TEXT-Fitch cuts RWE to 'A-', stable outlook
(The following statement was released by the rating agency)
July 26 - Fitch Ratings has downgraded RWE AG's (RWE) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'A', subordinated note rating to 'BBB' from 'BBB+' and Short-term IDR to 'F2' from 'F1'. The Outlook is Stable.
The downgrade mainly reflects Fitch's expectation that the financial burden, in terms of net debt and nuclear provisions, will remain at high levels over the rating horizon. This already takes account of management's restructuring measures, including the asset disposal programme, efficiency initiatives, a focus on long-term strategic capital expenditure and capital measures.
RWE is one of the leading integrated utilities in Europe with strong positions in the gas and electricity markets in Germany, UK as well as the Netherlands, a growing presence in Central and Eastern Europe, a growing renewables business across Europe, upstream oil and gas interests and open cast mining of lignite. While the asset disposal programme includes divestment of some network businesses, the group continues to maintain a balanced business profile with a broad level of asset diversity and integration across the value chain. In terms of geographical spread a large proportion of generation capacity (63.5%) and earnings (64.0%) remains centred in Germany.
Fitch calculated for FY11 funds from operations (FFO) adjusted net leverage of 3.5x. FY11 included many exceptional effects from Germany's nuclear phase-out decision after the Fukushima events. Therefore, the agency's base case forecast provides for FFO adjusted net leverage reducing towards 2x over the rating horizon.
Fitch's existing methodology for nuclear operators is better suited for jurisdictions where a dedicated asset fund is built up over time to match the operator's nuclear provision or for companies where nuclear plants still have longer-term economic useful lives with the cash impact of decommissioning being a distant prospect.
Therefore, Fitch considered how the net debt and nuclear provisions move over time in absolute terms and how FFO adjusted net leverage would evolve over time if the group were to fully fund the nuclear provision with a separate pool of dedicated assets over the remaining useful life of the plants. The conclusion was that this would yield FFO adjusted net leverage of above 3x over the rating horizon, a number that is comparable with other integrated utilities without nuclear assets.
As part of the analysis Fitch also looked at RWE's guidance in terms of their own debt factor (net financial obligations including provisions/EBITDA) and came to the conclusion that a target of 3x or slightly below 3x was not commensurate with an 'A' rating.
Other key aspects that Fitch considered as part of the rating process were the following:
- The challenging operating environment in the German electricity market with a fluctuating demand pattern for thermal plants across the day due to the integration of renewables, healthy reserve margins during summer and tight reserve margins during winter.
- High CO2 content of RWE's generation due to the sizeable capacity of lignite plant.
- Full auctioning of CO2 certificates from 2013.
- Negative oil-gas-spread on part of the group's gas supply contracts.
- Ongoing renewal of the thermal generation capacity with sizeable more efficient plant coming onstream over the next two years.
- High dividend pay-out of 50-60% of recurring net income.
Fitch attributed 0% equity credit to the EUR1.75bn hybrid securities issued by RWE in September 2010 as the documentation includes a 'look-back' provision. The recently issued CHF250m and CHF150m (separate issues), GBP750m and USD1,000m hybrid securities do not contain such a provision and attract 50% equity credit in line with Fitch's 'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis', dated 11 December 2011 at www.fitchratings.com.
As of 31 December 2011, the group held EUR2bn of cash and cash equivalents, EUR4.3bn of short-term securities (excluding pledged assets) and EUR4bn of committed, undrawn credit facilities with a maturity in November 2016. This liquidity position provides adequate funding well into 2013. Proceeds from the asset disposal programme will further bolster liquidity headroom.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- If leverage as expressed by RWE's reported debt factor were to move close to 2.5x Fitch may consider a positive rating action. This assumes that there are no significant differences between EBITDA and cash earnings.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- If leverage as expressed by RWE's reported debt factor were to remain materially above 3x for FY13 and beyond Fitch may consider a negative rating action. This guidance again assumes that EBITDA and cash earnings are fairly closely aligned.
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