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Rating Action:

Moody's downgrades E.ON's ratings to Baa2; stable outlook

Global Credit Research - 15 Mar 2017

London, 15 March 2017 -- Moody's Investors Service, ("Moody's") has today downgraded to (P)Baa2/ Baa2 from (P)Baa1/ Baa1 the long term senior unsecured ratings of E.ON SE (E.ON) and its guaranteed subsidiaries, E.ON International Finance B.V. and E.ON Beteiligungen GmbH. Concurrently, the rating agency affirmed the group's P-2 short-term ratings. The outlook is changed to stable from negative.

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

RATINGS RATIONALE

The rating action reflects Moody's view that measures announced by E.ON will not be sufficient to restore the company's financial profile in line with the rating agency's guidance for a Baa1 rating of credit metrics of funds from operation (FFO)/net debt of upper teens and retained cash flow (RCF)/net debt of mid teens in percentage terms, over the next 12 to 18 months.

On 15 March the company announced plans for debt reduction of up to EUR7 billion from its stated net economic debt of EUR26.3 billion as of financial year end 2016. The planned capital measures of approximately EUR2 billion may include an equity increase of up to 10% and the issuance of hybrid bonds. These measures are designed to compensate for a EUR2 billion nuclear premium payment, as part of an overall EUR10 billion, that E.ON expects to pay during 2017 in relation to the externalisation of its long dated nuclear storage obligations. This follows the approval of the associated law (Gesetz zur Neuordnung der Verantwortung der kerntechnischen Entsorgung) by the German parliament in late 2016, with EU clearance expected during the first half of 2017.

The company has implemented, or plans to implement, additional measures to shore up its financial profile, which include (1) a cost savings programme of EUR400 million; (2) potential further cost reductions for nuclear decommissioning which could amount to around EUR1 billion; (3) the planned disposal of its residual stake in Uniper from 2018 onwards, which could yield around EUR2.5 billion at current market prices; (4) a recommencement of scrip dividends; and (5) a 20 percent lower investment budget of EUR 8 billion for the current three year period.

In common with German peers, E.ON has been adversely affected by the externalisation of the nuclear storage obligations as well as a challenging commodity price environment and remains rather highly leveraged post the spin-off of a majority stake in Uniper, even after taking into account a solid underlying operating performance during 2016. The effect has been exacerbated by a macroeconomic environment characterised by low interest rates and rising inflation which have affected the size of the residual, shorter dated, nuclear decommissioning liabilities, and, to a lesser extent, pension liabilities in the company's accounts. These liabilities constitute a large portion of adjusted debt, weighing on E.ON's credit metrics. The rating agency expects that interest rates will rise slowly over time, which may alleviate the pressure, but the effect is likely only to be gradual.

The outcome of litigation in relation to a nuclear fuel tax imposed by the German government is still awaited. If this proves in E.ON's favour, the company could receive up to EUR2.8 billion in compensation. The timing of the decision is uncertain.

Moody's expects E.ON to generally achieve current guidance for the Baa2 rating of FFO/net debt of mid teens and RCF/net debt of low double digits over the medium term. A speedy disposal of the residual stake in Uniper and/or the application of the proceeds of any successful litigation to debt reduction, would accelerate the company's financial recovery.

The ratings continue to positively reflect (1) the group's scale, diversity and leading business positions; (2) that following the successful spin-off of a majority stake in Uniper, E.ON derives a material proportion of earnings from fairly low risk regulated and contracted businesses in distribution and renewables under well-established regulatory regimes; (3) strong market positions in energy supply albeit in competitive markets and potential to grow customer services from a fairly modest base; (4) that longer term business and financial risk will be reduced following the agreement on nuclear storage externalisation; and (5) that while E.ON is exposed to fairly weak power prices through its German nuclear generation fleet, earnings are rather well hedged over the next two years.

RATING OUTLOOK

The outlook is stable, reflecting Moody's view that the company will implement the announced measures thus bolstering its balance sheet strength, resulting in a financial profile well positioned in the Baa2 rating category over time.

WHAT COULD MOVE THE RATING UP/DOWN

Positive pressure could develop on the Baa2 rating if financial metrics show an improving trajectory towards achieving and subsequently maintaining the guidelines for a Baa1 category, with credit metrics of FFO/net debt of upper teens and RCF/net debt of mid teens in percentage terms.

Negative pressure could develop on the Baa2 rating (1) should the company not take appropriate measures to improve its financial profile, such that it consistently failed to meet the guidelines indicated for the current rating category and/or (2) its business risk profile were to increase; although such developments are currently not expected.

E.ON, headquartered in Essen, Germany is a multinational utility company, listed in the DAX30. the group is focused on distribution, renewables and customer solutions businesses. It holds a 46.7% minority stake in Uniper following its spin-off last year. As at FYE 2016, it had EBIT of EUR3.1 billion from continuing operations.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: E.ON Beteiligungen GmbH

....BACKED Senior Unsecured, Downgraded to Baa2 from Baa1

..Issuer: E.ON International Finance B.V.

....BACKED Senior Unsecured MTN Program, Downgraded to (P)Baa2 from (P)Baa1

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

..Issuer: E.ON SE

....Senior Unsecured MTN Program, Downgraded to (P)Baa2 from (P)Baa1

Affirmations:

..Issuer: E.ON International Finance B.V.

....BACKED Commercial Paper, Affirmed P-2

..Issuer: E.ON SE

.... Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: E.ON Beteiligungen GmbH

....Outlook, Changed To Stable From Negative

..Issuer: E.ON International Finance B.V.

....Outlook, Changed To Stable From Negative

..Issuer: E.ON SE

....Outlook, Changed To Stable From Negative

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.

Helen Francis
VP - Senior Credit Officer
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

Neil Griffiths-Lambeth
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

No Related Data.
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