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Rating Action:

Moody's changes outlook on Vattenfall to stable; affirms ratings

06 Jul 2021

Paris, July 06, 2021 -- Moody's Investors Service (Moody's) has today changed to stable from negative the outlook on Vattenfall AB (Vattenfall). At the same time, Moody's has affirmed the long-term A3 issuer and senior unsecured ratings, the Baa2 junior subordinated hybrid instrument ratings and the Prime-2 short-term commercial paper rating of Vattenfall.

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

RATINGS RATIONALE

RATIONALE FOR THE STABLE OUTLOOK

The change of outlook to stable reflects Moody's expectations that Vattenfall will maintain credit metrics commensurate with the A3 rating category, namely funds from operations (FFO)/ Net Debt above 25% and RCF/ Net Debt at least in the high teens in percentage terms. The action follows Vattenfall's announcement on July 1 [1] that it had sold its electricity distribution grid in Berlin to the City of Berlin for €2.1 billion. Later this year, the rating agency expects Vattenfall's balance sheet to be further strengthened by around €1.1 billion in net compensation from Germany following the legal settlement for the early shutdown of nuclear operations in the country.

Vattenfall targets FFO/ Net Debt in the 22%-27% range and has historically maintained a balanced financial policy. Supported by the disposal proceeds and nuclear compensation, Vattenfall's metrics will be higher in 2021, but Moody's expects ratios to weaken in 2022 on the back of heavy capital expenditure and higher dividend payouts, in line with the company's policy of distributing 40-70% of net income provided Vattenfall is within the targeted corridor.

Over the next 2-3 years, Moody's expects Vattenfall's EBITDA to face pressure due to a combination of lower achieved prices in power generation and a reduced contribution from the distribution segment. In generation, spot market prices in the Nordics have recovered substantially from a year ago but Vattenfall's current hedges were done at lower price levels than prior years and this will ultimately affect the company's cash flows. Earnings from distribution will decline as a result of the disposal of the Berlin grid and lower tariffs in Sweden following a cut in allowed returns at the start of the 2020-23 regulatory period. Conversely, and over time, earnings will benefit from further growth in wind as Vattenfall pursues its heavy investment programme.

To the extent proceeds are not paid as dividends, divestment of the electricity distribution grid in Berlin will strengthen Vattenfall's balance sheet. However, the sale will also reduce the proportion of earnings from lower risk activities. Regulated and contracted earnings account for a lower share of Vattenfall's earnings than for many rated peers and the company maintains a relatively high exposure to volatile wholesale power markets. A growing contribution from contracted renewables will benefit earnings stability but Moody's also notes that Vattenfall has shown willingness to enter into large zero subsidy renewables projects such as Hollandse Kust, which is scheduled to be commissioned in 2023 (although Moody's notes that merchant risk has been partly de-risked through partnering).

RATIONALE FOR AFFIRMATION OF THE RATINGS

Vattenfall's A3 senior unsecured rating is supported by (1) the breadth and scale of the company's operations; (2) its clean generation portfolio in the Nordics; (3) a moderate contribution from regulated electricity distribution and district heating activities; (4) an increasing contribution from contracted renewables; and (5) its solid financial profile with funds from operations (FFO)/net debt in the high 20s as of 2020.

These factors are balanced by (1) Vattenfall's exposure to conventional power generation, which accounted for around 44% of underlying EBITDA in 2020; (2) the competitive environment in retail markets; (3) friction from cuts in allowed returns for the distributions networks; and (4) execution risk associated with Vattenfall's strategy to grow its renewable energy portfolio and adapt to the evolving industry of energy services.

The A3 issuer and senior unsecured ratings incorporate an uplift for potential government support to Vattenfall's standalone credit quality, which is expressed by Moody's as a baseline credit assessment (BCA) of baa1. The uplift to the BCA, of one notch, results from the credit quality of Vattenfall's shareholder, the Government of Sweden (Aaa stable), and Moody's assessment of there being "moderate" probability of government support in the event of financial distress, as well as "moderate" default dependence.

The Baa2 long-term rating on the hybrid securities, which is two notches below the senior unsecured rating of A3 for Vattenfall, 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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on Vattenfall's ratings is unlikely in the medium term in view of Vattenfall's current business mix with still high exposure to volatile wholesale power markets and comparably lower portion of regulated earnings.

The ratings could be downgraded if (1) Vattenfall's credit metrics appeared likely to fall persistently short of Moody's guidance for the A3 rating; or (2) the share of higher risk cash flows were to increase without a commensurate strengthening of the company's financial profile. A change in the government support assumption could also result in a downgrade of Vattenfall's ratings.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Vattenfall AB

....LT Issuer Rating, Affirmed A3

....Junior Subordinated Regular Bond/Debenture, Affirmed Baa2

....Commercial Paper (Foreign Currency), Affirmed P-2

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

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

Outlook Actions:

..Issuer: Vattenfall AB

....Outlook, Changed To Stable From Negative

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389, and Government-Related Issuers Methodology published in Febuary 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] https://group.vattenfall.com/press-and-media/newsroom/2021/goodbye-to-stromnetz-berlin

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.
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