Credit Opinion: GDF SUEZ SAGlobal Credit Research - 16 Jun 2015
Category Moody's Rating
Issuer Rating A1
Senior Unsecured A1
Subordinate MTN -Dom Curr (P)A2
Commercial Paper P-1
Other Short Term -Dom Curr (P)P-1
GDF SUEZ CC
Issuer Rating A3
GDF SUEZ Invest International S.A.
Issuer Rating -Dom Curr A2
Issuer Rating -Dom Curr A3 Other Short Term -Dom Curr (P)P-2
GIE GDF SUEZ Alliance
Issuer Rating A1
Senior Unsecured -Dom Curr A1
ST Issuer Rating P-1 Contacts Analyst Phone Paul Marty/London 44.20.7772.5454 Helen Francis/London Monica Merli/London Key Indicators GDF SUEZ SA 12/31/2014 12/31/2013 12/31/2012 12/31/2011 12/31/2010
(CFO Pre-W/C + Interest) / Interest 6.7x 6.2x 5.4x 4.8x 5.6x
(CFO Pre-W/C) / Net Debt 20.9% 26.2% 22.8% 25.2% 25.5%
RCF / Net Debt 12.9% 15.5% 19.2% 17.0% 17.0%
 All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Non-Financial Metrics
Opinion Rating Drivers
- Scale and diversity support cash flow stability
- Business mix and hedging policy moderate commodity risk
- Conservative financial risk profile
- Ownership by the French government provides rating uplift
With consolidated revenues of EUR74.7 billion and EBITDA of EUR12.1 billion in 2014, GDF SUEZ SA ("GDF SUEZ"), whose commercial name is now ENGIE, is one of the largest European integrated utilities. It is also one of the most diversified, with substantial assets along the energy value chain, both in Europe and further afield, as well as in energy services. The group is currently organized along five business lines: Energy International (30% of 2014 EBITDA), Energy Europe (16%), Global Gas & LNG (18%), Infrastructures (26%) and Energy Services (9%).
The group is listed on Euronext Paris with a market capitalization of approximately EUR 42 billion. It is 33.3% owned by the French government (Aa1 negative).
SUMMARY RATING RATIONALE
GDF SUEZ's A1/Prime-1 ratings are based on its scale and diversity which is reflected in leading business positions across the energy value chain in many different markets. These help limit earnings volatility and should continue to underpin EBITDA against a backdrop of weak power generation markets in Europe. From a financial risk perspective, the A1 rating factors in the group's conservative financial policy. Our current guidance for the a2 standalone credit quality includes FFO/net debt in the mid twenties in percentage terms and RCF/net debt in the upper teens in percentage terms, vs. actual ratios of 21% and 13%, respectively, as of 31 December 2014.
Finally, the A1 rating incorporates one notch of rating uplift given the French government's 33.3% ownership.
DETAILED RATING CONSIDERATIONS
SCALE AND DIVERSITY SUPPORT CASH FLOW STABILITY
GDF SUEZ's ratings factor in its scale (total assets were EUR165 billion at year-end 2014) and diversity by geography, asset type and business. These characteristics should continue to moderate earnings volatility and support the relative stability of its cash flows which, combined with a consistent financial policy and active management of the balance sheet, has been reflected in relatively stable credit metrics.
The A1 rating reflects GDF SUEZ's geographical diversification: at year-end 2014, the group's installed generation capacity of 81 GW (net, on a proportionate basis) was spread across Europe (50%), North America (14%), Latin America (14%), Middle-East, Turkey and Africa (10%), Asia (8%) and Oceania (5%). The scale of its position beyond Europe has left it less exposed than many of its peers to the adverse effects of the structural changes which are underway in European energy markets.
In addition to geographical reach, the A1 rating takes account of (1) the size and granularity of the generation asset base, which helps absorb adverse operational developments, such as local changes to market frameworks or the impact of unusual weather conditions across the portfolio; and (2) the diversification implied by the group's strong position in domestic gas supply, and its well-established and substantial Global Gas & LNG, Infrastructures and Energy Services businesses.
BUSINESS MIX AND HEDGING POLICY MODERATE COMMODITY RISK
The A1 rating reflects that commodity risk is moderated by the substantial contribution from contracted or regulated activities, which we estimate accounted for approximately 60% of 2014 EBITDA. Contracted/regulated businesses cover a range of risks, but we view their growing contribution as credit positive overall because it dampens commodity-related volatility.
They include (1) regulated transmission, distribution and LNG terminals in France with a combined RAB of EUR23 billion; (2) Energy Services, whose portfolio of service and maintenance contracts has underpinned steady and growing annual EBITDA generation of more than EUR1 billion; (3) the group's regulated French gas supply business where, notwithstanding a declining 42% share in commercial/industrial clients, it retains a 80% share of households at year-end 2014; and (4) a substantial share of Energy International's generation earnings, whose commodity risk is mitigated by power purchase agreements. Although each is different, these are generally characterised by lengthy tenors, minimum contractually agreed revenue streams, fuel costs hedged by cost pass through mechanisms and protection against inflation.
The rating factors in that remaining commodity risk is reduced by the group's hedging policy and integrated business model: (1) GDF SUEZ sells forward a substantial proportion of its European power output on a three year rolling basis: generally 90% in the first year, 60% in the second year and 30% in the third year; (2) the diversity of the group's 1,296 TWh gas procurement and downstream supply portfolios, as well as the flexibility created by its LNG fleet, allow to mitigate its exposure to the gas-oil spread risk; (3) within individual markets, a diversified fuel mix can also mitigate risk - the group's 81 GW net installed generation capacity comprises natural gas (50%), hydro (18%), coal (16%), nuclear (7%) and wind (3%).
We expect the shift in business mix to continue gradually over the next 2-3 years up to around 65% of EBITDA from contracted/regulated activities, thanks in part to capital allocation but also because of weaker earnings from Energy Europe.
CONSERVATIVE FINANCIAL RISK PROFILE
The A1 rating reflects the group's conservative financial policy, as demonstrated by the various steps taken to restore financial flexibility following the IPR minority buy-out in June 2012 (e.g. asset disposals, hybrid issuance, etc.) as well as, more recently, the launch of a "quick reaction plan" over 2015-16 to mitigate the adverse effect of lower commodity prices.
We note that the group is guiding to a 2015 EBITDA in a range of EUR11.55 to EUR12.15 billion, reflecting low commodity prices, nuclear outages in Belgium, unfavorable weather conditions in Brazil, and more generally an ongoing challenging operating environment in the Energy Europe division. Given planned annual average capex (net of disposals) of EUR6-7 billion, we expect that GDF SUEZ's key credit metrics will remain broadly stable in 2015 compared with funds from operations (FFO) / net debt around 21% and retained cash flow (RCF) / net debt around 13% at year-end 2014.
These ratios are below our guidance for the current a2 stand alone credit quality, which includes FFO / net debt in the mid twenties in percentage terms and RCF / net debt in the upper teens in percentage terms. The negative outlook thus reflects the challenge that GDF SUEZ faces to strengthen those in the absence of an improvement in operating conditions or additional measures to improve the group's financial flexibility.
OWNERSHIP BY THE FRENCH GOVERNMENT PROVIDES RATING UPLIFT
Given the 33.3% stake held by the French government (Aa1 negative), GDF SUEZ is considered a Government-Related Issuer (GRI) under Moody's methodology. Accordingly, and based on our estimate of strong support in case of financial distress, the A1 rating factors in one notch of uplift from the group's standalone credit quality or Baseline Credit Assessment ("BCA") of a2.
GDF SUEZ's strong liquidity position is supported by EUR9.3 billion of available cash and a total of EUR13.3 billion of undrawn confirmed covenant-free credit facilities at 31 December 2014. These include a EUR4.5 billion five-year syndicated loan facility maturing in March 2018 and a EUR5.0 billion five-year syndicated facility maturing in April 2020. We believe that, together with strong cash generation, these sources are sufficient to finance the group's debt maturities (EUR9.1 billion in 2015 including EUR5.2 billion of commercial paper), capex and expected dividend payments over the next 18 months.
The negative outlook reflects the risk that credit metrics could stay below our guidance beyond 2015 in the absence of an improvement in operational performance and/or some recovery in commodity and power prices.
Given the current negative outlook, upward rating pressure is unlikely to arise in the medium term. The outlook could be returned to stable provided that credit metrics strengthen in line with our guidance for the A1 rating.
What Could Change the Rating - Down
The ratings could be downgraded (1) if credit metrics fail to recover to levels commensurate with our guidance for the current a2 BCA, including FFO / net debt in the mid twenties in percentage terms and RCF / net debt in the upper teens in percentage terms; or (2) if a change in the group's relationship with the government were to cause us to remove the uplift for potential extraordinary government support, or if there were to be a significant
downgrade of France's government rating.
Rating Factors GDF SUEZ SA
Unregulated Utilities and Unregulated Power
Companies Industry Grid 
Current FY 12/31/2014
Moody's 12-18 Month
Forward ViewAs of June 2015 Factor 1 : Scale (10%) Measure Score Measure Score
a) Scale (USD Billion) 200 Aaa >100 Aaa
Factor 2 : Business Profile (40%) a) Market Diversification Aaa Aaa b) Hedging and Integration Impact on Cash
c) Market Framework & Positioning A A d) Capital Requirements and Operational
e) Business Mix Impact on Cash Flow Predictability
Factor 3 : Financial Policy (10%) a) Financial Policy Baa Baa
Factor 4 : Leverage and Coverage (40%) a) (CFO Pre-W/C + Interest) / Interest (3
6.0x Baa 6.0x - 7.0x Baa
b) (CFO Pre-W/C) / Net Debt (3 Year Avg) 23.2% Baa 20% - 22% Baa c) RCF / Net Debt (3 Year Avg) 16.1% Baa 13% - 15% Ba
Rating: a) Indicated Rating from Grid A2 A3 b) Baseline Credit Assessment (BCA) a2 a2
Government-Related Issuer Factor
a) Baseline Credit Assessment (BCA) a2 b) Government Local Currency Rating Aa1 c) Default Dependence Moderate d) Support Strong e) Final Rating Outcome A1
 All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.  As of 12/31/2014; Source: Moody's Non-Financial Metrics  This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures
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