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Rating action

Scope has today affirmed Uniper SE’s issuer rating of BBB+ with Stable Outlook. The S-2 short-term rating and BBB+ senior unsecured debt rating were also affirmed.

Rating rationale

Uniper’s majority shareholder, Fortum (holding increased to 73.4% in May 2020), continues to rule out a domination and/or profit-and-loss transfer agreement or a squeeze-out until the end of 2021 at least. In Uniper’s supervisory board, Fortum occupies four of the six seats (including chairperson) representing shareholders but is not linked to the other six seats representing workers. From Scope’s perspective, Uniper will remain an independent company in the absence of a domination or profit-and-loss transfer agreement or a supervisory board majority that can directly influence financial decisions, e.g. on investments/divestments or dividend pay-outs. Hence, Uniper remains rated on a standalone basis.

The issuer rating remains constrained by Uniper’s business risk profile (BBB-) but supported by its strong financial risk profile (A) and sound financial policy, which aims at preserving the rating level.

Uniper’s business risk profile still sees significant negative effects from industry-inherent and non-controllable factors acting on commodity prices, generation disruptions and unhedged currency translation risks, particularly regarding the Russian rouble. These risks are partly mitigated by Uniper’s market position and outreach in gas trading (first in Germany and second in Europe) and through its power generation in major Western European markets.

Scope highlights the company’s consistent execution of its de-risking strategy. This encompasses the gradual transition towards lower-risk utility segments and the decarbonisation of its European power generation fleet. The latter is implemented via asset sales (e.g. recent disposal of French hard-coal plants) and gradual mothballing (exit strategy) of the remaining coal-fired power plants in Germany and the UK against compensation via auctions organised by the Federal Network Agency (BNetzA). This has already yielded results, with CO2 output of its European generation fleet down by more than 30% since 2016. Even so, 30% of its European power generation capacity remains exposed to lignite and hard coal (ESG: credit-negative environmental risk factor). By 2025, this figure is likely to reduce to around 10% of its European generation fleet – a positive ESG credit risk factor – through the disposal of Schkopau and mothballing of Scholven, Wilhelmshaven, Heyden, Staudinger 5 and Ratcliffe power plants. The gradual decarbonisation will further reduce non-controllable pricing risks on CO2 emissions and mitigate regulatory and reputational risks. Further, compensation payments for shutting down coal-fired capacities in Germany are likely reinvested into assets that are less exposed to pricing and volume risks and align with Uniper’s focus on regulated and quasi-regulated activities, or simply used to keep indebtedness low. Therefore, Scope’s view on a gradual stabilisation of Uniper’s business risk profile still holds, with lower-risk utility segments (power generation in capacity markets as well as power generation under long-term contracts with industrials) expected to contribute roughly 50% of group EBITDA over the next few years.

Amid the Covid-19 health crisis, Scope remains confident that Uniper’s EBITDA will remain in a range of EUR 1.4bn-1.6bn between 2020 and 2022. The company faces little pricing and cash flow risks for 2020 and 2021 despite the volatility of spot and forward prices for outright electricity production in its relevant markets. This is largely due to its extensive hedging of outright generation volumes: for 2020, 100% is hedged at EUR 46/MWh in Germany and 95% at EUR 28/MWh in the Nordic region; for 2021, 55% at EUR 49/MWh in Germany and 70% at EUR 28/MWh in the Nordic region – all above prices seen over the past three years. With the company’s European and Russian power generation largely secured by regulation, long-term contracts and/or extensive hedging, the only likely sources of volatility are trading volumes in global commodities, primarily natural gas, and the Russian rouble.

Uniper’s financial risk profile (A) strongly supports the overall rating. Of the EUR 3bn gross debt balance, only EUR 0.9m bears interest (mostly from leases), with the remainder relating to economic debt such as unfunded pensions and asset retirement obligations. As expansion capex is expected to be limited and to be largely financed internally, Scope expects no significant external financing over the next few years. Debt protection, as measured by EBITDA/interest cover, is expected to remain comfortably above 10x in light of the limited need for external financing and the roughly stable group EBITDA over the next three years. More importantly, leverage as measured by Scope-adjusted debt/EBITDA which includes Scope’s adjustments to long-term obligations for pensions and asset retirements but excludes margining liabilities, is expected to remain low, at below 1.7x, forming the basis for the rating case (2019: 1.0x; 2018: 0.9x; 2017: 1.0x). Scope-adjusted leverage is forecasted to increase to around 1.5x by 2022, reflecting expected negative discretionary cash flows of minus EUR 200m-500m expected during that period, but is unlikely to surpass Scope’s 1.8x threshold for a downgrade. According to Scope’s sensitivity analysis, the company has ample headroom on both net debt and unexpected shortfalls in EBITDA before reaching this 1.8x threshold: All things being equal, the headroom for additional debt is around EUR 500m (which could be used for growth capex beyond the EUR 400m communicated), while EBITDA can fall short by around EUR 150-200m in 2020/21 (15-20% against Scope’s estimates), which is deemed unlikely in the short term given Uniper’s recent confirmation of its 2020 guidance amid strong Q1 results and good visibility on the remainder of 2020. The same applies to Scope’s 2021 forecasts, with Uniper’s revenues partly secured by hedged volumes and prices in European power generation, as well as largely contracted business in global commodities and power generation in Russia.

Uniper is committed to keeping a credit rating of at least BBB, which corresponds to the company’s aspired debt factor (economic net debt/EBITDA as per Uniper’s definition) of 2.0x maximum. Scope underscores that the Uniper’s leverage figure is structurally slightly higher than Scope-adjusted debt/EBITDA, due to Scope’s adjustments and haircuts on long-term pension provisions, asset retirement obligations and margining to reflect their pay-out character and asset coverage. Given Uniper’s maximum leverage threshold and its rating commitment Scope understands that the company is likely to forego capex and dividends or seek adequate recapitalisation should leverage come close to the internal limit. Consequently, Scope has good comfort on the affirmed BBB+/Stable.

Uniper’s liquidity remains sound, with ratios of consistently above 200% (both internal and external sources) at all times. Uniper has to cover around EUR 1.0bn of debt in 2020-22, which includes margining positions related to electricity and gas trading of about EUR 0.5bn as at YE 2019. Margining liabilities are already largely balanced by receivables, while the remaining exposure can be covered comfortably by the large unrestricted cash buffer of EUR 1.3bn as of March 2020, free operating cash flows (consistently at least at breakeven), and the unused EUR 1.8bn multi-year syndicated credit facility (committed until 2024 with an extension option of one year).

Outlook and rating-change drivers

The Stable Outlook reflects Uniper’s status as an independent company. A Scope-adjusted debt/EBITDA of up to 1.7x remains commensurate with the current rating, assuming business risks do not increase significantly. The Outlook further incorporates Uniper’s maintenance of its financial policy, namely i) positive free operating cash flows; ii) gradual dividend increases; and iii) commitment to a maximum economic net debt/EBITDA of around 2.0x (as per Uniper’s definition).

A negative rating action could be required if Uniper lost its status as an independent company and developed a more aggressive stance on leverage and dividends. A potential negative rating action is also possible if Scope-adjusted debt/EBITDA was anticipated to reach above 1.8x for a prolonged period, driven, for example, by much lower operating cash flows without measures to counteract the weaker earnings.

A rating upgrade remains a remote scenario, given the company’s communicated financial leverage and dividend policies, but could occur if Scope-adjusted debt/EBITDA reached below 1.0x for a prolonged period.

Long-term and short-term debt ratings

In conjunction with the affirmation of the BBB+/Stable issuer rating, Scope has affirmed the BBB+ rating on senior unsecured debt.

Based on the sound liquidity and Uniper’s BBB+ issuer rating, Scope affirms its short-term rating of S-2. The short-term rating mirrors Scope’s perception of the company’s sustainable and robust 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 at well above 200% over the next three years.

One or more key drivers for the credit rating action are considered ESG factors.

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 and rating outlook (Corporate Rating Methodology, published on 26 February 2020; Rating Methodology for European Utilities, published on 18 March 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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 and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Henrik Blymke, Managing Director
The ratings/outlooks were first released by Scope on 13 June 2017. The ratings/outlooks were last updated on 6 May 2019.

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
© 2020 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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