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Rating Action:

Moody's reviews Fortum's Baa2 ratings for downgrade

10 Oct 2019

London, 10 October 2019 -- Moody's Investors Service (Moody's) has today placed the Baa2 issuer and senior unsecured ratings of Fortum Oyj (Fortum) on review for downgrade.

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

RATINGS RATIONALE

The rating review was prompted by the 8 October announcement that Fortum had reached an agreement with Elliott and Knight Vinke to acquire in excess of 20.5% in Uniper SE (Uniper) for approximately EUR2.3 billion, increasing Fortum's share in Uniper to more than 70.5%. With the increased ownership, Fortum aims to resolve the "complex relationship" between the parties in the context of the challenges faced until now and its strategic objective for the long-term ownership in Uniper.

The transaction is subject to regulatory approvals in Russia and the United States. While Fortum is currently restricted from increasing its stake in Uniper to over 50%, the company has indicated that it is in discussions with the Russian state authorities and has made a preparatory filing to the Russian Federal Antimonopoly Service. In this context, Fortum expects the closing of the transaction by the end of the first quarter of 2020.

The acquisition of a majority stake in Uniper, if concluded, would increase Fortum's size and geographical diversification, but also the company's carbon intensity, given the mix of Uniper's generation fleet. As a result, Fortum's exposure to decarbonization policies would increase in the context of the planned phase-out of coal generation in Germany. The loss of earnings from coal power plants would, however, be partly mitigated by greater utilization of Uniper's gas-fired generation fleet once the nuclear capacity is shut down. In addition, the acquisition of Uniper would increase Fortum's operations in Russia. While the acquisition cost would increase Fortum's debt burden, the increase in Uniper ownership would also reduce some of the uncertainties associated with the current shareholder structure and could unlock the potential for operational and financial synergies.

Fortum's credit quality is currently underpinned by (1) the company's scale as a large power generator in the Nordic region; (2) its relatively low cost and carbon free hydro- and nuclear power generation fleet; and (3) the presence of lower risk activities, including heat and other businesses under contracts. These positives are balanced by (1) the sensitivity of Fortum's earnings to a volatile power price environment, given the primarily fixed-cost nature of its generation fleet; (2) the material share of earnings in Russia, which are exposed to currency movements; and (3) a fairly high financial leverage, with funds from operations (FFO)/net debt of 23.5% as of end-June 2019.

Given Fortum's 50.8% ownership by the Government of Finland (Aa1 stable), Moody's considers the company to be a government-related issuer. The Baa2 rating incorporates a one-notch uplift from Fortum's standalone credit quality, expressed as a baseline credit assessment (BCA) of baa3, based on Moody's assessment of moderate support and moderate dependence. Moody's assumption of a moderate support takes account of the Finnish government's track record of being steadfastly non-interventionist, whilst positively recognizing the government's commitment to own a majority shareholding in Fortum.

RATING OUTLOOK

The Baa2 ratings are under review for downgrade, reflecting the risks associated with Fortum's acquisition of Uniper and the impact of the transaction on the company's credit quality absent measures that would bolster Fortum's balance sheet strength.

WHAT COULD CHANGE THE RATING UP/DOWN

The ratings could be confirmed if it became clear that Fortum was unlikely to increase its stake in Uniper and the company's financial profile remained comfortably positioned against Moody's guidance, which includes FFO/net debt ratio in low twenties in percentage terms.

Conversely, the ratings could be downgraded if Fortum increased its stake in Uniper and it appeared unlikely that the company would be able to take measures that would allow it to restore its financial flexibility post the acquisition.

Moody's will seek to conclude the ratings review as soon as possible, once there is more clarity around the risks to execution and any potential measures that Fortum may take to mitigate the impact of the Uniper acquisition on its business and financial risk profile.

LIST OF AFFECTED RATINGS

..Issuer: Fortum Oyj

On Review for Downgrade:

....LT Issuer Rating, Placed on Review for Downgrade, currently Baa2

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Baa2

....Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)Baa2

Outlook Actions:

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

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Fortum Oyj is the largest utility in Finland and one of the largest power generators in the Nordic region. The company has also a significant presence in Russia. In 2018, Fortum reported revenues of EUR5.2 billion.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

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.

Joanna Fic
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
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

No Related Data.
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