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EWE AG -- Moody's affirms EWE's Baa1 ratings, outlook stable

·17 min read

Rating Action: Moody's affirms EWE's Baa1 ratings, outlook stableGlobal Credit Research - 12 Aug 2022Frankfurt am Main, August 12, 2022 -- Moody's Investors Service (Moody's) has today affirmed EWE AG's (EWE) Baa1 long-term issuer rating, the (P)Baa1 rating of the company's EUR2.0 billion medium-term note programme, and the Baa1 senior unsecured ratings of the existing bonds issued under this programme. The outlook remains stable.RATINGS RATIONALEToday's rating action reflects Moody's view that EWE will be able to maintain financial metrics commensurate with the current rating, notwithstanding its full consolidation of the 50%-owned onshore wind joint venture Alterric GmbH (Alterric or the JV), with a moderately weaker stand-alone credit profile, over which EWE exerts management control. To reflect the changed business risk profile of the consolidated group and the minority ownership in Alterric effectively limiting EWE's direct access to the JV's cash flows, Moody's has tightened the requirements for the Baa1 rating.Alterric is jointly owned by EWE and Aloys-Wobben-Stiftung (AWS), the sole shareholder of the wind turbine manufacturer Enercon, and incorporates the combined wind onshore portfolios of the JV partners, amounting to around 2.3 gigawatts (GW) at the end of 2021, which are largely located in Germany and, to a lesser degree, France. The JV launched its operations at the end of March 2021.The JV is meant to expand the wind portfolio to around 5GW by 2030, with a focus on Germany and other European markets which implies substantial investments that will be financed largely on a project finance basis, as currently. The bulk of the existing operational wind assets is located in Germany and provides relatively predictable cashflow for the benefit of the JV partners.Affirmation of EWE's Baa1 ratings reflects the company's relatively stable and predictable earnings profile, supported by regulated electric and gas distribution activities, which – before Alterric was added - regularly accounted for around 60% of operating profit, or earnings before interest and taxes (operating EBIT or OEBIT). Incorporating Alterric's generation assets that continue to receive fixed, renewable energy feed-in tariffs, Moody's estimates the company's OEBIT from regulated and quasi-regulated activities over the next few years will be around 60-70%, taking also into account lower regulated returns on equity for distribution infrastructure, which will decrease to 5.07% from 6.91%, starting in 2023 for gas and in 2024 for electricity. The rating affirmation further reflects the substantial reduction in EWE's exposure to thermal generation owned through its swb subsidiary in Bremen, as a consequence of retiring the 303 megawatt (MW) coal fired block 6 at Hastedt plant in July 2021 under Germany's coal exit scheme. Exposure to conventional generation is now limited to more efficient, environmentally friendly gas and cogeneration facilities and to the coal-fired 119MW Hastedt block 15, which is currently expected to be retired by the end of 2023. The company remains exposed to market price risk for its retail supply business, given the structural short position of own generation but has been able to pass on increased energy costs in its electricity and gas retail tariffs without incurring major customer losses. The purchase of gas is conducted with various market participants, mostly located in Northwestern Europe. Moody's understands that there is no significant direct exposure to gas supplies from Russia . As one of the largest gas storage operators in Germany, EWE plays an important role for the security of supply in Germany; as of 9 August, its capacities were nearly 86% filled, exceeding the German average of about 73.7% and thus already now fulfilling the 85%-storage level obligation as of 1 October, imposed by the amended German Energy Act. EWE is 74% owned by two holding companies, which together represent 21 local cities and municipalities located in the state of Lower Saxony. However, given its fragmented ownership structure, in February 2021 Moody's ceased to treat the company as a government-owned related issuer (GRI) and stopped applying the GRI methodology published in February 2020. The remaining share of 26% is held by infrastructure investment company Ardian Infrastructure.STRUCTURAL SUBORDINATIONAt the launch of the JV, Alterric's owners announced plans for a future annual build-out of more than 200MW, with funding to be arranged largely on a project finance basis, in line with existing projects. Accordingly debt at the project vehicles is structurally senior to that at EWE and distributions from the JV will be subject to the continuing capital investment by the vehicle and any restrictions incorporated in the project finance debt terms. Given that EWE and AWS have stated that Alterric will operate independently and not be integrated into the organizational structures of its parent companies, Moody's expects funding arrangements for new investments to be concluded without any material financial involvement of the JV partners. In addition, given high CAPEX levels, the rating agency assumes that dividends paid by Alterric to its owners will only moderately contribute to EWE's cash flows. Given that Alterric debt is expected to account for around 30% of EWE's consolidated adjusted debt, and the nature of the JV funding arrangements, Moody's does not apply notching to EWE's senior unsecured obligations at this time.LIQUIDITYAs of 31 December 2021, EWE had EUR1,022 million of reported cash on hand. EWE also retains EUR750 million in committed funds available under a syndicated revolving credit facility maturing in June 2027 and in February arranged another EUR1.5 billion of short-term bank liquidity lines in view of increasing market volatility. In addition, EWE has approximately EUR590 million in committed short-term bilateral facilities with maturities ranging from one to three years. Alterric has a EUR200 million working capital facility in place which matures in August 2024 and serves to pre-finance new wind projects.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation that EWE will be able to maintain a financial profile consistent with the Baa1 rating together with the successful development of Alterric's expansion plans, resulting in a consolidated business risk profile at least on the current level.A rating upgrade is not currently anticipated given the planned investments mostly in renewable and infrastructure segments which will likely weaken EWE'S consolidated financial metrics. An upgrade of the rating would require Funds from operations (FFO)/net debt above 25% and Retained Cash Flow (RCF)/net debt of at least 20% on a sustained basis, assuming no deterioration in the group's consolidated business risk profile.Sustained deterioration in FFO/net debt to below 20% and deterioration in RCF/net debt to below the mid-teens in percentage terms, would result in downward rating pressure. Adverse energy market conditions or materially negative regulatory decisions for the next regulatory period for electricity and gas could also contribute to negative rating pressure, absent offsetting measures. In addition, a substantially faster than anticipated buildout of Alterric assets that had the effect of Alterric debt accounting for materially more than 30% of EWE's consolidated debt could, depending on the group business profile at that time, result in a downgrade of the rating due to structural subordination.EWE AG is one of Germany's largest regional integrated utilities and provides energy distribution and supply as well as telecommunications and IT services to customers principally in the federal state of Lower Saxony. In 2021, EWE recorded revenues of EUR6,120 million and an operating EBIT of EUR355 million.The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://ratings.moodys.com/api/rmc-documents/75129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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