MOODY'S PUTS Aa3 RATING OF RWE UNDER REVIEW FOR POSSIBLE DOWNGRADE AND RATINGS OF AMERICAN WATER WORKS AFFILIATES UNDER REVIEW FOR POSSIBLE UPGRADE
Moody's Investors Service has placed the Aa3 senior unsecured debt rating of RWE and that of its guaranteed affiliate RWE Finance B.V. under review for possible downgrade following today's announcement that RWE has signed an agreement to acquire American Water Works Company, Inc. ("AWW") and its subsidiaries for USD7.6 billion, including the assumption of USD3.0 billion of debt. Whilst Moody's believes that this transaction will be a significant boost to the company's multi-utility strategy and still falls within the parameters of the current rating, the rating is now more weakly positioned and a possible downgrade would reflect the fact that the company is expected to remain acquisitive in order to fulfil its strategic ambitions. Any downgrade is not expected to be more than one notch, given RWE's otherwise solid and sound financial profile.
At the same time, the rating agency has placed the debt ratings of American Water Capital Corporation (Baa1 senior unsecured), New Jersey-American Water Company (A3 senior secured) and Pennsylvania-American Water Company (A3 senior secured) under review for possible upgrade. The transaction will be subject to regulatory approvals, which are expected to take up to two years.
Following the significant changes in RWE's operating environment through deregulation and fierce competition in particular in the German electricity market, RWE has undergone a radical and successful restructuring of both its strategic focus and its operations. In addition to the merger with neighbouring utility VEW, RWE has used a series of mid to large scale acquisitions, including that of Thames Water in the UK, on its way to expand its position in its core market segments while at the same time divesting some of its non core activities. Even though a significant amount of debt funded transactions had been factored into the initial Aa3 rating, acquisitions to date have actually taken place in a shorter period of time than previously expected.
Moody's review of RWE's rating will concentrate on the likely scope and timing of further acquisitions. In addition to possible further bolt-on acquisitions in the consolidating US water sector, the rating agency would expect further transactions resulting from RWE's interest in the deregulated US energy markets and in boosting its market positions within the European utilities markets. The likelihood of any such accelerated acquisition program will be assessed in the context of RWE's significant cash positions and scope for further divestments of non-core activities, together with a clarification of the company's pension and nuclear liabilities management.
American Water Capital, a Delaware corporation, is a wholly-owned finance subsidiary of American Water Works. The purpose of this finance subsidiary is to streamline the financing function, create cash management efficiency, and lower the cost of capital for American Water Works' 25 water utility subsidiaries. American Water Capital is the primary funding vehicle for American Water Works and its utility subsidiaries. American Water Works has provided credit enhancement through a support agreement between American Water Works and American Water Capital. Separately, New Jersey-American Water and Pennsylvania-American Water are both regulated water utility subsidiaries of American Water Works.
The following ratings are affected as a result of this announcement:
Senior unsecured MTN: from Aa3 to review for possible downgrade
Commercial Paper: unchanged at Prime-1
RWE Finance BV
Guaranteed senior unsecured: from Aa3 to review for possible downgrade
Guaranteed short term: unchanged at Prime-1
American Water Capital Corporation
Issuer rating: from Baa1 to review for possible upgrade
Shelf registration of senior unsecured debt rated: from (P)Baa1 to review for possible upgrade
Shelf registration of preferred securities/subordinated debt: from (P)Baa2 to review for possible upgrade
Short-term rating for commercial paper: unchanged at Prime 2
New Jersey-American Water Company
Senior secured debt: from A3 to review for possible upgrade
Pennsylvania-American Water Company
Senior secured debt: from A3 to review for possible upgrade
Senior secured pollution control revenue bonds: from A3 to review for possible upgrade.
RWE AG, with headquarters in Essen, Germany, is a multi utility/multi energy company with core activities in electricity, gas, water and waste water, and waste and recycling activities. It also still holds significant financial investments in other activities including construction, civil engineering, and printing. As at FYE 1999/00 it had turnover of EUR 47 billion and shareholders' funds of EUR 9.5 billion.
American Water Works Company, Inc. is headquartered in Voorhees, New Jersey. It is the largest and most geographically diverse water service provider in the US with a presence in 23 states serving a population of 10 million people.
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