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UTILITIES
Publication Date:
Aug. 17, 2007
Issuer Credit Rating:
A+/Negative/A-1
Primary Credit Analyst:
Peter Kernan,
London,
(44) 20-7176-3618
Secondary Credit Analysts:
Amrit Gescher,
London,
(44) 20-7176-3733
Ralf Etzelmueller,
Frankfurt,
(49) 69-33-999-123
46 ■ NOVEMBER 2007
RWE AG
Rationale
The ratings on Germany-based utility RWE AG
reflect the group’s strong competitive position in
the German electricity market, which provides the
majority of group earnings and has delivered
sustained strong operating performance. The
ratings also reflect the group’s strong financial
profile. These strengths are partially offset by the
weakening of RWE’s business profile following
the sale of its regulated water operations and its
reliance on competitively exposed generation for
future growth.
Competition in the German retail market
remains moderate. Nevertheless, the introduction
of a network regulator and tariff cuts will likely
increase competitive pressures. Meanwhile, RWE’s
substantially lower level of freely granted carbon
dioxide (CO2) allowances for phase 2 of the EU
Emissions Trading Scheme (2008-2012) will likely
reduce generation margins. (RWE estimates that
slightly more than 50% of its German CO2
emissions will be covered by free allowances.)
RWE will, however, benefit from changes in the
German tax regime, which will result in the
average tax rate on German profits dropping to
31% from about 39%, from 2008.
RWE’s balance sheet has further strengthened
following the sale of RWE Thames Water for an
enterprise value of £8.0 billion (sale price of £4.8
billion plus pro forma net debt of £3.2 billion) in
December 2006. At June 30, 2007, net debt
(including pension provisions, and under RWE’s
definition) was €6.8 billion. RWE plans to
complete the sale of its U.S. water business
through an IPO by the end of 2007, subject to
market conditions, which will further deleverage
the group. RWE has a general net debt cap of
between €22 billion and €24 billion and has
substantial headroom relative to this cap to
increase leverage. RWE has material nuclear asset
retirement obligations, of which Standard &
Poor’s Ratings Services treats about €7 billion
as debt.
The group’s financial performance has been
strong over the past few years, with funds from
operations (FFO) increasing to more than €7
billion for full-year 2006, on the back of strong
power prices. The medium-term outlook for
power prices continues to be favorable on the
back of tight capacity margins and tightness in
fuel markets--given strong global demand for
commodities--as well as a tighter market for CO2.
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
RWE’s target for 2007 is that revenue will rise
slightly above the 2006 level of €44.2 billion and
that EBITDA will rise by between 5% and 10%
above the 2006 level of €7.17 billion.
There is an ongoing debate within the EU about
levels of competition in power markets, and a
draft third liberalization directive is expected later
in 2007. Among other areas, the debate has
focused on ownership unbundling of transmission
businesses to increase competition. Such a
measure could adversely affect RWE’s German
business, but Standard & Poor’s currently
considers that it is unlikely that this change will
be required.
Short-term credit factors
The ‘A-1’ short-term rating is underpinned by
large and diversified cash flows (cash flows from
operating activities were in excess of €2.5 billion
for the six months to June 30, 2007), RWE’s
current low level of net debt, and a benign
maturity profile. The rating is also supported by
substantial alternative sources of liquidity,
including more than €12 billion of liquid
securities held to offset on-balance-sheet nuclear
liabilities. At Dec. 31, 2006, €5.5 billion of
RWE’s €20.0 billion debt issuance program was
available. RWE faces a moderate maturity peak of
about €3.7 billion in 2007. In addition, the
company had unused funds of €3.5 billion
equivalent under its $5.0 billion CP program at
Dec. 31, 2006.
Outlook
RWE’s financial profile is strong for the ratings.
The negative outlook, however, reflects some
near-term uncertainty about the direction of
RWE’s strategy, financial and acquisitions
policies--in part due to planned changes in senior
management--and the manner in which RWE
could releverage its balance sheet.
The deterioration of RWE’s business profile as a
result of the water disposals could negatively
affect the ratings if the disposals are followed by
rapid and substantial investments in riskier
operations. To maintain the ratings, RWE needs
to restrict itself to moderate-scale or low-risk
acquisitions, and maintain conservative financial
policies. The outlook could be revised to stable
if RWE maintains its current strong
financial profile. ■