DBRS Comments on Coca-Cola Enterprises Inc.’s $5.3 Billion Non-Cash Write-Down

DBRS notes today that its ratings and trends on Coca Cola Enterprises Inc. (CCE or the Company) and The Coca-Cola Company (Coke) are unchanged following CCE’s announcement that it has recorded a $5.3 billion non-cash impairment charge to reduce the value of the Company’s North American franchise licence intangibles. The Senior Unsecured Debt ratings for CCE and Coke are A and AA (low), respectively and the Commercial Paper ratings are R-1 (low) and R-1 (middle), respectively. The trends are Stable.

The write-down is the result of CCE’s annual impairment analysis in accordance with SFAS No.142 and reflects an expected decline in near-term operating income resulting largely from weaker-than-expected economic conditions in North America and a continued increase in commodity costs. CCE recorded a similar write-down in February 2007 in the amount of $2.9 billion. DBRS believes the ratings continue to be supported by the continued strength of the business profile and financial metrics of the overall Coke system (Coca-Cola Company together with its key bottlers – CCE, Hellenic, FEMSA and Amatil) and therefore the ratings remain unaffected by today’s announcement or the expectation of lower earnings at CCE in the near term.

For the six months ended June 27, 2008, CCE has seen operating earnings (before impairment charges) decline 7.3% year-over-year due mainly to weakness in North American volumes (especially carbonated soft drinks (CSDs) and water in the immediate consumption category) and a continued increase in commodity costs. The Company expects these pressures will continue to affect earnings in the near term and now expects a low-single digit decrease in F2008 operating earnings. Despite the expectation of lower earnings in the near term, DBRS believes CCE will continue to generate sufficient free cash flow (approximately $675 million for F2008) to continue reducing debt. Additionally DBRS believes the Company will restrict share repurchases until the operating environment shows increased stability, thus allowing the Company to maintain a relatively stable financial risk profile in the near term.

To counter current headwinds, the Company plans on implementing further price increases (focused on the future-consumption category). The Company will also attempt to recruit new immediate consumption consumers, reduce operating expenses and strengthen execution. Completion of the Company’s planned 120-day business review should provide more detail on these longer-term initiatives that will depend on the continued support of Coke.

CCE’s business profile and ratings remain implicitly supported by the strength of Coke, which continues to generate improved operating performance. For the six months ended June 27, 2008, Coke displayed solid volume growth of 4%, revenue growth of 19% and operating income growth of 17%. Strong performance continues to be driven by Coke’s improving geographic diversification, marked by strong growth in Asia, Latin America, Eurasia and the Pacific regions. Strong overall operating performance combined with steady and significant debt reduction at the key bottling companies has benefited the financial profile of the Coke system as a whole. CCE’s bottling and distribution represents approximately 19% of Coke’s global beverage volume. Coca-Cola Company owns approximately 35% of CCE’s common stock and in DBRS’s view it is unlikely that it would let a key bottler fail. Thus, while The Coca-Cola Company does not guarantee CCE’s debt, the bottler network is critical to Coke’s success.

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