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Rating Action:

Moody's downgrades RWE's ratings to Baa1; outlook stable

21 Jun 2013

London, 21 June 2013 -- Moody's Investors Service has today downgraded to Baa1 and (P)Baa1 from A3 and (P)A3 the senior unsecured ratings of RWE AG ('RWE' or 'the Group') and RWE Finance BV, its guaranteed subsidiary. In addition, Moody's has downgraded to Baa3 from Baa2 RWE's subordinated debt rating. The Prime-2 and (P)Prime-2 short term ratings of RWE and RWE Finance BV were affirmed.

The outlook on all ratings is stable.

RATINGS RATIONALE

The downgrades reflect that the outlook is for the pressure on RWE's core generation earnings to intensify because of structural changes taking place in its domestic power markets and steeper than expected declines in power prices. It is unlikely therefore, in Moody's view, that RWE will be able to restore its financial profile to a level consistent with current guidance for the A3 rating despite the positive action taken by RWE in the last two years.

RWE's strategy to deal with the challenges of a less profitable power generation business and uncertainty around the future structure of power markets in Germany is largely defensive. The group is focused on stripping out costs, selling assets and cutting capex and dividends with the objective of becoming free cashflow positive by 2015, and bringing its leverage factor back down to under 3x, from 3.5x in 2012. The group is also currently evaluating the possibility of selling Dea, its E&P business. Further out it wants to take advantage of opportunities in energy services created by Energiewende in Germany, but in Moody's view these will be difficult to convert into material earnings streams before the medium-term.

In the shorter-term, RWE's hedging strategy will support profitability against the effects of lower wholesale market power prices; and in 2013 increased earnings from other businesses -- especially renewables and E&P - together with an expected settlement with Gazprom should help offset the reduction in generation profits which will result from full auctioning of CO2 and lower achieved average power prices.

However, cyclical and structural pressures on the core generation business are intensifying and there remains uncertainty around the development of energy markets in Germany. The combination of excess generation capacity, weak power demand and lower commodity prices has been reflected in the continuing decline in one year forward German baseload prices during the year to under EUR40/MWh. In addition, Moody's considers that the planned rapid growth of contribution from renewables and the increase in production at, and subsequent sale of, the E&P unit carries some execution risk.

The downgrade is therefore prompted by the increased risk in Moody's view that over the near term RWE will be unable to strengthen sustainably its financial profile from 2012 levels when metrics (including FFO/net debt of 19.6% and RCF/net debt of 14.4%) were at the bottom end of current guidance for the A3 rating -- which is FFO/net debt in the twenties per cent and RCF/net debt in the mid- to high teens in percentage terms.

The stable outlook assumes that RWE will continue to deliver on its cost cutting and capex reduction plans, and succeed in realising substantial asset disposals such as to ensure a financial profile comfortably aligned with Moody's guidance for the Baa1 rating which includes FFO/net debt of around 20%, and RCF/net debt in the mid-teens in percentage terms.

The following ratings were downgraded:

- RWE AG: the senior unsecured debt ratings to Baa1 and (P)Baa1 from A3 and (P)A3; and the subordinated debt rating to Baa3 from Baa2

- RWE Finance BV: the guaranteed senior unsecured debt ratings to Baa1 and (P)Baa1 from A3 and (P)A3

The following ratings were affirmed

- RWE AG: the Prime-2 and (P)Prime-2 senior unsecured debt ratings

- RWE Finance BV: the (P)Prime-2 guaranteed senior unsecured debt rating

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure could develop on the rating in the event of (i) improved clarity around the future shape of energy markets in Germany and an easing of the structural pressures on power prices; (ii) a strengthening of RWE's financial risk profile through cost and capex cuts, asset disposals and cashflow growth such that FFO/net and RCF/net debt were positioned comfortably in the twenties per cent and high-teens in percentage terms.

The rating would come under negative pressure in the event that shortfalls in expected cashflow generation and asset disposals were to cause RWE's financial profile to weaken on a sustainable basis versus Moody's new guidance for that rating level.

The principal methodology used in these ratings was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy 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, gas, oil and gas upstream. It reported group EBITDA of EUR9.3 billion in 2012.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Niel Bisset
Senior Vice President
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

Monica Merli
MD - Infrastructure Finance
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's ratings to Baa1; outlook stable
No Related Data.
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