London, 31 July 2019 -- Moody's Investors Service (Moody's) has today changed to negative
from stable the outlook on the A3 issuer rating of Amprion GmbH (Amprion).
Concurrently, Moody's has affirmed this rating.
RATINGS RATIONALE
OUTLOOK CHANGE TO NEGATIVE
The outlook change to negative from stable reflects Moody's expectation
that Amprion's key credit metrics could fall below the rating agency's
guidance for the existing A3 rating. Specifically, Moody's
projects that Funds From Operations (FFO) / Net Debt and Retained Cash
Flow (RCF) / Net Debt will decline to levels below the mid-teens
and low-teens (both in percentage terms) respectively, in
the latter years of the current regulatory period, absent sufficient
mitigating measures taken to protect credit quality. The anticipated
weakening of Amprion's currently strong financial profile is driven
by (1) the lower allowed equity return in the current regulatory period
(2019-23), depressing operating cash flows; and (2)
further increases in planned investments over the next decade, from
already elevated levels, increasing leverage.
Allowed equity returns on the vast majority of Amprion's assets
were lowered by over 200 basis points from the start of the current regulatory
period on 1 January 2019 (to 6.91% from 9.05%,
both nominal pre-tax post trade-tax) following a decision
by the German energy regulator (Bundesnetzagentur, BNetzA) in summer
2016. This ruling was upheld by Germany's highest court earlier
this month following an appeal by most network operators.
In addition, at its FY2018 results, and in line with the 2030
grid development plan to deliver government energy policy objectives,
Amprion announced a material increase in planned investments of 37%
over the next ten years (the period 2019-28) to EUR9.3 billion,
from EUR6.8 billion over 2018-27. Moody's understands
the majority of the increase in planned investment was due to a higher
proportion of the transmission lines for Amprion's largest projects
being undergrounded, rather than overgrounded, which increases
costs (primarily cable installation). Over the next five years,
when most of this planned capex will occur, we expect Amprion's
capex to average around 17% of net PP&E with capex levels in
absolute terms around 50% higher than 2018 levels, themselves
the highest to-date.
Moody's considers that the execution risk associated with delivering
this programme is moderated by (1) Amprion's track record,
both in project delivery and cost efficiency (reflected in its 100%
cost efficiency status by the regulator being reaffirmed for the current
regulatory period); (2) the programme still comprising only onshore
transmission projects during this regulatory period, which we view
as carrying lower risk than offshore transmission projects; and (3)
a regulatory regime that provides for timely cost recovery. However,
lower opex allowances during the construction period for most of Amprion's
large investment projects will reduce the extent to which the company
can outperform regulatory cost allowances and thus increase operating
cash flows.
To-date, Amprion has maintained a strong financial profile,
reflected in FFO / Net Debt of 48.7% and Net Debt / Fixed
Assets of 23.6% (both at December 2018), despite the
material growth investments undertaken in recent years. Amprion's
financial profile has been supported by its owners (RWE AG, Baa3
stable, and a consortium of institutional investors) pursuing a
prudent financial policy. The owners injected EUR400 million of
equity in June 2015, almost equal to total dividends paid during
the prior regulatory period (2014-18).
Consequently, the extent of the weakening in Amprion's financial
profile over the third regulatory period from this latest step-up
in planned investments, at a time of tighter regulatory allowances,
will be impacted in part by the measures taken by the owners to support
credit quality. Moody's understands that the owners have
made a contractual commitment to provide a further material contribution
in 2020; the 2015 equity injection represented over 40% of
Amprion's net debt at December 2018.
Finally, certain parameters of the regulatory framework for the
current regulatory period are pending appeal, including (1) the
level of annual required productivity improvement gains factored into
regulatory cost allowances; (2) treatment of regulatory balances
pertaining to electricity transmission network operators administering
renewable obligations (known as EEG). However, Moody's
believes that the potential upside from a successful appeal is unlikely
to materially alter key credit metrics for the remainder of the current
regulatory period.
RATING AFFIRMATION
The affirmation reflects that Amprion's rating continues to be supported
by (1) the very low business risk profile of its monopoly electricity
transmission network operations in Germany which it operates under an
established regulatory framework; (2) its strong operational performance
and efficiency; and (3) the aforementioned periodic equity injections
from its owners, which support its financial profile.
In recent years, Amprion has held very large cash balances related
to administering its renewable obligations, over EUR1.5 billion
at December 2018. Since these are a pass-through item,
albeit one that accounts for the vast majority of the group's revenues
and creates significant working capital swings, Moody's excludes
the impact on financial metrics of administering renewable obligations.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the negative outlook, Moody's currently sees little
potential for upward pressure on the rating.
The outlook could be stabilised if the company were to take sufficient
mitigating measures, in particular balance sheet measures,
such that Amprion was expected to maintain a financial profile commensurate
with Moody's guidance for the A3 rating, which includes FFO
/ Net Debt and RCF / Net Debt at least in the mid-teens and low-teens
(both in percentage terms) respectively. Moody's believes
that continued strong operational performance and a favourable ruling
from outstanding appeals of certain aspects of the regulatory determination
for the current regulatory period are unlikely to be sufficient,
in isolation, to maintain the current A3 rating.
Downward rating pressure would arise if (1) Amprion appeared unlikely
to meet Moody's ratio guidance for the A3 rating on a sustained
basis; or (2) there was a deterioration in the Amprion's business
risk profile, e.g. arising from adverse changes to
the regulatory framework or greater execution risk associated with delivering
its capex programme, resulting from changes in project composition.
Amprion is one of the four German electricity transmission network companies,
covering a balancing zone that stretches from Lower Saxony to the Alps.
Amprion operates one of the longest extra-high voltage grid of
380kV and 220kV in Germany, measuring around 11,000 kilometers
in length and with 160 substations and transformer stations. The
company reported revenue of EUR13.9 billion in FY2018.
The principal methodology used in this rating 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 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 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.
Philip Cope
AVP-Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Paul Marty
Senior Vice President/Manager
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
