London, 24 May 2017 -- Moody's Investors Service, ("Moody's") has today downgraded to Baa1/(P)Baa1
from A3/(P)A3 the long term senior unsecured ratings of EnBW Energie Baden-Wuerttemberg
AG ('EnBW'), and its guaranteed subsidiary, EnBW International
Finance B.V.. Concurrently, it has downgraded
to Baa3 from Baa2 EnBW's subordinated debt ratings. The P-2
short-term issuer rating is affirmed. The outlook has 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 a deterioration in the company's financial
profile in 2016 and Moody's view that the company is unlikely to
restore credit metrics in line with an A3 rating at least over the next
12-18 months.
In common with German nuclear generator peers, EnBW has been adversely
affected by the expected externalisation of its long dated nuclear storage
obligations. This follows the approval of the associated law (Gesetz
zur Neuordnung der Verantwortung der kerntechnischen Entsorgung,
commonly known as the "KFK" law) by the German parliament
in late 2016, with EU clearance expected during the first half of
2017. The company will have to pay EUR4.7 billion into a
dedicated external fund, EUR1.2 billion of which is a cash
premium. The negative effect on the company's financial profile
has been amplified by prevailing low interest rates 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. Nuclear and pension liabilities constitute a large portion
of adjusted debt and weigh on EnBW'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 company has additionally been affected by a severe drop of generation
earnings over the last few years reflecting a difficult market environment
and low power prices. EnBW's adjusted EBITDA fell by 8%
to EUR1.9 billion in 2016.
The rating takes into account recent measures that the company has implemented
to mitigate the effects of the KFK decision and the challenging operating
conditions, which include (1) ongoing cost cutting measures which
should amount to EUR650 million between 2015-2020; and (2)
elimination of the common dividend on 2016 results. Moody's
expects the shareholders to continue to maintain a supportive stance with
regard to future dividends and factors in EnBW's objective to fund
investments and dividends from internally generated cash flow and divestments
over the next few years. These measures mitigate, but do
not fully compensate for, the weakening in the company's financial
profile.
The rating continues to factor positively EnBW's scale and leadership
position as a vertically integrated utility within the wealthy Land of
Baden-Wuerttemberg (Aaa stable). Financial metrics should
recover over time, driven by improving EBITDA in regulated and contracted
earnings. EnBW remains committed to its EUR2.4 billion EBITDA
target in 2020. The company's position in low risk network
activities is reinforced by the acquisition of VNG, which should
be fully consolidated in 2017. Existing renewables, and projects
in the pipeline out to 2020, benefit from supportive German regulatory
regimes. In addition, conventional generation will become
less important, reflecting low power prices and the closure of the
remaining nuclear plants at the end of 2019 and 2022. EnBW targets
growth in energy services, capitalizing on the company's strong
links within the region, although we expect these services to develop
at a measured pace.
There remain certain execution risks associated with high levels of investment,
primarily relating to possible delays or budget overruns in project completion.
Moody's continues to recognize the progress the company has made
on execution of its wind strategy to date, with the commissioning
of Baltic 1 and 2 in recent years. The offshore wind parks,
Hohe See and Albatros, expected to be commissioned in late 2019,
will provide a significant step up in capacity and earnings from this
sector.
In the 2020-2025 period we expect the company to pursue further
investments in networks, particularly the North/South transmission
link, as well as expanding energy services in the region.
EnBW has been successful in the recent offshore German wind auction to
build 900 MW of additional capacity, which will strengthen its pipeline
of assets. These windfarms will be exposed to more risky merchant
power prices but commissioning is not expected until 2025.
Given its 46.75% ownership by the Land of Baden-Wuerttemberg
, EnBW's Baa1 rating is based on Moody's rating methodology for
Government-Related Issuers (GRI) updated in October 2014.
It reflects the company's baa2 stand-alone credit quality,
or Baseline Credit Assessment (BCA), combined with one notch uplift
for potential support by the regional government.
OUTLOOK
The current outlook is stable reflecting that the company is well positioned
at the current Baa1 rating category. Moody's expects that
the company will maintain a financial profile comfortably in line with
current guidance of FFO/net debt of around mid teens and RCF/net debt
of around low teens in percentage terms.
WHAT COULD MOVE THE RATING UP/DOWN
The rating could move up should the company demonstrate FFO/net debt of
comfortably in the upper teens in percentage terms and RCF/net debt in
the mid teens on a consistent basis.
The rating could move down should (1) ratios fall below guidance on a
consistent basis and/or (2) the business risk of the company materially
increase.
EnBW is the third largest German utility, based in Karlsruhe,
Germany. Its vertically integrated energy activities serve approximately
5.5 million customers and comprise electricity generation and trading,
transmission and distribution networks, renewables, and the
supply of electricity, gas and related services. The Group
operates across Germany and is also active in the Czech Republic,
Austria, Turkey, Switzerland and Hungary. As at FYE
2016, it had revenues of EUR19.4 billion.
The methodologies used in these ratings were Unregulated Utilities and
Unregulated Power Companies published in May 2017 and Government-Related
Issuers published in October 2014. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies
LIST OF AFFECTED RATINGS
Downgrades:
..Issuer: EnBW Energie Baden-Wuerttemberg AG
....LT Issuer Rating, Downgraded to
Baa1 from A3
....Subordinate Regular Bond/Debenture,
Downgraded to Baa3 from Baa2
....Senior Unsecured MTN Program, Downgraded
to (P)Baa1 from (P)A3
..Issuer: EnBW International Finance B.V.
....Backed Senior Unsecured MTN Program,
Downgraded to (P)Baa1 from (P)A3
....Backed Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
Affirmations:
..Issuer: EnBW Energie Baden-Wuerttemberg AG
....ST Issuer Rating, Affirmed P-2
....Other Short Term, Affirmed (P)P-2
..Issuer: EnBW International Finance B.V.
....Backed Other Short Term , Affirmed
(P)P-2
Outlook Actions:
..Issuer: EnBW Energie Baden-Wuerttemberg AG
....Outlook, Changed To Stable From
Negative
..Issuer: EnBW International Finance B.V.
....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
Vice President - Sr 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
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
