13. Jun 2017 Rating news – Corporations
Scope rates German power and gas company Uniper SE at BBB+, Stable Outlook
The first-time ratings reflect Scope’s view on Uniper’s diversified business mix of regulated and non-regulated utility segments and strong financial risk profile, to which management is committed through a conservative financial policy.
Scope Ratings assigns a corporate issuer rating of BBB+ to Germany-based Uniper SE. The Outlook is Stable. Scope also assigns an S-2 short-term rating. The senior unsecured debt under the debt issuance programme is rated BBB+.
Scope regards the company’s business risk profile to be driven by its dominant position among the top 10 power generators in major western European markets combined with its strong position within different service territories in Russia. While the company’s high exposure to commodity trading, particularly to gas, weighs on its overall margins compared to those of other European utilities, its credit quality is supported by its wide outreach within gas trading in Germany, covering almost half of the country’s needs. Nevertheless, Scope regards the company’s cash flow to be strongly influenced by the industry-inherent volatility in gas trading, the achievable pricing for outright power generation in major European markets, and its significant exposure to the Russian rouble. In light of the energy transition, i.e. decarbonisation and decentralisation, Scope regards Uniper’s shift of its business mix towards regulated and quasi-regulated segments (such as capacity remuneration), as well as shrinking results from volatile merchant segments (gas exploration), as gradually strengthening its business risk profile.
Uniper’s financial risk profile strongly supports the overall issuer rating. The company has strongly deleveraged over the last two years, helped by solid operating cash flows, fairly restricted investment needs and asset disposals. Scope highlights that the envisaged proceeds from the Yuzhno Russkoye disposal, EUR 1.7bn to be received by the end of 2017, will further reduce leverage. Despite Scope’s expectations about weaker operating cash flows, which are predominantly driven by lower power prices and the sale of the E&P business, the company will not require significant external financing, thanks to comparatively limited maintenance and dedicated growth capex over the next 2.5 years, and a dividend payout linked to free operating cash flows.
Current and expected key credit metrics signal a strong financial position as indicated by a Scope-adjusted leverage of comfortably below 2.0x (Scope-adjusted debt/EBITDA 2016: 1.7x; 2017E: 0.9x; 2018E: 0.6x) and an EBITDA/interest cover of well above 10.0x. However, Scope’s assessment of Uniper’s financial risk profile is based on a Scope-adjusted leverage of between 1.5-1.7x in the mid-term as Uniper may use the significant cash cushion from the sale of Yuzhno Russkoye to exploit investment opportunities. In light of Scope’s leverage expectations for 2018/19E the company would have a theoretical headroom on additional debt of significantly more than EUR 1bn before reaching Scope's assumption on a leverage between 1.5-1.7x.
Key rating drivers
The ratings are driven positively by the following:
- Ongoing shift towards more cash flow from regulated and quasi-regulated activities, which can partly offset the volatility from non-regulated activities
- Dominant player in European power and gas supply
- Strong diversification regarding markets, technologies, and some integration across the power utilities’ value chain, thereby limiting the incremental effect of underperformance in particular business segments
- Well-shielded market position in the regulated Russian power market
- Strong financial risk profile following deleveraging efforts, supported by the conservative financial policy and comfortable liquidity profile
The following points limit the rating:
- Overall business risk profile significantly weaker than the financial risk profile
- Blended industry risks at BB+ primarily driven by strong dependence on cyclical business in non-regulated power generation and commodity trading
- Cash flow volatility stemming from still-high exposure to merchant business risks
- Profitability strongly impacted by external non-controllable effects and overall margin dilution by high share of trading business
- Significant exposure to the volatile Russian rouble
S-2 short-term rating
The assigned S-2 short-term rating reflects Uniper’s sound liquidity profile. While Scope highlights the company’s operating strength with expected positive free cash flows over the next few years, Uniper’s liquidity also comprises a EUR 2bn debt issuance programme (EUR 1.5bn unused), a EUR 1bn commercial paper programme and committed undrawn credit facilities of EUR 2.5bn. The company’s new financial structure after the spin-off from E.ON SE has strongly reduced refinancing needs over the next few years. Scope expects Uniper to comfortably refinance upcoming debt maturities through internal cash sources.
The Stable Outlook reflects Scope’s expectations that Uniper will retain its strong financial risk profile, by aligning leverage to its announced target of comfortably below 2.0x (using Uniper’s definition of economic net debt/EBITDA). The envisaged disposal of its stake in the Russian gas field Yuzhno Russkoye at the end of 2017 will give Uniper comfortable headroom for further investments and a further growth of Uniper’s dividend payouts from Scope’s perspective, without threatening the company’s leverage guidance. Moreover, Scope’s Stable Outlook incorporates further stabilisation of the business risk profile, through a gradually higher share of regulated and quasi-regulated infrastructure activities.
A rating upgrade could be warranted if Uniper were to keep its already very low leverage below 1.0x (Scope-adjusted debt/EBITDA) over a longer period, which could result from investment headroom not being utilised.
A negative rating action could be required if leverage exceeded a Scope-adjusted debt/EBITDA of 1.8x on a sustainable basis, due to a persistence of low achievable wholesale prices in power generation or low commodity prices in the trading business or large debt-financed acquisitions.
The full rating report, which includes the rating rationale and analytical details, is available HERE.
Analyst Conference Call
Scope will present the ratings of Uniper SE in a telephone and web conference. Analysts are available at the end to answer questions.
Scope’s Analyst Conference Calls allow investors, decision-makers and advisors from banks and other distribution channels to be informed on the main aspects of current fund analyses.
The Analyst Conference Call will take place on Tuesday, 20 June 2017 at 2:30 pm CET.
Register for the call HERE.
Regulatory and legal disclosures
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs, Dr Stefan Bund.
The rating has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Werner Stäblein, Committee Chair
The rating concerns an entity, which was evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.
Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer has participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.
Key sources of information for the rating
- Website of the rated entity
- Audited annual financial statements
- Interim statements
- Detailed information provided on request
- Investor presentations
- Data provided by external data providers
- External market reports
- Press reports/other public information
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on 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 default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.
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