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Rating Action:

Moody's affirms Verbund's rating at Baa1; outlook changed to negative

12 Aug 2014

London, 12 August 2014 -- Moody's Investors Service has today affirmed the senior unsecured rating of Verbund AG (Verbund) at Baa1/(P)Baa1. The outlook on the rating has been changed from stable to negative.

RATINGS RATIONALE

The change in outlook to negative from stable reflects the ongoing weakness of power prices and the subsequent negative implications for Verbund's credit metrics. The decline of power prices has been due to a combination of cyclical and structural (i.e., sustainable) factors, and our ratings assume that conditions are unlikely to improve in the near term. (See our Special Comment published on July 1, 2014 for more details.) Locked-in prices for the company's owned electricity generation for 2014 might fall ca. 15-20% short of 2013 levels (which were EUR48.1 per megawatt hour (MWh)) and current forward prices suggest another decline of ca. 10% for 2015. In this context, the negative rating outlook reflects Moody's expectation that the company's credit metrics will fall short of the guidance set for the Baa1 rating category in 2014 and might be weakly positioned thereafter.

Moody's notes the cost cutting measures initiated by the company (EUR 130 million targeted by 2015), and additional measures taken to restructure the thermal generation fleet in Austria and France as well as the recently announced exit from its shareholding of Sorgenia in Italy. However, Moody's expects these measures to only partially offset pressure on the company's cash flows as well as increased investment plans over the upcoming four years (ca. EUR 1.5 billion growth capex plus ca. EUR 800 million maintenance capex for the years 2014-18).

Verbund's Baa1 rating reflects the company's leading position in the Austrian power generation market and its attractive hydro generation portfolio in Austria as well as in Germany. The rating also reflects the company's exposure to wholesale price variances and associated cash flow volatility, particularly in the context of the current low power price environment. Despite related negative implications on realized power prices, Moody's recognizes the profitability of hydro plants, thanks to low generation cost. The rating also positively reflects Verbund's activities in the regulated transmission network business in Austria.

In light of Verbund's 51% ownership by the Government of Austria (Aaa stable), the company falls under Moody's rating methodology for government-related issuers and its Baa1 rating incorporates a two-notch uplift from its standalone credit quality for potential government support. A change of the law, or its interpretation, and a prospective reduction of the government's stake in Verbund is not expected but could result in a lower assessment of government support, which Moody's has considered to be strong.

For Verbund to support its current ratings, Moody's would expect the company to maintain credit metrics comfortably positioned within the following bands: (1) funds from operations (FFO) interest coverage of 3.0x-5.0x; (2) FFO/net debt in the mid teens to low twenties in percentage terms on a sustainable basis; and (3) retained cash flow (RCF)/net debt in the low -- mid teens in percentage terms on a sustainable basis.

WHAT COULD CHANGE THE RATINGS UP/DOWN

We consider an upgrade of Verbund's rating as unlikely within the short term. However, a strengthening of financial metrics to levels comfortably above the range set out above, would be a precondition for Moody's to consider upgrading the company's rating. This could be driven by a recovery of power prices in the Austrian and German market. Moreover, (1) an extension of Verbund's cost cutting programme, (2) a reduction of capex plans, (3) an adjustment of the cash dividend policy and/or (4) additional asset disposals could result in a stabilization of the rating outlook.

Negative pressure on Verbund's rating would develop if Verbund's credit metrics were likely to move below the parameters set for the current rating, driven by (1) a further decline of power prices from current levels; (2) a failure to achieve the targets set for cost cutting, the restructuring of the thermal fleet; and/or (3) a lack of financial discipline in terms of capex and/or cash dividends. Moreover, a decline of government support for Verbund, for example due to a reduction of its shareholding following a change of the Austrian Constitutional Law, could have a negative impact on the rating.

PRINCIPAL METHODOLOGY

The methodologies used in this rating were Unregulated Utilities and Power Companies published in August 2009, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Verbund is the leading electricity company in the Austrian market, where it owns and operates more than 40% of the generation capacity. In addition, Verbund's energy operations include electricity trading in Europe and power supply to end customers in Austria. The company is also the key player in the electricity transmission segment, as it owns and operates via its 100% subsidiary Austrian Power Grid AG ("APG") approximately 80% of the Austrian network as well as international interconnections. Following a revision of its international expansion strategy, Verbund is now predominantly concentrated on its operations in Austria and Germany and has only minor presence in markets such as France, Romania and Albania. As of December 2013, the company reported revenues of EUR3.3 billion and EBITDA of EUR1.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Matthias Heck
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Verbund's rating at Baa1; outlook changed to negative
No Related Data.
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