German Utility RWE Downgraded To 'BBB-/A-3'; Outlook Negative

Transcription

1 Research Update: German Utility RWE Downgraded To 'BBB-/A-3'; Outlook Negative Primary Credit Analyst: Vittoria Ferraris, Milan (39) ; Secondary Contact: Tobias Buechler, CFA, Frankfurt +49 (0) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 13,

2 Research Update: German Utility RWE Downgraded To 'BBB-/A-3'; Outlook Negative Overview The German nuclear commission has released its recommendation that German utilities contribute to funding of nuclear waste provisions, resulting in an obligation for RWE to contribute approximately 6.5 billion. We think the targeted IPO of RWE's downstream business marks the start of dilution in cash flows coming from assets with stable earnings generation. We are consequently lowering our ratings on RWE to 'BBB-/A-3' from 'BBB/A-2' and removing the ratings from CreditWatch negative. The negative outlook reflects both the execution risks linked to the IPO of RWE's downstream business and the uncertainties on the terms of the nuclear commission's nuclear waste obligations' settlement. Rating Action On June 13, 2016, S&P Global Ratings lowered to 'BBB-/A-3' from 'BBB/A-2' its long- and short-term corporate credit ratings on German utility RWE AG and its subsidiaries Essent N.V. and Essent Nederland B.V. The outlook is negative. At the same time, we lowered our issue ratings on RWE's senior unsecured debt to 'BBB-' from 'BBB', its junior subordinated debt to 'BB' from 'BB+', and its commercial paper to 'A-3' from 'A-2'. We also removed all the ratings from CreditWatch with negative implications, where we placed them on Feb. 26, Rationale The downgrade reflects our downward revision of our assessment of RWE's business risk profile to satisfactory from strong. The weaker business risk profile incorporates our view of the decreasing profitability of RWE's operations despite its efforts to mitigate adverse market conditions with cost cuts. In addition, although we regard the IPO of RWE's downstream business as supportive for the group's financial flexibility, it will also likely dilute future cash flows from assets characterized by stable and visible earnings. We expect to continue to analyze the group on a consolidated basis over our three-year rating horizon. We acknowledge, however, that if necessary the downstream business, post IPO, could be managed as a financial asset by RWE rather than as an operating subsidiary over the longer term. In such circumstances, we think that RWE would increasingly focus on its generation JUNE 13,

3 and trading business, which we consider relatively risky and potentially volatile. Following the German nuclear commission's recommendation that German utilities contribute to funding nuclear waste, which we expect will become law before the end of 2016, we have eliminated the 30% discount that we historically applied to RWE's nuclear and mining provisions to reflect what in our view was a conservative discount rate adopted by the group. Although we still believe that future nuclear decommissioning costs are conservatively provisioned by the group, we believe that this discount is no longer appropriate. This results in weakening credit metrics, which will, however, derive support from positive cash flow generation after capex and dividends in We consequently continue to assess RWE's financial risk profile as significant. At the current rating level, we see stability commensurate with RWE's capacity to sustain adjusted funds from operations (FFO) to debt in excess of 16% over the next few years. Although we have little visibility on the terms of the final settlement on nuclear waste liabilities, we assume at this stage that RWE will gradually contribute, starting in 2017, to the funding of these obligations. In our base case for RWE, we assume: About 6.5 billion of nuclear waste obligations to be funded over ; Power prices at the indicated forward rates; Positive cash flow after capex and dividends over ; and A successful IPO of RWE's downstream business. Based on these assumptions, we arrive at the following credit measures: Average adjusted FFO to debt of 16.1% in ; and Average adjusted debt to EBITDA of 4.2x in the same period. Liquidity The short-term rating on RWE is 'A-3'. We assess the group's liquidity as adequate based on our view that over the 12 months started March 31, 2016, its liquidity sources will exceed uses by far more than 1.2x. However, as of 2017, we expect RWE will start funding its nuclear waste obligations. While we do not have full visibility on the payment profile, which we think will depend upon the group's final settlement with the German government, among others, we believe there is a higher likelihood of liquidity staying at adequate, rather than strong. Principal liquidity sources are: Access to about 11.7 billion of liquid funds as of March 31, 2016, which, according to the group, could be monetized within days; An undrawn 4 billion credit facility maturing in 2021; and Our estimate of cash FFO of about 3.7 billion. Principal liquidity uses are: Annual investments in the 2.3 billion- 2.5 billion range annually; JUNE 13,

4 Shareholder distributions below 500 million; Our assumption of short-term debt maturities of about 3.9 billion over the next 12 months; and Cash outflows to the nuclear waste storage fund of approximately 1.3 billion over the next 12 months. We continue to rate RWE's senior unsecured debt in line with the 'BBB-' long-term rating despite a material share of priority liabilities (which mainly include trade payables at the operating subsidiary level). This is because we expect that this debt will be reallocated within the structure bringing senior unsecured debt closer to the operating cash flows of downstream business. Outlook The negative outlook reflects the uncertainties weighting on our base case scenario for RWE, relative to the execution risks of the IPO of the downstream business and the terms of the settlement of waste nuclear obligations for RWE with the German government. Upside scenario We would revise the outlook to stable if the IPO of the downstream business resulted in an improvement of the group's financial flexibility and in line with our expectations, and if the final settlement on nuclear obligations did not dampen projected credit metrics beyond our expectations. Ratings stability is, in our view, commensurate with RWE's capacity to sustain adjusted FFO to debt above 16%. Downside scenario We could downgrade RWE if we observe it is struggling to maintain credit metrics commensurate with a 'BBB-' rating, namely with adjusted FFO to debt of at least 16%. Ratings Score Snapshot Corporate Credit Rating: BBB-/Negative/A-3 Business risk: Satisfactory Country risk: Very low Industry risk: Intermediate Competitive position: Satisfactory Financial risk: Significant Cash flow/leverage: Significant JUNE 13,

5 Anchor: bbb- Modifiers Diversification/Portfolio effect: Neutral (No impact) Capital structure: Neutral (No impact) Liquidity: Adequate (No impact) Financial policy: Neutral (No impact) Management and governance: Strong (No impact) Comparable ratings analysis: Neutral (No impact) Stand-alone credit profile: bbb- Group credit profile: bbb- Entity status within group: Parent Related Criteria And Research Corporate Methodology, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013 Key Credit Factors For The Unregulated Power and Gas Industry, March 28, 2014 Group Rating Methodology, Nov. 19, Corporate Criteria: Rating Each Issue, April 15, 2008 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Methodology: Hybrid Capital Issue Features: Update On Dividend Stoppers, Look-Backs, And Pushers, Feb. 10, 2010 Criteria Clarification On Hybrid Capital Step-Ups, Call Options, And Replacement Provisions, Oct. 22, 2012 Methodology And Assumptions: Assigning Equity Content To Corporate Entity And North American Insurance Holding Company Hybrid Capital Instruments, April 1, 2013 Ratings List Downgraded; CreditWatch Action RWE AG Essent Nederland B.V. To From JUNE 13,

6 Essent N.V. Corporate Credit Rating BBB-/Negative/A-3 BBB/Watch Neg/A-2 RWE AG Senior Unsecured BBB- BBB/Watch Neg Junior Subordinated BB BB+/Watch Neg Commercial Paper A-3 A-2/Watch Neg RWE Finance B.V. Senior Unsecured* BBB- BBB/Watch Neg *Guaranteed by RWE AG Additional Contact: Industrial Ratings Europe; Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings public website at Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JUNE 13,

7 Copyright 2016 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor's Financial Services LLC. JUNE 13,