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Rating Action:

Moody's downgrades RWE to Baa3/P-3; stable outlook

13 May 2016

London, 13 May 2016 -- Moody's Investors Service has today downgraded to Baa3 and (P)Baa3 from Baa2 and (P)Baa2 the senior unsecured ratings of RWE AG (RWE), and RWE Finance B.V. its guaranteed subsidiary. Concurrently, Moody's has downgraded to Ba2 from Ba1 the subordinated debt ratings. The short term ratings of RWE and RWE Finance BV are downgraded to Prime-3 and (P)Prime-3 from Prime-2 and (P)Prime 2. The outlook is stable. This concludes the review of the ratings initiated on 13 February 2016.

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

RATINGS RATIONALE

Today's rating action reflects (1) a weak power price environment, which is likely to maintain pressure on RWE's operating cash flows from generation; (2) the risk that the recent recommendation by the government-appointed nuclear commission that a significant premium should be paid by the German nuclear generators will be an additional financial burden for RWE. These factors are likely to result in RWE having a financial profile that is no longer consistent with the guidance for the Baa2 rating category. In addition, the action factors in; (3) the company's exposure to coal and lignite generation in the context of a political environment that is likely to remain challenging over the longer term, given the government's commitment to clean energy.

Forward baseload prices in Germany have declined significantly over the last twelve months and whilst there has been some rebound in recent weeks to around EUR 24/MWh, they are likely to remain low and volatile. RWE's generation fleet is primarily fixed-cost in nature, with over half of output represented by lignite and nuclear, making it exposed to movements in wholesale power prices as RWE's hedges roll off, although the company remains rather well hedged over 2016-18.

The rating action also takes into account the recent unanimous recommendation by the German government-appointed nuclear commission that (1) the liabilities of the German nuclear generators for interim and final storage should be externalised into a separate public fund backed by liquid financial assets from the companies; and (2) a premium, of around 35%, should be paid by 2022 in order to release the generators from these obligations. The nuclear generators have objected to the level of premium to be paid. In Moody's view, there is a good likelihood that, while there may be further negotiations on the final calculations of the underlying liabilities, a solution will be found and passed into law. The requirement to fund the externalized liabilities will reduce the companies' financial flexibility and the premium will result in a direct additional debt burden of several billion euros for the industry. Should an agreement not be reached and passed into law this year, Moody's believes the issue will remain a significant overhang for the companies.

If the nuclear commission's proposal is passed into law, Moody's will remove the "equity credit" that it has previously applied to these unfunded nuclear obligations on the assumption that the companies would raise equity to fund them if so required. This will apply both to the liabilities to be externalized, where the funding obligation will crystallise, as well as those which remain with the companies. This is because the costs and timing of payments of these residual nuclear obligations, which relate to the dismantling of the plants, restoring the sites and dealing with low level waste, are significantly shorter term and more certain than the long term storage costs. All plants will shut by 2022, the dismantling operations are already in progress for those plant that have already shut down and most of the operations will be completed around twenty years after final closure. Moody's will recognise the companies' efforts, as they are implemented, to either raise equity or take other measures to pay for these obligations.

Moody's notes as mitigating factors that (1) the companies will likely have some time to make payments into the fund; and (2) political, business and financial risk will be reduced through the removal of these long dated interim and final storage liabilities which carry a significant number of uncertainties relating to final location and costs. Separately, the companies, including RWE, have outstanding laws suits against the government in relation to nuclear fuel taxes and early nuclear decommissioning on which a formal decision is expected this year. This may result in some compensation being paid to the companies.

Nonetheless, taking into account this combination of factors, RWE's financial profile is likely to weaken such that is no longer consistent with the guidance for a Baa2 rating. RWE should, however, be well positioned against guidance of FFO/net debt of low-mid teens and RCF of low double digits/low teens, in percentage terms, for the Baa3 rating.

RWE's plans to restructure the group and sell down stakes in its newly established company (NewCo) which will hold lower risk regulated and contracted activities, will diversify funding sources for the group, but is not expected to fundamentally change the business risk profile of the group. Moody's believe that settlement of the nuclear issue could reduce business risk for the company, a credit positive, nonetheless, in order to fund the payments, RWE could sell stakes in NewCo, introducing minority shareholders, a credit negative.

The rating is further supported by (1) RWE's commitment to take measures within its means to shore up its financial profile as reflected in the dividend cut on its 2015 results; and (2) RWE's shift toward more regulated and contracted earnings through its emphasis on growth capex in these areas.

RATIONALE FOR THE STABLE OUTLOOK

The outlook is stable and reflects Moody's view that RWE should be able to sustain a financial profile in line with guidance for the Baa3 rating.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could move up if there were a sustained reduction in risks in its principal operating environments and the company's financial profile were to improve such that it could sustain financial metrics of FFO/net debt in the high teens and RCF/net debt in the low teens.

The ratings could move down if power prices dropped materially below current levels, political risk were to increase significantly in relation to its thermal assets or nuclear assets, such that the financial guidance for the current rating were no longer sustainable.

Moody's also points out that a future restructuring of the group could also result in structural issues that affect the ranking, and hence relative positioning, of senior unsecured and hybrid ratings. The greater inclusion of minority shareholders may also affect the group's financial profile. Such factors would be assessed at the time for rating implications. Moody's may further adjust financial guidance as the group's business and financial structure evolves.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: RWE AG

....Subordinate Regular Bond/Debenture, Downgraded to Ba2 from Ba1

....Commercial Paper, Downgraded to P-3 from P-2

....Other Short Term, Downgraded to (P)P-3 from (P)P-2

....Senior Unsecured MTN, Downgraded to (P)Baa3 from (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

..Issuer: RWE Finance B.V.

....BACKED Senior Unsecured MTN, Downgraded to (P)Baa3 from (P)Baa2

....BACKED Other Short Term, Downgraded to (P)P-3 from (P)P-2

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: RWE AG

....Outlook, Changed To Stable From Rating Under Review

..Issuer: RWE Finance B.V.

....Outlook, Changed To Stable From Rating Under Review

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

Headquartered in Essen, Germany, RWE AG is one of the largest listed European utilities with core activities in electricity generation, distribution and supply. It reported group EBITDA of EUR7.00 billion in 2015.

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

Moody's downgrades RWE to Baa3/P-3; stable outlook
No Related Data.
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