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
