July 27, 2012 / 1:37 PM / 7 years ago

TEXT-S&P cuts RWE AG's corporate credit ratings to 'BBB+'

Overview
     -- In our view, the business risk profile of German utility RWE AG has 
weakened, owing to continuously weak profitability amid challenging market 
conditions that are unlikely to improve materially in the medium term.
     -- Furthermore, RWE's divestment program has shown limited results, 
failing to compensate for the impact of lower cash generation on key credit 
metrics. RWE's financial risk profile has therefore in our view deteriorated.
     -- We are lowering our long-term ratings on RWE and its subsidiaries to 
'BBB+' from 'A-' and affirming the 'A-2' short-term ratings.
     -- The stable outlook reflects our opinion that RWE should be able to 
achieve and maintain cash flow credit metrics commensurate with the ratings 
over the medium term. In particular, we regard efforts to strengthen the 
capital base and planned lower capital expenditure as positive.
 
Rating Action
On July 27, 2012, Standard & Poor's Ratings Services lowered its long-term 
corporate credit ratings on German power and gas utility RWE AG and
its subsidiaries to 'BBB+' from 'A-'. The outlook is stable. 

At the same time, the 'A-2' short-term corporate credit rating was affirmed. 

Rationale
The downgrade reflects our view of a sustained deterioration of RWE's business 
risk profile, as well as its weakened cash generation capacity and credit 
protection ratios in the medium term. 

In particular, we are concerned about the long-term profitability of RWE's 
power generation operation, especially in the key German market. RWE's power 
generation operation depends on its large thermal generation fleet and 
remaining nuclear fleet. The group's nuclear and lignite generation assets are 
well placed in the merit order in terms of marginal cost, resulting in healthy 
generation spreads and a high number of operating hours. However, the 
remaining coal- and gas-fired units are unlikely to contribute significantly 
to the group's operating profit. This is because of the increasing share of 
renewable energy sources replacing thermal power plants in the overall 
generation mix. RWE has recently profited from low carbon dioxide (CO2) 
prices, which have relieved the burden of high CO2 emissions. However, the 
risk of rising CO2 prices remains. Additionally, RWE is still renegotiating 
its long-term gas supply contracts with some of its major suppliers, which is 
causing a structural deficit for its gas midstream operations.

The ratings continue to be underpinned by group's leading position in power 
generation and supply in northwestern Europe, reasonable business and 
geographic diversity, and meaningful share of stable regulated earnings. We 
further assume that RWE will be able to cut costs to improve overall 
profitability. We also anticipate increasing profit contributions from RWE's 
exploration and production activities. We continue to view RWE's business risk 
profile as "strong," however at the lower end of the category.

We have revised our view of the financial risk profile to "significant" from 
"intermediate". RWE's cash flow generation capacity has weakened as a result 
of difficult operating conditions, which we do not expect to ease materially 
in the medium term. Additionally, RWE has not made significant headway in 
executing its announced EUR7 billion disposal program. The group has however 
increased its capital base significantly, by issuing shares and hybrid 
securities, to realign its capital structure to likely weaker future cash 
generation. We believe these measures will help stabilize the group's 
financial risk profile at the current level.

Liquidity
 The 'A-2' short-term ratings reflect our view of RWE's "strong" liquidity,
 based on our projection that the ratio of liquidity sources to uses will 
exceed 1.5x for the next 12 months and remain higher than 1.0x over the next 
24 months. The liquidity assessment reflects our view of:
     -- RWE's reported access to unrestricted cash and short-term marketable 
securities, including fixed-income instruments, of EUR5.7 billion as of March 
31, 2012; 
     -- An undrawn EUR4 billion credit facility maturing in November 2016; and 
     -- Our estimate of somewhat lower operating cash flow in 2012 than the 
EUR5.5 billion achieved in 2011, and a moderate increase in 2013. 

This compares with our assumptions on cash uses for RWE, which include:
     -- Investments averaging about EUR5.5 billion annually over the next two 
years; 
     -- Annual dividend payments of about EUR1.5 billion; and
     -- Repayment of about EUR5 billion of short-term and long-term debt over 
the next two years.

The group's standing in the financial markets appears strong. It has solid 
relationship with banks and prudent financial risk management, in our view. We 
understand that there are no restrictive covenants in the documentation 
attached to the group's debt. 

Outlook
The stable outlook reflects our assumption that RWE will be able to maintain 
cash flow credit metrics commensurate with the ratings over the medium term. A 
ratio of adjusted funds from operations (FFO) to debt of 20% would be 
commensurate with the high end of the range for a "significant" financial risk 
profile and the current ratings, barring further weakening of the business 
risk profile. We believe that the ratios could fall below this level in 2012, 
but strengthen again in subsequent years, mainly as a result of lower capital 
expenditure, gradual improvement in cash generation, and deleveraging.

We could take a negative rating action if we believed RWE's credit metrics 
were unlikely to remain sustainably consistent with the ratings, in 
particular, if cash flow generation from operating activities were lower than 
we currently anticipate or if expected deleveraging did not take place. Also, 
a further weakening of RWE's business risk profile, for example as a result of 
a meaningfully lower share of stable regulated income, could lead to a 
downgrade, in line with our rating methodology. 

A positive rating action is unlikely in the short to medium term. This is due 
to the continuously difficult operating environment, which we expect to 
persist, hampering RWE's financial performance. In the longer term, ratings 
upside could arise if RWE improved its financial risk profile and showed 
materially stronger key credit metrics. With the current business risk 
profile, this would mean a financial risk profile in our "intermediate" 
category and adjusted FFO to debt sustainably higher than 25%.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Downgraded; Ratings Affirmed
                                        To                 From
RWE AG
Essent Nederland B.V.
Essent N.V.
 Corporate Credit Rating                BBB+/Stable/A-2    A-/Negative/A-2

RWE AG
 Senior Unsecured                       BBB+               A-
 Junior Subordinated                    BBB-               BBB

RWE Finance B.V.
 Senior Unsecured*                      BBB+               A-

Ratings Affirmed
RWE AG
Essent N.V.
Essent Nederland B.V.
 Commercial Paper                       A-2                

*Guaranteed by RWE AG.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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