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Rating Action:

Moody's affirms E.ON's Baa2 ratings; stable outlook

25 Mar 2020

Paris, March 25, 2020 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 senior unsecured ratings of E.ON SE (E.ON) and its guaranteed subsidiary, E.ON International Finance B.V.. The Prime-2 commercial paper ratings of E.ON SE, together with the (P)Baa2 senior unsecured ratings for the MTN programmes of E.ON SE and E.ON International Finance B.Vwere also affirmed. The outlook on all the ratings is stable.

RATING RATIONALE

The affirmation of E.ON's ratings reflects the group's progress towards completion of the complex asset swap with RWE AG (RWE, Baa3 positive), announced in March 2018. The transaction received European Commission approval in September 2019, after which RWE transferred its 76.8% stake in Innogy (Baa2 stable) to E.ON in return for E.ON's renewable and certain other assets. Simultaneously, E.ON issued shares giving RWE a 16.7% stake in the company (subsequently reduced to 15%). E.ON currently holds 90% of innogy and has decided to complete a squeeze-out of the remaining minority shareholders. This was approved by innogy's shareholders on March 4, 2020 and is expected to be completed during the course of 2020. Going forward, E.ON will have an increased contribution from low risk earnings, deriving some 70% of EBITDA from electricity and gas distribution networks across a number of relatively well-established regulatory regimes. The remainder of cashflows will come from primarily higher risk customer solutions, with a modest contribution from lower risk heat activities.

innogy has a relatively high debt burden and this, together with the cost of acquiring the remaining innogy shares, has increased E.ON's leverage. At the same time, E.ON's leverage continues to be negatively affected by low discount rates increasing pension and nuclear provisions. The rating agency expects credit metrics to be somewhat weak for the rating category over the next 24 months, however, successful execution of E.ON's cost optimization programmes -- which seeks to achieve annual net synergies of some EUR740 million by 2022 -- will strengthen the company's free cash flow and support improvement in its credit metrics. Affirmation of the ratings is further supported by E.ON's commitment to maintaining strong credit quality and a track record of past measures to restore financial flexibility.

In 2020 and 2021, Moody's expects E.ON to display an overall flattish growth in EBITDA reflecting a combination of continued pressure on operating performance in its UK customer solutions segment, some headwinds from previously announced tariff reductions in key jurisdictions such as Germany and Sweden, and a general time lag until cost synergies kick in (whereas cash restructuring costs will be more front-end loaded). Noting management's commitment to bring its net leverage ratio -- as per company's definition - down to around 5x, Moody's anticipates that E.ON will manage its capital structure consistent with a strong investment grade rating and protect its balance sheet should this become necessary.

E.ON's Baa2 rating continues to positively reflect the company's (1) scale and diversification; (2) high share of earnings from fairly low risk regulated and contracted businesses in networks under well-established regulatory regimes; and (3) strong market position in energy supply, albeit in competitive markets. Whilst E.ON is exposed to power prices through its remaining nuclear generation fleet, earnings are well hedged and account for a relatively small share of cash flows.

The rating further takes into account (1) the increased leverage in E.ONs capital structure following the asset swap; (2) competitive retail markets in some of the company's jurisdictions, notably the UK; (3) some pressure on earnings due to cuts in allowed regulatory returns, which will slow down the pace of de-leveraging.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectations that E.ON will successfully integrate innogy, grow its regulatory asset base (RAB) and achieve the set out cost synergies so that its funds from operations (FFO)/ Net Debt ratio moves above 13% by 2022. At the same time, Moody's would expect E.ON's retained cash flow (RCF)/ Net Debt ratio to move above 8%. While acknowledging that the macro environment remains uncertain due to the global spread of the COVID-19 virus, Moody's anticipates E.ON's profile, which is underpinned by a high degree of regulatory revenues, will provide a certain degree of shelter against near-term volatility.

ESG CONSIDERATIONS

Environmental and social considerations are important to the credit quality of European utilities. Compared to some of its peers, however, E.ON is less exposed to environmental considerations because of its high percentage of cash flows now being derived from regulated networks where carbon intensity is substantially less. In terms of social considerations, a key risk for the industry is pressure from authorities to alleviate the electricity bill of retail customers.

LIQUIDITY

E.ON's liquidity profile is good. As of end December 2019, the company's liquidity profile was supported by (1) €1.9 billion of unrestricted cash and €1.1 of securities and fixed-term deposits, and (2) a committed fully undrawn Revolving Credit Facility (RCF) of €3.5 billion expiring in 2024. In order to fund the squeeze-out of the innogy stock held by the remaining minority shareholders, E.ON has secured a €1.75 billion acquisition facility maturing in 2023.

WHAT COULD CHANGE THE RATING UP/ DOWN

Given Moody's expectations that E.ON will display relatively weak credit metrics for the rating category until 2022, the rating agency currently anticipates no upward pressure.

The Baa2 rating could come under downward pressure should it become clear that the company will not succeed in meeting guidance for the current rating i.e. FFO/ Net debt above 13% and RCF/ Net debt above 8%, by 2022.

METHODOLOGY

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Knut Slatten
VP - Sr Credit Officer
Infrastructure Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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