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Rating Action:

Moody's changes outlook on EnBW to negative; affirms ratings

12 Jun 2019

London, 12 June 2019 -- Moody's Investors Service (Moody's) has today changed to negative from stable the outlook on EnBW Energie Baden-Wuerttemberg AG (EnBW) and its guaranteed subsidiary, EnBW International Finance B.V.. Concurrently, Moody's has affirmed the A3 long-term issuer and senior unsecured ratings of EnBW and EnBW International Finance, and the Baa2 subordinated debt ratings of EnBW. The Prime-2 short-term issuer rating has been also affirmed.

A full list of affected ratings is provided towards the end of this press release.

The rating action follows EnBW's announcement, on 4 June, that it had acquired the French wind and solar farm developer and operator, VALECO, for an undisclosed price and the company's planned acquisition, announced on 7 May, of the German telecommunications company Plusnet GmbH (Plusnet).

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

Today's change in outlook reflects the risk that EnBW might not be able to mitigate the negative effects of the announced transactions sufficiently to sustain a financial profile commensurate with its current A3 rating, given expected increase in debt by some EUR1 billion. While the acquisitions are consistent with EnBW's strategy, they are in the context of a weaker financial profile than previously anticipated by Moody's. Absent mitigating measures, there is an increased likelihood of EnBW's key credit metrics falling persistently short of guidance for the current rating and downward rating pressure.

In March 2019, EnBW announced it had been selected as the exclusive bidder to acquire 100% of VALECO, an independent energy operator active in the French wind and solar energy markets. On 3 June the transaction received final approvals from the French authorities and was closed for an undisclosed price. The planned acquisition of 100% of Plusnet, a telecom infrastructure company in Germany, is expected to be completed in summer 2019, subject to certain approvals and closing conditions.

With 276 megawatts (MW) of onshore wind and 56 MW of solar power, VALECO will contribute to EnBW's strategy in terms of increasing the share of cash flows from contracted renewables while providing direct entry to the French renewables market. The transaction will, according to the company, increase EnBW's renewables portfolio by 31% and bring it close to its 2020 target of 1,000 MW of onshore wind capacity, add some PV capacity of 56 MW and give access to a 1.7 gigawatts (GW) pipeline. The planned acquisition of Plusnet will, if completed, expand EnBW's regional expertise in communication infrastructure at a national level. Both transactions are consistent with the group's strategy and will provide growth and diversification opportunities as the company manages the nuclear and coal exit in the coming years.

Against the above, and absent measures to bolster balance sheet strength, the acquisitions will negatively affect EnBW's leverage metrics over the medium-term. Whilst Moody's recognizes that the company's earnings will increase this year on the back of increased capacity once new offshore wind farms are commissioned, EnBW has also a large investment programme and it does not preclude pursuing further opportunities in offshore wind, which could absorb free cash flow and delay deleveraging. Concurrently, low discount rates continue to affect negatively adjusted net debt, which, according to company data, increased by more than EUR1.1 billion (14%) to EUR9.6 billion in 2018. Despite a reported 5.3% increase in adjusted EBITDA in Q1, Moody's anticipates that EnBW's financial profile will be such that metrics will be weak for the A3 rating in 2019. The negative outlook thus reflects the risk that, with the acquisitions and associated further investment, ratios will not recover such that EnBW will be able to achieve a financial profile commensurate with the guidance for its A3 rating.

RATIONALE FOR AFFIRMATION OF THE RATINGS

Affirmation of the ratings reflects EnBW's (1) scale and leadership position as a vertically integrated utility within Baden-Wuerttemberg; (2) significant proportion of earnings, around 50% of EBITDA, from low risk regulated distribution and transmission activities; (3) growing share of renewables under contracts, as the company continues to invest in line with its strategy; and (4) historically balanced financial policy and demonstrated commitment to maintaining a robust credit quality. These positives are, however, balanced against (1) the evolving operating environment in Germany for conventional generation; (2) increasingly challenging environment in retail markets, given competition and evolution of energy services; (3) certain execution risks relating to a large investment programme, including offshore wind development; and (4) an anticipated erosion of financial flexibility following the two acquisitions.

Given EnBW's 46.75% ownership by the Land of Baden-Wuerttemberg (Aaa stable), Moody's considers the company to be a government-related issuer. The A3 rating incorporates a one-notch uplift from EnBW's standalone credit quality, expressed as a baseline credit assessment (BCA) of baa1, based on Moody's assessment of moderate support and high dependence. Moody's assumption of a moderate support takes account of the regional government's track record of supportive stance towards EnBW and its endorsement of the company's strategy.

The Baa2 long-term rating on the hybrid securities, which is two notches below the issuer rating of A3 for EnBW, reflects the features of the hybrids that receive basket 'C' treatment, i.e. 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook, upward pressure on the ratings is not currently anticipated. The outlook could be stabilised if EnBW demonstrates a clear path towards achieving, on a sustainable basis, guidance for the current ratings of FFO/net debt comfortably in the upper teens and RCF/net debt in the mid-teens in percentage terms.

The rating could be downgraded if, taking in to account such measures as the company may implement, credit metrics appear likely to fall persistently below the above guidance with FFO/net debt in the mid-teens and RCF/net debt in the low double digits/low teens and below. A reduction in the government support assumption incorporated into EnBW's rating would also likely result in a downward rating adjustment.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Karlsruhe, EnBW is a large vertically-integrated group, whose activities comprise electricity generation and trading, transmission and distribution networks, renewables and the supply of electricity, gas and related services. In 2018, EnBW reported EBITDA of EUR2.2 billion.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: EnBW Energie Baden-Wuerttemberg AG

....LT Issuer Rating, Affirmed A3

....ST Issuer Rating, Affirmed P-2

....Subordinate Regular Bond/Debenture, Affirmed Baa2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

.....Other Short Term, Affirmed (P)P-2

..Issuer: EnBW International Finance B.V.

.... Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Backed Other Short Term, Affirmed (P)P-2

Outlook Actions:

..Issuer: EnBW Energie Baden-Wuerttemberg AG

....Outlook, Changed to Negative From Stable

..Issuer: EnBW International Finance B.V.

....Outlook, Changed to Negative From Stable

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.

Joanna Fic
Senior Vice President
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

Neil Griffiths-Lambeth
Associate Managing Director
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

No Related Data.
© 2023 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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