Rating Rationale

Scope has today affirmed Uniper SE’s (Uniper) issuer rating of BBB+ with a Stable Outlook, its S-2- short-term rating as well as its BBB+ rating on the company’s senior unsecured debt. The rating affirmation reflects Scope’s view of Uniper’s business risk profile (assessed at BBB-) which remains constrained by significant merchant risks despite the company’s dominant position in power generation and gas supply. However, Scope believes that the company’s gradual and still ongoing shift towards regulated and quasi-regulated business segments strengthens the defensive character of its business model. Overall creditworthiness is strongly supported by Uniper’s improved financial risk profile (assessed at A) but also its sound financial policy in terms of dividend distributions and a leverage-driven M&A strategy which aims at preserving credit quality.

Scope notes that Uniper remains an independent company for the time being, after Fortum Deutschland SE, a subsidiary of Finnish Fortum Oyj (not rated by Scope), was only able to convince 0.47% of shareholders in addition to E.ON’s 46.65% share of Uniper to tender their shares in Fortum’s public tender offer. Fortum expects to finalise the transaction in mid-2018, upon obtaining all required regulatory approvals. While it remains to be seen whether Fortum will acquire additional shares in Uniper on the market over the next months, Scope believes that Fortum will stick to a minority share given the Finnish utility’s publicly announced strategy of establishing co-operation with Uniper as well as the potential pressure on Fortum’s financial risk profile.

Scope continues to consider Uniper’s business risk profile to be a constraint on the overall rating. While Uniper clearly ranks among the dominating power generators in major Western European markets and holds the number one position in gas trading in Germany and number two position in Europe, its overall business risks remain affected by industry-inherent and non-controllable factors acting on commodity prices, generation disruptions or unhedged translation risks, particularly with regard to the Russian rouble. However, Scope believes that Uniper’s business risk profile justifies the affirmed rating given the company’s gradual transition towards lower-risk utility segments (power generation in capacity markets such as Russia, France and the UK but also power generation under long-term contracts with industrials), which Scope believes will make up around 60% of the company’s EBITDA by 2020. Scope sees the company as being largely on track despite the delayed commercial operation date for power plant Datteln IV.

Uniper’s operating result in terms of Scope-adjusted EBITDA (including operating leases) is expected to remain depressed compared to 2016/17 (Scope’s forecast: 2018E: EUR 1.6bn, 2019E: EUR 1.4bn) due to the lack of positive effects from gas price renegotiations, the lapse of cash flow contributions following the sale of its gas exploration and production (Yuzhno Russkoye) and the effect from lower average prices for power generation volumes compared to the previous two years. Regarding the latter, Scope believes that forward power prices in Uniper’s core markets of Germany and Sweden will remain well above the low levels seen in 2015-16 due to the rebound of commodity prices and gradual shifts in the markets’ merit order systems. These shifts involve the phasing-out of nuclear in Germany and coal as well as a sustainably higher price for CO2 emissions which is favourable for Uniper’s nuclear, hydro and gas-fired plants in Europe (see also Scope’s research ‘European Utilities: Commodity Rebound Past the Trough’). Over the next 2.5 years, Scope believes that Uniper will have upside rather than downside as displayed by current forward prices in Germany and Sweden which are well above the company’s hedged prices for 2018 and 2019 (1y forward Germany baseload YTD at around 36 EUR/MWh against hedged price of between 20-24 EUR/MWh; 1y forward Nordpool baseload YTD currently at around 29 EUR/MWh against hedged price of between 20-24 EUR/MWh). Reflecting Scope’s expectations of net capex of less than EUR 1bn per annum, free cash flows are expected to remain in positive territory despite the delayed EBITDA contribution from Datteln IV, thereby allowing Uniper’s envisaged dividend growth, in Scope’s view.

Scope acknowledges Uniper’s prudent financial policy which focusses on: i) communicated maximum leverage of less than 2.0x (as per Uniper’s definition of net economic debt including operating leases, full asset retirement obligations, full pensions and margining positions divided by adjusted EBITDA); ii) dividend payouts linked to free cash from operations (funds from operations minus maintenance or replacement capex); and iii) a commitment to small-scale M&A activities only, in conjunction with low-risk targets. Scope expects that this combination will lead to a robust financial risk profile, supporting the agency’s rating case.

Uniper’s financial risk profile is considered to strongly support the affirmed rating. Uniper’s debt protection – as measured by EBITDA/interest cover – comfortably stands above 10x (15.0x in 2017 vs 7.6x in 2016), thanks to the cash-financed redemption of bank loans in Q1 2017, the lapse in 2017 of interest one-off effects from the spin-off from E.ON in 2016 and limited needs for additional external financing. Scope-adjusted debt/EBITDA, which includes Scope’s adjustments to long-term obligations for pensions and asset retirements but also margining positions and leases, is fully in line with Scope’s financial risk profile assessment (2017: 1.0x vs 1.6x in 2016). The agency notes that Scope’s leverage is slightly lower than the company’s calculated leverage in terms of net economic debt/EBITDA due to Scope’s adjustments/haircuts on long-term pension provisions and asset retirement obligations, thereby reflecting the payout character of such debt obligations.

The company has retained sufficient headroom for relatively small investments or minor disposals before reaching the leverage range of between 1.5-1.7x upon which Scope’s rating case is based. All things being equal, Scope calculates Uniper’s potential headroom for additional debt (which could be used for additional growth capex beyond Uniper’s communicated EUR 500m growth investments) to be around EUR 400m based on the agency’s leverage maximum of 1.8x. Similarly, Scope calculates that the company’s EBITDA could fall short by around EUR 250m in 2018/19 before reaching the agency’s leverage-based rating trigger for a negative rating action. Such headroom will increase in case Uniper will conduct further asset disposals which are not reflected in Scope’s rating case. Moreover, Scope believes that the company’s debt profile can largely absorb the anticipated downturn (compared to 2016/17 levels) in the company’s EBITDA profile in 2018 and, particularly, 2019 (when lower EBITDA contributions from Global Commodities and International Power are anticipated).

In light of Scope’s expectation of continued positive free cash flows at least at breakeven, and in conjunction with Uniper’s continued access to its EUR 2bn debt issuance programme on top of its EUR 2.5bn undrawn credit facilities (committed until June 2021), the company is expected to comfortably cover the upcoming sizeable maturity of EUR 500m from its corporate bond in December 2018 as well as minor positions from bank loans and finance leases. For 2019 and 2020 Scope expects debt repayments of less than 200m per annum, which is expected to be covered from internal cash flows.

Based on our positive assessment of liquidity and Uniper’s BBB+ issuer rating, Scope affirms its short-term rating of S-2. This rating reflects Scope’s perception of the company’s sustainable liquidity profile in terms of short-term debt coverage and access to external corporate funding. Including all internal and external sources of liquidity, coverage of short-term debt is projected to stand well above 2x, a level Scope considers to be commensurate with the rating.

Key Rating Drivers

Positive

• Ongoing shift towards more cash flow from regulated and quasi-regulated activities, which can partly offset volatility from non-regulated activities
• Dominant player in European power and gas supply
• Strong diversification regarding markets, technologies, and some integration across the value chain, thereby limiting the incremental effect of underperformance in particular business segments
• Well-protected market position in the regulated Russian power market
• Strong financial risk profile following deleveraging efforts, supported by conservative financial policy and comfortable liquidity profile

Negative

• Overall business risk profile significantly weaker than financial risk profile
• Industry-inherent merchant risks under adverse market conditions in non-regulated power generation and commodity trading and resulting cash flow volatility
• Profitability heavily impacted by external non-controllable effects and overall margin dilution due to high share of trading business
• Significant exposure to the volatile Russian rouble

Rating Outlook

The Stable Outlook reflects Scope’s expectations that Uniper will retain its strong financial risk profile in line with the publicly communicated maximum leverage target of below 2.0x (as per Uniper’s definition of economic net debt/EBITDA). This corresponds to a leverage as per Scope’s definition (Scope-adjusted debt/EBITDA) of around 1.7x. Moreover, Scope’s Stable Outlook incorporates the further stabilisation of Uniper’s business risk profile through the gradual transition towards a higher contribution from regulated and quasi-regulated business segments. The Stable Outlook also reflects the status quo regarding shareholder structure and the fact that no significant changes have been made to Uniper’s communicated financial policy. Scope would reassess its rating, should Fortum or any other shareholder obtain a controlling stake in Uniper.

Scope believes that the possibility of a rating upgrade is remote, given the company’s communicated financial leverage and dividend policy. Scope could consider a rating upgrade if Uniper’s leverage, as measured by its Scope-adjusted debt/EBITDA, stabilised at below 1.0x over a prolonged time horizon.

Scope maintains its downgrade trigger for a negative rating action. A negative rating action could be required if Scope expected that the utility’s financial risk profile was likely to deteriorate to Scope-adjusted debt/EBITDA above the rating case, i.e. to 1.8x, over a prolonged period as a result of consistently low achievable wholesale prices in power generation or persistently low commodity prices in the trading business.

For the detailed rating report, click here.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) Corporate Ratings and European Utilities are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 13 June 2017.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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