocks and adequate macroeconomic<br />
management.<br />
What Could Change the Rating - UP<br />
Continued evidence of a sustained reduction in the external<br />
vulnerability of the country might lead to a reassessment of its<br />
creditworthiness. Signs that fiscal policy is contained and that<br />
adequate savings are accumulated during the energy boom<br />
could also lead to an upward revision.<br />
What Could Change the Rating - DOWN<br />
A relaxation of the current fiscal and monetary policy stance<br />
would likely be a source of serious concern even under a scenario<br />
of continued increase in energy exports. Downward<br />
pressure on the rating might appear in the event of a sharp<br />
and permanent reversal of FDI flows, particularly if accompanied<br />
by a deterioration of the external position and accumulation<br />
of external debt.<br />
Recent Developments<br />
The energy sector-based economic expansion of the past several<br />
years is continuing in full force, with real GDP growth<br />
expected to reach 6.5% in 2005. Unemployment has reached<br />
the lowest levels in decades and GDP per capita has been rising<br />
at a double-digit pace, both in nominal and PPP basis.<br />
The non-energy economy is also posting decent rates of<br />
growth, including manufacturing, suggesting that despite the<br />
strong performance of the energy sector, prudent macroeconomic<br />
management has thus far limited the loss of the nonenergy<br />
sector's external competitiveness. Inflationary pressures<br />
have emerged recently, however, as fiscal policy was<br />
loosened and as a consequence the high levels of liquidity<br />
resulting from sizeable foreign exchange inflows. In the long<br />
run, a loss of competitiveness of the non-energy sector via a<br />
real exchange rate appreciation would exacerbate the economy’s<br />
vulnerability to the energy sector’s volatility.<br />
The external position – the key factor underpinning the<br />
current ratings – continues to improve on the back of major<br />
increases in energy exports, driven not only by price, but also<br />
substantial volume increases. A sizeable accumulation of FX<br />
reserves coupled with net external debt amortizations has led<br />
to a significant improvement of the country’s already favorable<br />
external debt indicators. FX reserves are now over twice<br />
as large as the country’s entire external debt stock. The external<br />
position should continue improving due to the planned<br />
expansion of the energy sector and the likelihood of high<br />
energy prices. The ratio of external debt to current account<br />
receipts is likely to remain well below 50%, one of the lowest<br />
among similarly rated credits.<br />
On the fiscal front, the energy boom has led to a large rise<br />
in revenues which has been matched by an increasingly<br />
aggressive expansion in expenditures. Nonetheless, the fiscal<br />
balance has remained in surplus, despite sizeable contributions<br />
to a revenue stabilization fund, estimated to amount to<br />
over 5.0% of GDP. At this stage, it is not clear whether the<br />
rise in expenditures will be easily reversed if needed. The<br />
sharp increase in the non-energy fiscal deficit suggests that<br />
public finances are becoming increasingly exposed to potential<br />
swings in the energy cycle. Although at the central government<br />
level debt indicators are likely to keep improving,<br />
Moody’s will continue to carefully monitor off-budget activities<br />
which have led to a build-up of contingent liabilities as<br />
the government has created various public entities to carry<br />
out an ambitious capital and social expenditure program.<br />
• 178 •
United Kingdom<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa/P-1<br />
Aaa/P-1<br />
Analyst<br />
Phone<br />
Alexander Kockerbeck/Frankfurt 49.69.707.30.700<br />
Sara Bertin-Levecq/Paris 33.1.53.30.10.20<br />
Vincent J. Truglia/New York 1.212.553.1653<br />
United Kingdom<br />
1997 1998 1999 2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (%y/y) 3.2 3.2 3.0 4.0 2.2 2.0 2.5 3.2 1.6 2.3<br />
CPI Inflation (%y/y) 1.8 1.6 1.3 0.8 1.2 1.3 1.4 1.3 2.4 2.2<br />
General Government Revenue/GDP 39.0 40.0 40.5 41.2 41.5 40.1 40.2 41.0 41.4 41.8<br />
General Government Expenditure/GDP 41.2 40.0 39.5 37.4 40.8 41.8 43.5 44.1 44.8 45.1<br />
General Government Balance/GDP -2.2 0.0 1.0 3.8 0.7 -1.7 -3.3 -3.1 -3.4 -3.3<br />
Gross General Government Debt/GDP 50.5 47.4 44.9 41.9 38.7 38.2 39.7 41.5 43.1 44.3<br />
Current Account Balance/GDP -0.2 -0.5 -2.7 -2.6 -2.2 -1.6 -1.5 -2.0 -2.1 -1.9<br />
Opinion<br />
Credit Strengths<br />
The United Kingdom's credit strengths are:<br />
• Successful macroeconomic management<br />
• Improvements in competitiveness<br />
• Sound monetary and fiscal framework<br />
• Diversified economic base and high degree<br />
of integration in global trade and capital markets<br />
• Comparatively low public sector debt<br />
• Relatively favorable demographics<br />
• Developed second pillar pension system<br />
Credit Challenges<br />
The United Kingdom's credit challenges are:<br />
• High debt to income ratios of private households<br />
• Possible sharp adjustment process in housing market<br />
• Underinvestment in key areas<br />
Rating Rationale<br />
The UK's Aaa country ceiling for foreign currency debt and<br />
the Aaa local currency debt of the government are supported<br />
by the country's sound monetary and fiscal framework, its<br />
highly advanced and diversified economic base and the high<br />
degree of integration in global trade and capital markets. The<br />
UK continues to be the first destination in Europe for foreign<br />
direct investment. The City of London has retained its position<br />
as a very important European financial center even after<br />
the introduction of the euro.<br />
Rating Outlook<br />
The ratings are well positioned and have a stable outlook.<br />
The UK government intends to promote sustained GDP<br />
growth by addressing some (infra-)structural weaknesses of<br />
the economy. Many initiatives aim at boosting basic skills,<br />
R&D and to increase competition. Thanks to important labor<br />
market reforms and low wage inflation high employment levels<br />
continue to support economic growth and fiscal revenues.<br />
However, income generation may be hampered through several<br />
channels. Net financial balances of households and companies<br />
turned into deficit in 1998, with strong increases in<br />
outstanding mortgage debt since 1997. Financial vulnerability<br />
has therefore increased. Via a potential impact on private consumption,<br />
housing prices represent a risk factor, especially in<br />
case of an interest rate shock. Declining consumer confidence<br />
and a general reassessment of households' income situation<br />
are potential risks. It seems households do not have difficulties<br />
so far to service their debts. A weaker-than-expected economic<br />
and financial environment may cause higher deficits or<br />
higher tax rates in coming years, given the government's relatively<br />
large multi-year investment spending commitments.<br />
There seems to be some scope to focus on spending priorities<br />
without jeopardizing the underlying strength of public<br />
finances. The solid fiscal situation allows to let automatic stabilizers<br />
operate while remaining on track to meet fiscal stability<br />
rules over the cycle. The debt to GDP ratio is expected to<br />
stabilize at around 40%, lowest within G7. Regarding present<br />
and future fiscal burden of the pension system, the UK is in a<br />
relatively solid position. Public pension expenditure as percentage<br />
of GDP is predicted to decline due to a more favorable<br />
old age dependency ratio and a more developed system of<br />
private pension funds than in most other EU countries. Corporate<br />
pension schemes suffered from the stock market crash,<br />
complicating the government's long-term plan to pass<br />
increasing responsibility for pension provision to the private<br />
sector. A Pension Protection fund has therefore been put into<br />
place by the government in 2005.<br />
What Could Change the Rating - UP<br />
The UK's ratings are well positioned in the Aaa category, the<br />
highest on <strong>Moody's</strong> rating scale.<br />
What Could Change the Rating - DOWN<br />
Given the UK's solid fiscal situation and track record, only a<br />
fiscal policy change towards large deficit spending and a decisive<br />
trend change towards high public debt generation would<br />
seem able to put the Aaa status into question.<br />
Recent Developments<br />
Major revisions to national accounts showed that economic<br />
growth was more balanced and robust than thought. The<br />
Bank of England's several interest rate hikes since November<br />
2003 reflect robust economic growth expectations around<br />
trend. Nevertheless, recently slowing consumption and<br />
investment and thus subdued economic growth have led the<br />
BoE to cut interest rates by 25 basis points in August 2005. A<br />
cooling housing market and high personal debt burden<br />
dampen private consumption. House prices have softened<br />
from the peak in 2004 but continue to pose a risk for private<br />
consumption in case of strong correction (wealth effect). Current<br />
growth expectations for 2005 are clearly below the 3-<br />
3.5% predicted in the government’s budget. Continued support<br />
to economic growth comes from the boost in public<br />
investment, to catch up in key areas like infrastructure, health<br />
and education. This investment priority is reflected in budget<br />
plans with a shift from budget surpluses to deficits since 2002.<br />
The government intends to reduce tax fraud and avoidance<br />
after severe tax revenue shortfalls in 2002/2003. Furthermore,<br />
the government is working on plans to enhance efficiency of<br />
public administrations. <strong>Project</strong>ed economic growth and government<br />
investment activities seem to work in favor of a balanced<br />
fiscal situation in the medium term.<br />
• 179 •
United States of America<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
United States of America, Government of<br />
Outlook<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa/P-1<br />
Aaa/P-1<br />
Stable<br />
Government Bonds<br />
Aaa<br />
Analyst<br />
Phone<br />
Steven A. Hess/New York 1.212.553.1653<br />
Thomas J. Byrne/New York<br />
Vincent J. Truglia/New York<br />
United States of America<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth (% change) 3.7 0.8 1.6 2.7 4.2 3.5 3.6<br />
Inflation (% change Dec/Dec) 3.4 2.8 1.6 2.3 2.6 3.4 3.4<br />
Gen. Gov. Balance/GDP 1.6 -0.4 -3.8 -4.6 -4.3 -4.1 -3.9<br />
Gen. Gov. Primary Balance/ GDP 4.1 1.9 -1.7 -2.8 -2.5 -2.3 -1.9<br />
Gen. Gov. Debt/GDP 58.3 57.9 60.2 62.6 63.4 66.4 69.1<br />
Gen. Gov. Debt/Gen. Gov. Revenue 162.7 166.0 185.3 196.1 200.4 208.5 215.4<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for the United States are:<br />
— The world's largest economy, with major shares of global<br />
trade flows, international finance, and international corporate<br />
activity<br />
— Global role of the currency, resulting in the country's<br />
position as the center of dollar financial markets, extremely<br />
small foreign currency liabilities, and continued inflow of<br />
financial and direct-investment capital<br />
— Moderate government debt levels<br />
— Innovative and flexible economy<br />
Credit Challenges<br />
Credit challenges for the United States are:<br />
— A large current account deficit in relation to the size of<br />
the economy that leaves it vulnerable to possible changes in<br />
confidence<br />
— Social Security and Medicare programs that face serious<br />
financing problems over the long term<br />
Rating Rationale<br />
The Aaa foreign currency country ceilings of the United<br />
States reflect sound structural fundamentals and the dollar's<br />
global role. The government bond rating, first assigned in<br />
1917, is also Aaa, backed by the moderate level of government<br />
debt in relation to GDP that should not deteriorate greatly<br />
despite budget deficits.<br />
As the world's largest economy with flexible markets, an<br />
open foreign trade regime, and a high degree of capital<br />
mobility, the US has for some time been the center of global<br />
trade and finance. As the anchor of international trade and<br />
finance, it presents little payment risk to international investors.<br />
With only minor exceptions, there are no restrictions on<br />
payments and no likelihood of them being imposed.<br />
The American economy has demonstrated its competitiveness<br />
through fairly rapid productivity growth, a high degree<br />
of technological innovation, and generally sound public<br />
finances. Taken together, these factors help support the Aaa<br />
foreign currency ceilings. Recently, the outlook for some of<br />
these factors has changed for the worse, including, possibly,<br />
the pace of innovation and, definitely, the direction of government<br />
budgets at the federal and state levels. They do not seem<br />
to have fundamentally altered the US economic role in the<br />
world, however.<br />
Placed in context, however, the US government's financial<br />
position remains well within the range that supports a Aaa<br />
rating. The ratios of general government debt to GDP and to<br />
revenue declined substantially during the second half of the<br />
1990s and are in the middle range of ratios in other large<br />
industrial economies. The debt ratios may well deteriorate<br />
somewhat over the next few years, but are unlikely to move<br />
drastically upward.<br />
For a number of years, the United States has run sizable<br />
current account deficits. A continued increase in the deficit<br />
could bring about adjustments in the exchange rate and affect<br />
economic growth. Despite this, the financing of the deficits is<br />
almost entirely in U.S. dollars, and the creditworthiness of<br />
the United States as a whole would not be affected by such an<br />
adjustment. For the near term, however, a continued, relatively<br />
high current account deficit is expected.<br />
Rating Outlook<br />
Structural fundamentals, political stability, and favorable<br />
long-term economic prospects support a stable outlook for<br />
the Aaa ratings of the United States during the present<br />
decade. Government finance appears quite manageable for at<br />
least the next several years.<br />
What Could Change the Rating - DOWN<br />
As an advanced economy with almost no foreign currency<br />
debt—plus the ability to continue to borrow in its own currency—the<br />
US ratings face little threat in the next several<br />
years. Over the long term, failure to reform entitlement problems<br />
could bring the rating under pressure.<br />
Recent Developments<br />
Strong growth in both personal and corporate tax revenues<br />
contributed to growth in total federal government receipts of<br />
14.6% in FY 2005, which ended September 30. This also<br />
meant that the ratio of receipts to GDP rose to 17.5% from<br />
16.3% in 2004 and the ratio of federal debt to revenue<br />
decreased to 214% from 229% a year earlier. The budget deficit<br />
for the fiscal year was 2.6% of GDP, down from 3.6% the<br />
previous year. In the current fiscal year, it is unclear how<br />
costly this fall's hurricanes will be to the federal government,<br />
but the deficit will likely rise as a percent of GDP as a result.<br />
<strong>Moody's</strong> would not view this one time event as fundamentally<br />
altering the medium-term government debt dynamics.<br />
The deficit on trade in goods and services increase $81 billion<br />
during the first nine months of the year from the corresponding<br />
period in 2004. <strong>Moody's</strong> does not consider the size<br />
of the trade or current-account deficits to be a threat to the<br />
rating, although it could have macroeconomic consequences.<br />
• 180 •
Venezuela<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Country Ceiling: Fgn Currency Debt<br />
Country Ceiling: Fgn Currency Bank Deposits<br />
Venezuela, Government of<br />
Outlook<br />
Senior Secured<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
B2/NP<br />
B3/NP<br />
Stable<br />
B2<br />
Government Bonds -Fgn Curr<br />
B2<br />
Government Bonds -Dom Curr<br />
B1<br />
Analyst<br />
Phone<br />
Luis Ernesto Martinez-Alas/New York 1.212.553.1653<br />
Mauro Leos/New York<br />
Vincent J. Truglia/New York<br />
Venezuela<br />
2000 2001 2002 2003 2004 2005F <strong>2006</strong>F<br />
Real GDP Growth 3.7 3.4 -8.8 -7.7 17.3 9.4 8.0<br />
CPI Inflation, eop 13.4 12.3 31.2 27.1 19.2 18.0 16.5<br />
General Government Balance/GDP (%)[1] -1.7 -4.5 -2.4 -4.3 -5.1 -3.7 -3.5<br />
General Government Debt/GDP (%)[1] 25.8 28.9 40.6 44.4 44.7 44.7 44.0<br />
General Government Debt/Revenue (%)[1] 132.3 143.0 188.3 194.2 181.9 188.6 187.0<br />
Current Account Balance/GDP (%) 10.1 1.6 8.2 13.7 12.7 9.2 7.9<br />
External Debt/Exports (%)[2] 53.6 67.2 70.6 78.5 63.6 65.0 70.0<br />
External Vulnerability Indicator[3] 59.3 97.8 102.5 51.5 45.4 45.1 44.5<br />
[1] Central Government [2] Current Account Receipts [3] (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/ Official Foreign<br />
Exchange Reserves<br />
Opinion<br />
Credit Strengths<br />
Credit strengths for Venezuela are:<br />
-Important energy exporter<br />
-Demonstrated commitment by the authorities to service<br />
the country's debt<br />
Credit Challenges<br />
Credit challenges for Venezuela are:<br />
- A rising public-sector debt burden in relative terms<br />
-A long-term process of institutional change<br />
Rating Rationale<br />
The ratings are supported by the authorities’ determination<br />
to service the public-sector debt in full and on a timely basis<br />
even under conditions of severe stress. They are also supported<br />
by a strong foreign exchange reserve position. The<br />
current ratings and their stable outlook fully incorporate the<br />
view that foreign exchange controls make a sharp and sudden<br />
decline in international reserves less likely even under the<br />
event of a fall in oil prices.<br />
What Could Change the Rating - UP<br />
A track record of successfully managing the impact on oil<br />
price volatility on overall economic combined with a countercyclical<br />
economic policy may have positive implications for<br />
the ratings.<br />
What Could Change the Rating - DOWN<br />
A rapid decline in international reserves could place downward<br />
pressure on the ratings.<br />
Recent Events<br />
Mr. Chavez's fiscal policy is aimed at reducing or eliminating<br />
the traditional volatility of output and policies to ensure a<br />
more balanced and sustained growth path. To this end fiscal<br />
policy will aim at maintaining non interest primary spending<br />
as a percent of GDP at around 21%, and no to go below that<br />
level even in the event of a sharp fall in oil prices. The goal is<br />
both help the beginning of a recovery in domestic investment<br />
from the current dismal levels while limiting the volatility of<br />
overall economic performance that is attributed to the volatility<br />
of the fiscal policy. This spending level will be financed<br />
with oil rents, perhaps with increases in tax collection, but<br />
surely with domestic credit and debt issuance if needed.<br />
Achieving single digit inflation in a short period of time is no<br />
an important objective of the authorities, they are more concerned<br />
with growth and poverty reduction.<br />
The portion of Mr. Chavez's consolidated policy mix that<br />
has been more open to criticism is the loss of PDVSA's<br />
autonomy, and the change in oil strategy based on price and<br />
relatively limited growth in production capacity, which is<br />
expected to be partly financed with the company's own<br />
resources and partly with foreign direct investment (FDI).<br />
Mr. Chavez is most interested in attracting FDI for downstream<br />
activities than for crude exploration and extraction.<br />
The expectation is that this strategy could revitalize and<br />
deepen the existing oil cluster in Venezuela, which could<br />
bring massive social and economic benefits. However, the<br />
road ahead is full of obstacles and success is far from assured.<br />
The demonstrated ability and willingness of Venezuela to<br />
pay its external debt in full and on a timely basis is the most<br />
crucial supporting factor for the current ratings and their stable<br />
outlooks.<br />
• 181 •
XL Capital Assurance Inc.<br />
New York, New York (State of), United States<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Ult Parent: XL Capital Ltd<br />
Outlook<br />
Senior Unsecured<br />
Subordinate Shelf<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Stable<br />
A3<br />
(P)Baa1<br />
Preferred Shelf<br />
(P)Baa2<br />
Preference Stock<br />
Baa2<br />
Analyst<br />
Phone<br />
Matthew Noll/New York 1.212.553.1653<br />
Anna Gurvich/New York<br />
Jack Dorer/New York<br />
XL Capital Assurance Inc. (SAP Statistics)<br />
H1 2005 2004 2003 2002 2001<br />
Gross Par Written ($mil) 14,966 33,655 23,261 16,614 9,221<br />
Net Income ($mil) 1 (6) (11) (8) (8)<br />
Expense Ratio (%) 51.4 76.1 76.7 163.0 nm<br />
Loss Ratio (%) 69.1 6.1 0.0 0.0 0.0<br />
Adjusted NPO ($mil)[1] 7,742 6,841 4,386 2,633 724<br />
Market Share (%)[2] 0.4 0.3 0.2 0.1 0.1<br />
Hard Capital ($mil) 292 287 278 181 141<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 26.5 23.9 15.8 14.5 5.1<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[3] na 43.7 39.3 39.3 36.7<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[3] na 154.2 168.2 179.0 208.6<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[3] na 1.45 1.50 1.57 1.68<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[3] na 1.42 1.28 1.45 1.54<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] These <strong>Moody's</strong> model results are as of year-end and for XLCA and XLFA combined. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality insured portfolio and well diversified<br />
insured portfolio with nominal liquidity needs<br />
• Strong risk adjusted capitalization<br />
• Steadily building franchise value<br />
• Parent provides explicit and implied support<br />
• Proven strategy, transparency of business risks<br />
• Management's commitment to Aaa reflects sensitivity of<br />
franchise to rating<br />
Credit Challenges<br />
• Sensitivity of insurance portfolio to credit cycle and some<br />
large single-name exposures<br />
• Indirect exposures to risks of parent<br />
• Alternatives to financial guaranty and new entrants are<br />
likely to increase competition<br />
• Need to further establish acceptance and trading value in<br />
certain sectors<br />
• Declining issuance and tight credit spreads could hurt<br />
demand for credit enhancement<br />
Rating Rationale<br />
<strong>Moody's</strong> Aaa financial strength rating for XL Capital Assurance<br />
Inc. (XLCA) is based on the company's conservative<br />
business philosophy and operating strategies, a strong capital<br />
base, and explicit claims paying support provided by its<br />
highly-rated parent company, XL Reinsurance America,<br />
which is wholly owned by XL Capital Ltd, a Bermuda based<br />
insurance holding company. XLCA follows detailed surveillance<br />
procedures built around a proactive monitoring and<br />
remediation philosophy that emphasizes early and forceful<br />
intervention. The rating also reflects the high quality of<br />
XLCA's existing insured portfolio, as well as its ongoing commitment<br />
to underwrite well-priced, investment grade financial<br />
guaranty transactions.<br />
While XL Capital is still somewhat new to the financial<br />
guaranty market, the company has demonstrated a strong<br />
commitment to financial guaranty by establishing two separately<br />
capitalized subsidiaries. XLCA serves as the group's<br />
main platform for originating primary financial guaranty<br />
transactions.<br />
Rating Outlook<br />
<strong>Moody's</strong> outlook for XLCA's Aaa rating is stable. Structured<br />
products and international sectors continue to be the focus of<br />
the business strategy for XLCA, and growth in these markets<br />
should continue to provide the company with good opportunities<br />
over time. XLCA’s UK subsidiary is expected to lead the<br />
company’s efforts to expand its franchise in Europe where<br />
increased capital market activity has been brought about by<br />
privatization and a growing structured products market.<br />
The maintenance of <strong>Moody's</strong> Aaa rating over the long term<br />
will be dependent on maintaining strong underwriting discipline<br />
and reasonable exposure limits to avoid the accumulation<br />
of large single risks and correlated exposures. As a newer<br />
entrant to the industry with a smaller capital base relative to<br />
its peers, XLCA must carefully manage its single risk accumulations<br />
on each of its transactions. Substantial rating pressure<br />
at the parent level would likely trigger a rating reassessment<br />
of XLCA.<br />
What Could Change the Rating - DOWN<br />
• Failure to progress toward trading parity with the established<br />
guarantors<br />
• Failure to attain a three-year average operating ROE of<br />
12% over the intermediate term for the combined guaranty<br />
platform<br />
• Hard and total capital ratios falling below 1.3x without<br />
corrective action<br />
• Parent's rating falling below A3<br />
• Extensive diversification in higher risk businesses<br />
Recent Developments/Results<br />
Gross premiums written for the first six months of 2005 were<br />
$115.4 million, up 8% from the same period during 2004 due<br />
to pooled corporate and municpal underwriting volume. Total<br />
shareholder equity on June 30, 2005 was $234.7 million,<br />
about equal to 12 months prior.<br />
• 182 •
XL Financial Assurance Ltd.<br />
Hamilton, Bermuda<br />
Ratings and Contacts<br />
Category<br />
Outlook<br />
Insurance Financial Strength<br />
Key Indicators<br />
Moody’s Rating<br />
Stable<br />
Aaa<br />
Analyst<br />
Phone<br />
Matthew Noll/New York 1.212.553.1653<br />
Anna Gurvich/New York<br />
Jack Dorer/New York<br />
XL Financial Assurance Ltd. (U.S. GAAP Statistics)<br />
H1 2005 2004 2003 2002 2001<br />
Gross Par Written ($mil) 13,387 28,760 22,586 17,245 10,593<br />
Net Income ($mil) 35 76 76 69 22<br />
Expense Ratio (%) 45.3 51.8 47.5 45.5 59.2<br />
Loss Ratio (%) 19.5 20.3 22.9 10.7 25.9<br />
Adjusted NPO ($mil)[1] 66,359 60,963 39,591 25,416 15,730<br />
Market Share (%)[2] 3.4 3.1 2.2 1.6 1.2<br />
Hard Capital ($mil) 1,231 1,176 792 591 452<br />
Operating Leverage (Adjusted NPO / Hard Capital) (x) 53.9 51.8 50.0 43.0 34.8<br />
Credit Quality Ratio (Expected Loss / Adjusted NPO) (bps)[3] na 43.7 39.3 39.3 36.7<br />
Tail Risk Ratio (99.9 % Losses / Adjusted NPO) (bps)[3] na 154.2 168.2 179.0 208.6<br />
Hard Capital Ratio (Hard Capital / 99.9 % Losses)(x)[3] na 1.45 1.50 1.57 1.68<br />
Total Capital Ratio(Total Capital / 99.99 % Losses)(x)[3] na 1.42 1.28 1.45 1.54<br />
[1] Adjusted Net Par Outstanding reflects the haircuts assigned to reinsurance provided by non-Aaa reinsurers. [2] Total market share is based on total primary and reinsurance NPO rated by<br />
<strong>Moody's</strong>. [3] These <strong>Moody's</strong> model results are for XLCA and XLFA combined. All results are as of calendar year-end.<br />
Opinion<br />
Credit Strengths<br />
• High quality insured portfolio and well diversified<br />
insured portfolio with nominal liquidity needs<br />
• Strong risk adjusted capitalization<br />
• Steadily building franchise value<br />
• Parent provides explicit and implied support<br />
• Stable earning stream, proven strategy, transparency of<br />
business risks<br />
• Management's commitment to Aaa reflects sensitivity of<br />
franchise to rating<br />
Credit Challenges<br />
• Sensitivity of insurance portfolio to credit cycle and some<br />
large single-name exposures<br />
• Indirect exposures to risks of parent<br />
• Alternatives to financial guaranty and new entrants are<br />
likely to increase competition<br />
• Need to further establish acceptance and trading value in<br />
certain sectors<br />
• Declining issuance and tight credit spreads could hurt<br />
demand for credit enhancement<br />
Rating Rationale<br />
<strong>Moody's</strong> Aaa financial strength rating for XL Financial Assurance<br />
Ltd. (XLFA) is based on the company's conservative<br />
business philosophy and operating strategies, a strong capital<br />
base, and explicit claims paying support provided by its<br />
highly-rated parent company, XL Insurance (Bermuda) Ltd,<br />
which is wholly owned by XL Capital Ltd, a Bermuda based<br />
insurance holding company. XLFA follows detailed surveillance<br />
procedures built around a proactive monitoring and<br />
remediation philosophy that emphasizes early and forceful<br />
intervention. The rating also reflects the high quality of the<br />
company's existing insured portfolio, as well as its ongoing<br />
commitment to reinsure well-priced, investment grade financial<br />
guaranty transactions.<br />
While XL Capital is somewhat new to the financial guaranty<br />
market, it has demonstrated a strong commitment to the<br />
business by establishing two separately capitalized subsidiaries.<br />
XLFA's affiliate company, New York-based XL Capital<br />
Assurance (XLCA), serves as the group's main platform for<br />
originating primary financial guaranty transactions. Pursuant<br />
to an arms-length reinsurance treaty, XLCA cedes up to 90%<br />
of its exposure to XLFA.<br />
Rating Outlook<br />
<strong>Moody's</strong> outlook for XLFA's Aaa rating is stable. Reinsurance<br />
of structured products and international transactions continue<br />
to be the primary business strategy for XLFA. These markets<br />
should continue to provide the company with strong opportunities<br />
for the near future.<br />
The maintenance of <strong>Moody's</strong> Aaa rating over the long term<br />
will be dependent on maintaining strong underwriting discipline<br />
and reasonable exposure limits to avoid the accumulation<br />
of large single risks and correlated exposures. As a newer<br />
entrant to the industry with a smaller capital base relative to<br />
its peers, XLFA must carefully manage its single risk accumulations<br />
on each of its transactions. Substantial rating pressure<br />
at the parent level would likely trigger a rating reassessment<br />
of XLFA.<br />
What Could Change the Rating - DOWN<br />
• Failure to progress toward trading parity with the established<br />
guarantors<br />
• Failure to attain a three-year average operating ROE of<br />
12% over the intermediate term for the combined guaranty<br />
platform<br />
• Hard and total capital ratios falling below 1.3x without<br />
corrective action<br />
• Parent's rating falling below A3<br />
• Extensive diversification in higher risk businesses<br />
Recent Developments/Results<br />
Gross premiums written for the first six months of 2005 were<br />
$119.0 million, about flat relative to the same period during<br />
2004. XLFA's affiliate, XLCA, saw stronger underwriting in<br />
pooled corporate and municipal business; however, the positive<br />
volume impact was offset by tighter credit spreads in the<br />
structured markets. Total shareholder equity on June 30,<br />
2005, including $39 million in redeemable preferred shares<br />
was $645.6 million, up from $452.4 million one year prior.<br />
XL Capital Ltd contributed $125 million to XLFA's balance<br />
sheet in December 2004.<br />
• 183 •
10 Moody’s Corporate Governance Assessment<br />
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Glossaries<br />
• 185 •
PAGE INTENTIONALLY LEFT BLANK
Glossary of Electric Terms<br />
Definitions Guide<br />
Availability Factor<br />
The percentage of time an electric plant is available for use.<br />
Avoided Cost<br />
The price for power established by regulators for use in contracts between utilities and qualifying facilities. The price is based on the fixed<br />
and variable costs of new generating plant.<br />
Baseload<br />
The minimum steady demand over a given time period.<br />
Baseload Plants<br />
Plants built to meet a utility’s minimum steady demand. These plants produce electricity almost all the time.<br />
Break-Even Price for Capacity<br />
The price a utility must charge for each unit of capacity to cover all of its fixed charges after applying all profits or margins from its energy<br />
sales.<br />
Capacity<br />
The amount of energy, measured in kilowatts, that a plant or a system is capable of producing.<br />
Capital Recovery<br />
The recovery of investments in equipment. This encompasses two elements: recovery of capital, which is the original investment, and recovery<br />
on capital, representing the carrying costs of the investment.<br />
Cogeneration<br />
A process in which industrial companies, municipalities, and other organizations use waste heat to produce both electric power, which may<br />
be sold to regulated electric utilities, and steam for industrial use.<br />
Combustion Turbine<br />
Unit A gas-powered electric generating unit that is driven without converting heat into steam.<br />
Curtailment<br />
An interruption in the delivery of electricity. Some companies accept discounts in return for letting the utility cut off electricity to them during<br />
periods of high demand. These arrangements are often called curtailable electric service programs or interruptible service contracts.<br />
Cycling Units<br />
An electric generating unit that is used to follow fluctuations in demand through increases and reductions in the level of output.<br />
Deferrals<br />
Costs that are not recovered from customers at the time at which they are incurred, but that the regulators have deemed prudent and can be<br />
recovered at a later time.<br />
Demand-Side Management (DSM)<br />
Incentive programs employed by a utility to reduce demand. These include time-of-day rates, the sale of energy-efficient appliances, and<br />
interruptible industrial service contracts.<br />
Dispatch<br />
The start-up of a generating unit.<br />
Economic Dispatch<br />
The selection of the least costly combination of power plants and power purchases at a utility’s disposal to satisfy a given demand.<br />
Energy<br />
The actual electricity generated, measured in kilowatt-hours.<br />
Firm Purchases<br />
Purchased generating capacity that is available to the utility on a continuing basis and that can not be reduced by the seller for reasons other<br />
than system reliability.<br />
Flue Gas<br />
A mixture of gases resulting from combustion and other reactions in a combustion device and then channeled through a chimney or stack<br />
into the air.<br />
Flue Gas Desulfurization<br />
The removal of sulfur from flue gas.<br />
Franchise Fee<br />
A payment to a city or county government for the right to install and maintain equipment on public rights-of-way.<br />
Fuel Adjustment Clause<br />
A regulatory mechanism allowing utilities to pass on to electricity users any increases or decreases in fuel cost, with periodic prudency<br />
reviews.<br />
Fuel Mismatch<br />
A price risk created when contractual energy payments are linked to a different fuel than that used by the generating facility.<br />
Heat Rate<br />
The energy, measured in Btus (British thermal units), needed to produce one kilowatt-hour of electricity. The lower the heat rate, the more<br />
efficient the generating facility.<br />
Independent Power Producer (IPP)<br />
A non-utility energy producer that sells electric power to electric utilities and directly to industrial customers.<br />
Load Factor<br />
A utility’s average demand as a percentage of peak demand. Generally, large industrial users have a high and relatively constant load factor,<br />
as plants are kept in operation regardless of season. Residential users generally have a lower, more seasonal load factor.<br />
Municipalization<br />
Establishment by towns and cities of municipal utility districts to take over services previously provided by investor-owned utilities.<br />
Off-System Power Market<br />
The electrical power market outside a utility’s service area.<br />
Peaking Capacity<br />
That portion of a utility’s capacity that is designed for use during periods of peak demand.<br />
• 187 •
Peaking Unit<br />
A plant designed to operate only during periods of peak demand.<br />
<strong>Project</strong> Financing A financing tool for individual construction projects requiring large capital expenditures. Debt service and amortization<br />
come solely from cash flow of the specific project.<br />
Prudency Audit<br />
An audit by a state regulatory commission to evaluate a utility’s investments in new plant and equipment.<br />
Qualifying Facility (QF)<br />
A non-utility power producer or cogenerator that meets specific operating, efficiency, size, and fuel source standards established by the Federal<br />
Energy Regulatory Commission. The Public Utility Regulatory Policies Act of 1978, which established the QF to promote alternative<br />
energy sources, ensured a market for QF power by requiring local utilities to buy power from the QF under long-term contracts.<br />
Rate Base<br />
The value of that part of a utility’s plant and equipment that is in use or that is deemed by regulators to be useful for future public service.<br />
The utility is only allowed recovery of and a return on investments that are allowed into rate base by the regulators.<br />
Rate Order<br />
The decision by the regulator regarding prices, service provisions, capital expenditures, conservation programs, etc.<br />
Rate Phase-in<br />
The recovery of capital expenditures for new plant and/or equipment through a series of gradual rate increases.<br />
Regional Power<br />
Pool An agreement that facilitates economical buying and selling of power among members.<br />
Regulatory Asset<br />
An asset the costs of which have been deferred as part of a plan approved by the regulators.<br />
Regulatory-Out Clause<br />
A clause in the contract between the purchasing utility and a power project that allows the utility to protect itself against the risk that a state<br />
commission will disallow collection from ratepayers of the utility’s capacity and energy payments to the project.<br />
Replacement Power Costs<br />
The costs incurred through buying power from other utilities when a utility’s own plants cannot provide a sufficient level of power to meet<br />
demand, usually due to mechanical failure.<br />
Reserve Margin<br />
The percent difference between peak demand and capacity, including both the company’s own plant capacity and the power available by<br />
contract from other electric utilities. Generally, 15% to 20% reserve is considered adequate in the U.S.<br />
Retail Sales<br />
Sale of energy to end-users, which include four categories of customers: residential, commercial, industrial, and public authorities.<br />
Retail Wheeling<br />
A scheme by which retail customers can contract to purchase power directly from any provider without regard to currently existing service<br />
areas.<br />
Stranded Costs<br />
Costs that will be unrecoverable through rates in a an open market. These may include above-market purchased power contracts and<br />
expensive nuclear plants that produce power at above-market costs.<br />
Wholesale Sales<br />
The sale of energy or capacity to municipal utilities or cogenerators within an investor-owned utility’s service territory.<br />
• 188 •
Selected Glossary of Technical and Banking Terms<br />
Used by permission from Clifford Chance Publications, published 1991.<br />
Amortisation<br />
reduction of loan outstandings, usually in accordance with an agreed repayment schedule<br />
Advance payment guarantee<br />
a guarantee given on behalf of a contractor, for example, under a construction contract, for repayment of advance payments made by the<br />
employer in the event of non-performance by the contractor<br />
Assignment<br />
the transfer of title to an asset — particularly of contractual rights, claims and debts — absolutely for the purposes of security<br />
Bareboat charterparty<br />
a long-term contract for employment and use of a vessel<br />
Bid bond<br />
a bond given on behalf of a party bidding for a contract to ensure that it will enter into and perform the contract if its bid is accepted<br />
BOT (build-operate-transfer)<br />
a structure of project finance whereby the project company will build and operate the project for a period determined to be sufficient to discharge<br />
construction costs and generate a satisfactory return during the operating period, at the end of which the project is handed over to<br />
the host government, usually without compensation<br />
Buyer credit<br />
a financing arrangement under which a bank in the supplier’s county lends to the buyer — or a bank in the buyer’s country — to enable the<br />
buyer to make payments due to the supplier under a contract for supply of goods and/or services<br />
Caps, collars, floors<br />
techniques employed in hedging arrangements to minimize the effects of fluctuations in interest rates<br />
Cash deficiency agreement<br />
an undertaking, usually given by a parent company, to creditors of its subsidiary to ensure that the subsidiary will have sufficient cash to<br />
meet its commitments<br />
Completion<br />
-satisfaction of the agreed tests for practical completion of a project, usually marking the end of the construction phase and the beginning of<br />
the operating phase<br />
Completion guarantee<br />
a guarantee, usually given by a parent company or sponsor, of performance of the project company’s obligations to bring the project to the<br />
point of completion<br />
Concession agreement<br />
an agreement made between a host government and the project company or sponsors to permit the construction, development and operation<br />
of a project and, usually, to have access to public utilities<br />
Conditions precedent<br />
documentary and other conditions required to be satisfied before the borrower can request drawdown or other credit facilities to be made<br />
available under the terms of facility agreement<br />
Covenant<br />
an agreement by a party to perform — or refrain from performing — certain acts, breach or which might constitute an event of default<br />
Cross-default<br />
an event of default triggered by a default in the payment of — or by the actual or potential acceleration of the repayment of — other indebtedness<br />
of the borrower or another company (whether associated or not)<br />
Debt/equity swap<br />
a transaction whereby the owner of a foreign currency debt instrument — usually for developing country debt — exchanges it for local currency-denominated<br />
debt securities or an equity interest in a enterprise in that country<br />
Debt service<br />
the payment of scheduled interest, fees, commissions and principal installments under a loan agreement<br />
Default interest<br />
interest payable under the terms of a loan agreement on overdue amounts, usually at an enhanced rate<br />
Depreciation<br />
the reduction in the value of assets over time<br />
Double tax treaty<br />
an agreement between two countries to avoid or limit the double taxation of income and gains, whereby an investor resident in one country<br />
may apply for reduction of or exemptions from taxes imposed on his business by the other and/or be entitled to relief in respect of such<br />
income or gains in the investor’s own country<br />
Drawdown<br />
a borrowing made under the terms of a loan facility<br />
EBRD<br />
the European Investment Bank for Reconstruction and Development<br />
EIB<br />
the European Investment Bank<br />
Equity<br />
a company’s paid-up share capital and other shareholders’ funds, possibly including long-term subordinated loans<br />
Escrow accounts<br />
accounts into which a borrower or other party may be required to direct payment of receivables or other cash, and to which conditions<br />
apply restricting access to the funds; possibly charged in favor of the lenders<br />
Event of default<br />
an event which under the terms of a loan agreement entitles the lender to cancel the loan facility, accelerate payment of outstanding and<br />
enforce security (such as breach of covenant, insolvency, material adverse change)<br />
Expropriation<br />
the dispossession of assets by the state or a state entity, for example, under nationalisation programme.<br />
• 189 •
Export credits<br />
credit or guarantee facilities made available to exporters to promote the manufacture of goods or provision of services for export<br />
Feedstock<br />
the supply of raw materials, for example, crude oil, to a processing or refining plant<br />
<strong>Finance</strong> lease<br />
a financing device whereby possession of an asset is acquired for use for most of its useful life; rentals over the term of the lease are sufficient<br />
to enable the lessor to recover the cost of the asset plus a return on the investment<br />
Floating charge<br />
(England and Wales) a security interest created over the assets and undertaking of a company, including future property, whereby the company<br />
retains the right to deal with the charged assets in the ordinary course of its business<br />
Force majeure<br />
risks arising from circumstances, generally outside the control of the parties, which entitle one or other party to refrain from performing its<br />
contractual obligations<br />
Forward purchase<br />
a financing structure whereby one party purchases agreed quantities of future production and/or cash proceeds from the project company,<br />
sufficient to produce a return to the purchaser of the purchase price plus an amount equivalent to interest<br />
Full recourse<br />
a (conventional) financing structure where the borrower — and possibly guarantors — undertake to be responsible for repaying the loan in<br />
full with interest, regardless of the success or failure of the project<br />
Golden share<br />
a shareholding interest entitling the holder to exercise a degree of control over certain activities of the company or over the transferability of<br />
its shares, usually retained, for example, by a state entity in a newly privatized enterprise<br />
Governing law<br />
the system of law to which the terms and conditions of a contract are subject, either expressly or by operation of the rules of conflict of laws<br />
Gross-up clause<br />
a clause providing for a debtor to make additional payments to the creditor to compensate for withholding taxes or other levies which<br />
reduce the amounts actually received by the creditor<br />
Hell-or-high water provision<br />
provisions which state an unconditional obligation regardless of any event affecting the transaction<br />
IBRD<br />
The International Bank for Reconstruction and Development (the World Bank)<br />
IFC<br />
the International <strong>Finance</strong> Corporation, the private sector lending agency of the World Bank<br />
Indemnity<br />
an undertaking to protect a person against the consequences of particular circumstances, in particular, for any financial loss<br />
Joint and several liability<br />
liability, for example, under a guarantee given by two or more guarantors, which gives rise to one joint obligation and to as many several<br />
obligations as there are obligors, so that each is liable for the payment of the full amount, but performance by one discharges the other<br />
Jurisdiction clause<br />
a clause whereby one or more parties expressly submit to the jurisdiction of specified courts and, commonly, waive any sovereign or other<br />
immunities it or they may have<br />
Lender liability<br />
liabilities which may be imposed on lenders as a result of action (or failure to act) on their part, for example, failing to honor a commitment<br />
to make a loan<br />
Licence<br />
an authority issued by a state or state entity, for example, to explore for or produce hydrocarbons or minerals in a particular area<br />
Limited recourse<br />
a financing structure in which the lender is relying to some degree on the project assets and cash flows for repayment and debt service without<br />
full guarantees from the project company or its sponsors<br />
Margin<br />
the extra percentage rate of interest charged above the relevant basis rate, for example, Libor or Prime rate, in a floating interest rate loan<br />
Material adverse change<br />
an event of default designed to permit acceleration in the event of changes in circumstances which might affect the successful completion<br />
of the project, performance of covenants or repayment of the loan<br />
Negative pledge<br />
a covenant whereby a borrower and/or guarantor will undertake not to create or allow the creation of encumbrances on its assets<br />
Non-recourse<br />
meaning the same as “limited recourse”, sometimes used to indicate that the lender is placing a particularly high degree of reliance in the<br />
project<br />
NPV (net present value)<br />
an estimate of cash flows or the value of production to be generated by a project, net of operating costs and expenses, discounted back to<br />
the time of determination<br />
Off-balance-sheet liability<br />
a corporate obligation that does not appear as a liability on the company’s balance sheet, for example, lease obligations and take-or-pay<br />
contracts<br />
Off-take agreement<br />
a long-term agreement to purchase minimum amounts of the product of a project, at an agreed price; often entered into by one of the<br />
project sponsors on a take-or-pay basis<br />
Operating lease<br />
a lease which is not a finance lease — perhaps a short-term lease whereby the lessee uses the asset for only a fraction of its useful life<br />
Pari-passu clause<br />
a covenant whereby the borrower and/or guarantor agrees to ensure that its indebtedness under the loan facility shall rank at least equally<br />
with all its other unsecured debt, subject to debts preferred by operation of law, for example, certain taxes and wages<br />
• 190 •
Participation agreement<br />
an agreement whereby one bank agrees to fund all or part of another bank’s loan on terms that the other bank will have to repay the funding<br />
only if, and to the extent that, it receives repayment from the borrower<br />
Performance bond<br />
a bond or guarantee given by a bank in favour of a project company on behalf of a contractor or supplier of a specified percentage of the<br />
value of the relevant contract, for example, construction contract or supply agreement<br />
Pro-rata sharing clause<br />
a clause in a loan or intercreditor agreement whereby banks agree to share amongst themselves amounts received or recovered from the<br />
borrower and/or guarantors pro rata to their participation in the financing<br />
Production payment<br />
a financing structure whereby one party purchases an undivided share in the minerals, hydrocarbons or production of the project company<br />
in return for periodic production payments by the project company in the production phase of the project<br />
Promissory note<br />
an unconditional promise in writing, signed by the debtor, undertaking to pay a specific sum on demand or at a future date<br />
Put-or-pay agreement<br />
an agreement whereby a supplier undertakes to supply an agreed quantity of materials to the project company and to make payments sufficient<br />
to enable the company to obtain alternative supplies in the event of the supplier’s failure; often entered into by a project sponsor<br />
Representations<br />
a series of statements of fact and/or law made by one party to an agreement on the basis of which the other party undertakes to enter into<br />
the agreement; some or all of the representations may be repeated - or deemed repeated - periodically during the life of the agreement;<br />
material inaccuracies will normally constitute an event of default<br />
Royalty<br />
a share of the production or revenues reserved by the grantor of a licence, for example, to exploit hydrocarbons or minerals<br />
Set-off clause<br />
a clause permitting one party (eg, a bank or the agent) to set-off any cash deposits made with it by another (eg, the borrower or guarantor)<br />
against amounts owing to it under the loan agreement<br />
Sovereign immunity<br />
the doctrine under which it may be impossible to sue or seize the assets of a state or state entity<br />
SPV (special purpose vehicle)<br />
a company established for a particular purpose, for example, to achieve off-balance sheet or advantageous tax treatment or to isolate the<br />
parent’s other assets from the creditors of the vehicle<br />
Standby letter of credit<br />
a letter of credit issued by a bank as a form of guarantee, entitling the beneficiary to make a drawing upon presentation of a certificate of<br />
non-payment under the guaranteed facility<br />
Subordinated loan<br />
a loan made on terms whereby the lender agrees that some or all payment obligations will rank behind certain other unsecured indebtedness<br />
of the borrower<br />
Supplier credit<br />
a financing arrangement under which the supplier agrees to accept deferred payment terms from the buyer and funds itself by discounting or<br />
selling the buyer’s bill or promissory notes with a bank in its own country<br />
Supply-or-pay agreement<br />
see “put-or-pay agreement” above<br />
Swap<br />
the exchanging of one debt, currency or interest rate for another<br />
Syndicated loan<br />
a loan made available by a group of banks in pre-defined proportions under the same credit facility<br />
Take-and-pay contract<br />
an agreement between a purchaser and a seller whereby the purchaser’s obligation to make payments, normally, arises only if the product or<br />
service is actually tendered (sometimes used to mean the same as take-or-pay)<br />
Take-or-pay contract<br />
an agreement between a purchaser and a seller whereby the purchaser agrees to pay specified amounts periodically in return for products or<br />
services even if there is no delivery of the products or performance of the services<br />
Throughput agreement<br />
an agreement whereby the user of a facility — such as a pipeline — undertakes to the pipeline owner to pass minimum amounts of, say, oil<br />
or gas through the pipeline and to pay throughput fees sufficient to cover the owner’s costs and debt service obligations<br />
Tolling agreement<br />
an agreement whereby the user of a facility — such as a smelter or refinery — undertakes to the facility owner to supply minimum amounts<br />
of raw materials for processing at the facility and to pay tolling fees sufficient to cover the owner’s costs and debt service obligations; the<br />
user might be obliged to pay a capacity reservation fee even where nothing is put through the facility<br />
Turnkey contract<br />
a contract for the construction of a project and installation of all facilities, providing for the project to be handed over at the point where it<br />
is ready for immediate operation<br />
Unitisation agreement<br />
an agreement entered into where a field to be developed is covered by more than one licence with, as a result, different parties being<br />
involved; the licensees’ interests are unitised to reflect their interest in all the licences covering the field<br />
Withholding tax<br />
tax deductible at source from interest, fees, commissions or dividends<br />
Working capital maintenance<br />
an undertaking, usually given by a parent company, to creditors of its agreement subsidiary to ensure that the subsidiary has sufficient working<br />
capital to meet its commitments in accordance with the project and finance documents<br />
• 191 •
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Alphabetical Index of<br />
Credit Opinions<br />
• 193 •
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Index of <strong>Project</strong> & <strong>Infrastructure</strong> <strong>Finance</strong> Credit Opinions<br />
Page<br />
3 Aeroporti di Roma S.p.A.<br />
4 AES Eastern Energy, L.P.<br />
5 AES Corporation, (The)<br />
6 AES Ironwood, L.L.C.<br />
7 AES Puerto Rico, L.P.<br />
8 AES Red Oak, L.L.C.<br />
9 Allegheny Energy Supply Company, LLC<br />
10 Alliance Pipeline L.P.<br />
11 Alliance Pipeline Limited Partnership<br />
12 AmerenEnergy Generating Company<br />
13 American Ref-fuel Company LLC<br />
14 ANA - Aeroportos de Portugal, S.A.<br />
15 Aruba Airport Authority N.V.<br />
16 Australia Pacific Airports (Melbourne) Pty<br />
17 Autopista del Mayab<br />
18 Autopista Del Sol<br />
19 Autostrade S.p.A.<br />
20 BAA plc<br />
21 Bina-Istra d.d.<br />
22 Borger Energy Associates, L.P.<br />
23 Brilliant Power Corporation<br />
24 Brisa-Auto-Estradas de Portugal, S.A.<br />
25 Brooklyn Navy Yard Cogeneration Partners L.P.<br />
26 Caithness Coso Funding Corp.<br />
27 California Petroleum Transport Corporation<br />
28 CE Casecnan Water and Energy Company, Inc.<br />
29 CE Generation LLC.<br />
30 Cedar Brakes I, L.L.C.<br />
31 Cedar Brakes II, L.L.C.<br />
32 Cerro Negro <strong>Finance</strong>, Ltd.<br />
33 Choctaw Generation Limited Partnership<br />
34 Cleco Evangeline LLC<br />
35 CMS Energy Corporation<br />
36 Cogentrix Energy, Inc.<br />
37 Coleto Creek WLE, LP<br />
38 Colowyo Coal Funding Corp.<br />
39 Compania Nationala de Cai Ferate CFR S.A.<br />
40 Conproca, S.A. de C.V.<br />
41 Constructora Intl de Infraestructura<br />
42 Deer Park Refining Limited Partnership<br />
43 Derby Healthcare plc<br />
44 DFS Deutsche Flugsicherung GmbH<br />
45 East Coast Power L.L.C.<br />
46 Edison Mission Energy<br />
47 Edison Mission Energy Funding Corporation<br />
48 EES Coke Battery Company, Inc.<br />
49 El Habal Funding Trust<br />
50 Ellenbrook Developments plc<br />
51 Elwood Energy LLC<br />
52 Empresa Eléctrica Guacolda S.A.<br />
53 ESI Tractebel Acquisition Corp.<br />
54 ESI Tractebel Funding Corporation<br />
55 Excel Paralubes Funding Corporation<br />
56 Exelon Generation Company, LLC<br />
57 Express Pipeline Limited Partnership<br />
58 Fertinitro <strong>Finance</strong> Inc.<br />
59 Fideicomiso Petacalco<br />
60 FPL Energy American Wind, LLC<br />
61 FPL Energy National Wind, LLC<br />
62 FPL Energy Virginia Funding Corporation<br />
63 GH Water Supply (Holdings) Limited<br />
Page<br />
64 Golden State Petroleum Transport Corporation<br />
65 Greater Toronto Airports Authority<br />
66 Hamaca Holding LLC<br />
67 Homer City Funding LLC<br />
68 Hospital Company (Dartford) Issuer Plc (The)<br />
69 HOVENSA L.L.C.<br />
70 Husky Terra Nova <strong>Finance</strong> Ltd.<br />
71 Hutchison Ports (UK) Limited<br />
72 Indiantown Cogeneration, L.P.<br />
73 Inmobiliaria Fumisa, S.A. de C.V.<br />
74 Interlink Roads Pty Ltd<br />
75 International Power plc<br />
76 Iroquois Gas Transmission System, L.P.<br />
77 Juniper Generation, L.L.C.<br />
78 Kern River Funding Corporation<br />
79 Kincaid Generation, L.L.C.<br />
80 Lane Cove Tunnel <strong>Finance</strong> Company<br />
81 LS Power Funding Corporation<br />
82 LSP Energy Limited Partnership<br />
83 Machadinho Energética S.A. - MAESA<br />
84 Merey Sweeny Coker <strong>Project</strong><br />
85 Metronet Rail BCV <strong>Finance</strong> Plc<br />
86 Metronet Rail SSL <strong>Finance</strong> Plc<br />
87 MidAmerican Energy Holding Co.<br />
88 Monterrey Power, S.A. de C.V.<br />
89 N.V. Luchthaven Schiphol<br />
90 NATS (En Route) PLC<br />
91 NAV CANADA<br />
92 Orange Cogen Funding Corporation<br />
93 Octagon Healthcare Funding plc<br />
94 Phoenix Park Gas Processors Limited<br />
95 Petrozuata <strong>Finance</strong> Inc.<br />
96 Power Receivable <strong>Finance</strong>, LLC<br />
97 PPL Montana, LLC<br />
98 Proyectos de Energia, S.A. de C.V.<br />
99 PSEG Power L.L.C.<br />
100 Quezon Power (Philippines), Limited Co.<br />
101 Ras Laffan Liquefied Natural Gas Company Ltd.<br />
102 Rede Ferroviaria Nacional-REFER, E.P.<br />
103 Reliant Energy Mid-Atlantic Power Hldgs., LLC<br />
104 Rutas del Pacifico<br />
105 Salton Sea Funding Corporation<br />
106 SCL Terminal Aéreo Santiago S.A.<br />
107 Selkirk Cogen Funding Corporation<br />
108 Sincrudos de Oriente SINCOR C.A.<br />
109 Sithe/Independence Funding Corporation<br />
110 Sociedad Concesionaria Central<br />
111 Sociedad Concesionaria Costanera Norte S.A.<br />
112 Sociedad Concesionaria Vespucio Norte Express S.A.<br />
113 Southern Power Company<br />
114 Sutton Bridge Financing Limited<br />
115 Tenaska Alabama II Partners, L.P.<br />
116 Tenaska Georgia Partners, L.P.<br />
117 Tenaska Virginia Partners, L.P.<br />
118 Tenaska Washington Partners, L.P.<br />
119 Tietê Certificates Grantor Trust<br />
120 Transurban <strong>Finance</strong> Company Pty Ltd<br />
121 Utility Contract Funding, L.L.C.<br />
122 Westralia Airports Corporation PTY Limited<br />
123 Windsor Petroleum Transport Corporation<br />
• 195 •
Page<br />
Index of Governments, Supranationals, Financial Guarantors, &<br />
<strong>Project</strong> Developers Credit Opinions<br />
127 Ambac Assurance Corporation<br />
128 Ambac Financial Group, Inc.<br />
129 Argentina<br />
130 Asian Development Bank<br />
131 Australia<br />
132 Belgium<br />
133 Buenos Aires, City of<br />
134 Buenos Aires, Province of<br />
135 Canada<br />
136 Cayman Islands<br />
137 Chile<br />
138 China<br />
139 CIFG Assurance North America, Inc.<br />
140 CIFG Europe<br />
141 CIFG Guaranty<br />
142 Colombia<br />
143 Council of Europe Development Bank<br />
144 Czech Republic<br />
145 Dominican Republic<br />
146 Ecuador<br />
147 El Salvador<br />
148 European Bank for Reconstruction & Development<br />
149 European Investment Bank<br />
150 Export <strong>Finance</strong> and Insurance Corporation<br />
151 FGIC Corporation<br />
152 Financial Guaranty Insurance Company<br />
153 Financial Security Assurance Holdings Ltd.<br />
154 Financial Security Assurance Inc.<br />
155 France<br />
Page<br />
156 Hong Kong<br />
157 IBRD (World Bank)<br />
158 India<br />
159 Indonesia<br />
160 Inter-American Development Bank<br />
161 International <strong>Finance</strong> Corporation<br />
162 Israel<br />
163 Italy<br />
164 Kuwait<br />
165 MBIA Inc.<br />
166 MBIA Insurance Corporation<br />
167 México<br />
168 Norway<br />
169 Oman<br />
170 Panama<br />
171 Philippines<br />
172 Poland<br />
173 Portugal<br />
174 Qatar<br />
175 Rio de Janeiro, City of<br />
176 Spain<br />
177 Thailand<br />
178 Trinidad & Tobago<br />
179 United Kingdom<br />
180 United States of America<br />
181 Venezuela<br />
182 XL Capital Assurance Inc.<br />
183 XL Financial Assurance Ltd.<br />
• 196 •
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