Fitch Affirms EnBW at 'A-'; Outlook Stable
WARSAW, Poland & LONDON -- May 24, 2013
Fitch Ratings has affirmed Energie Baden-Wurttemberg AG's (EnBW) Long-term
Issuer Default Rating (IDR) at 'A-', senior unsecured rating at 'A-' and the
Short-term IDR at 'F2'. Additionally, Fitch has affirmed EnBW's subordinated
note rating at 'BBB'. The Outlook on the Long-term IDR is Stable.
The affirmation reflects Fitch's view that the implementation of
credit-preserving measures, to offset negative effects of depressed power
generation market conditions as a result of structural changes in the segment
and weak energy demand, and Germany's atomic law, is progressing as expected.
KEY RATING DRIVERS
Reducing Cash Flows
Fitch expects that pressure on the operating cash flows will continue in the
medium term in light of decreased generation margins, full auctioning of CO2
certificates from 2013, and accelerated nuclear decommissioning. This is only
partially offset by the growth in EnBW's network business (a differentiator
compared to some of its peers). The latter faces working capital pressure due
to insufficient cost allocating by the regulator. However, we view this as a
Fitch forecasts funds from operations (FFO) lease-adjusted net leverage to
remain around 2.0x and FFO interest coverage around 5.0x reflecting external
debt reduction following equity issue (EUR822m) in July 2012 and accommodative
Credit Preserving Measures
In addition to shareholder's support, the company mitigates the weakness in
generation by implementing a strict efficiency programme, including
simplification of their organisational structure and employee layoffs. EnBW
retains capex flexibility, and plans to reduce its funding burden through
participation models for certain projects. We believe there is limited scope
for near-term non-core disposals but acknowledge the management's commitment
to free cash flow (FCF) generation and current credit ratings.
EnBW has only limited headroom to absorb negative changes in the credit
metrics at its current rating level, as we believe that pressures on the cash
flow in the generation segment are structural and near-term regulatory or
systemic support for underutilised facilities (eg capacity payments) is
uncertain. While contribution from better performing businesses (networks,
renewables - with only a gradual ramp up of wind capacity and possibly
reducing support and expected returns for future projects) increases, in
relative terms this partly reflects weaker generation and trading segment.
Fitch therefore views the business risk of the company as higher and has
tightened its rating guideline for EnBW's current rating to 2.5x (from 3.0x)
measured as FFO lease-adjusted net leverage.
Although Fitch reflects nuclear decommissioning in its forecasts, the agency
is reviewing its leverage ratio adjustments to better capture the financial
profile of utilities that face firm and relatively near-term decommissioning
dates, as is the case in Germany. The fact that nuclear decommissioning
liabilities are not directly captured in the numerator of the leverage rating
guideline added to its tightening. EnBW employs an advanced modelling and
management of its pension and nuclear decommissioning liabilities.
At end-March 2013, EnBW had a sound liquidity position; with unrestricted cash
of almost EUR2.2bn, a fully available syndicated facility of EUR2bn (maturity
2017), and a EUR512m committed undrawn bank line against EUR986m of short-term
financial liabilities and our expectation of marginally negative FCF for 2013.
Positive: Rating upside is currently limited by EnBW's business profile
features including structural changes in the power generation segment.
Negative: Future developments that could lead to a negative rating action
Weakening of credit metrics with FFO lease-adjusted net leverage above 2.5x
and FFO interest coverage below 4.5x on a sustained basis, for example as a
consequence of weaker than expected operational performance or higher capex
(net of disposals).
Additional information is available on www.fitchratings.com. The ratings above
have been initiated by Fitch as a service to investors.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Jacek Kawalczewski, CFA, +48 22 338 6291
Borja Monforte, +34 93 467 87 47
Fitch Ratings Espana, S.A.U.
Paseo de Gracia, 85. 7th floor
Josef Pospisil, CFA, +44 20 3530 1287
Peter Fitzpatrick, +44 20 3530 1103, London
Press spacebar to pause and continue. Press esc to stop.