DBRS Confirms Coca-Cola Enterprises Inc. at “A” and R-1 (low) with a Stable Trend

DBRS has today confirmed the Senior Unsecured Debt rating of Coca-Cola Enterprises Inc. (CCE or the Company) at “A” and its Commercial Paper at R-1 (low). The trends are Stable.

CCE’s earnings growth has been challenged by continued softness in carbonated soft drink (CSD) consumption, rising input and energy costs and, more recently, the additional pressure from macroeconomic weakness, especially in the United States. Although these pressures have resulted in CCE revising its F2008 earnings guidance downward on October 23, 2008, DBRS believes the Company continues to remain well placed in its rating category. DBRS’s view is based on CCE’s position as the largest bottler and distributor of The Coca-Cola Company (Coke), the continued strength of Coke’s brand and portfolio of products and the overall health of the Coke system (i.e., Coke and its four largest bottlers), whose overall leverage remains relatively stable.

CCE realized a modest increase in operating earnings in F2007 as the Company relied more heavily on pricing to offset the continued impact of rising commodity costs and weaker global volumes. In F2008, however, the associated revenue gains from new still brands, combined with further pricing increases, have not been enough to offset the effects of a more pronounced decline in North American sparkling volumes (especially in the higher-margin immediate-consumption channel) and even higher costs (fuel in addition to commodities). Operating earnings before non-recurring items were 6.2% lower year over year (YOY) for the nine months ended September 26, 2008. DBRS notes that year-to-date (YTD) net income was further affected by the Company’s Q2 2008 $5.3 billion non-cash writedown of its North American Franchise Licence intangible assets to fair market value (see the DBRS press release dated July 17, 2008).

Given the expectation of continued softness in the immediate consumption channel (i.e., in the United States), reduced demand (i.e., volumes) due to the effects of further price increases, an expected high single-digit increase in CCE’s concentrate costs in H2 2008 and a $35 million reduction in funding from Coke, CCE now expects full-year F2008 operating earnings to decline by 10% YOY compared with a high single-digit decline announced at the end of Q2 2008. Although the potential decline in earnings at CCE is noteworthy, DBRS does not consider it sufficient to result in any ratings pressure for the Company. While some margin relief may come from lower oil prices and a cooling of commodity markets, DBRS believes the economic environment will remain weak in F2009, thus limiting any material growth in operating earnings in the near term.

CCE continues to be managed in a financially prudent manner. As expected, the Company did not complete any share repurchases in F2007 and made no major acquisitions, allowing CCE to apply the majority of its free cash flow to debt reduction. The Company reduced debt by $817 million in F2007 to $9.4 billion. Although cash flow from operations will be lower in F2008 (DBRS estimates $1.6 billion compared with $1.8 billion in F2007), DBRS expects CCE will still generate at least $500 million in free cash flow that should be applied to debt reduction rather than to share repurchases.

DBRS notes that the ratings for CCE continue to be implicitly supported by (1) the strength of Coke and (2) the overall health of the Coke system. Coke (rated AA (low) – see the link below for the Coke press release released October 28, 2008, confirming the ratings) continues to demonstrate improving performance due to the strength of the Company’s brand portfolio, geographic diversification and performance in high-growth international markets. As well, DBRS notes that financial leverage of the Coke system remains relatively stable, with debt-to-EBITDA of 1.72 times (x) at year-end 2007 compared with 1.63x at year-end 2006 and 1.78x at year-end 2005.

With the risk profile of the Coke system intact, DBRS believes the expected decline in CCE’s near-term performance is not material to the ratings. A decline in the overall performance of the Coke system or material debt-financed acquisitions or share repurchases that result in a meaningful increase in leverage for the Coke system could, however, result in pressure on all of the ratings. As well, DBRS notes that a continued decline in CCE’s individual performance, which could materially affect the Company's financial flexibility, could potentially result in pressure on CCE’s individual ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Coca-Cola Enterprises Inc. fully guarantees debt issued by Coca-Cola Enterprises (Canada) Bottling Finance.