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Rating action

Scope Ratings GmbH (Scope) has today affirmed Uniper SE’s issuer rating of BBB+ with a Stable Outlook. Concurrently, the S-2 short-term rating and BBB+ senior unsecured debt rating have been affirmed.

Rating rationale

Scope continues to rate Uniper on a standalone basis, reflecting its financial and largely strategic independence from majority shareholder Fortum, which holds 76.1% (as of YE 2020) in the company. Despite its majority ownership, Fortum does not have direct control of Uniper. Both companies are strengthening their cooperation and aligned strategic direction. This is evidenced by the recent appointments of Klaus-Dieter Maubach as CEO and Tiina Tuomela as CFO and the formation of joint teams for the joint development of activities in: i) Nordic hydro; ii) renewables; and iii) hydrogen. Nevertheless, Scope believes that Uniper retains its independence for the time being. This is due to the absence of a domination or profit-and-loss transfer agreement, which Fortum has ruled out until YE 2021, or a supervisory board majority that can directly influence financial decisions, e.g. on investments/divestments or dividend pay-outs.

As such, the issuer rating reflects Uniper’s unchanged strong financial risk profile (A) and its significantly weaker business risk profile (BBB-).

Uniper’s business profile has proven very robust amid the pandemic. This is thanks to its: i) widely hedged exposure in power generation; ii) good support from robust regulated and quasi-regulated business activities; and iii) well-balanced position in commodity trading, with a solid and well-diversified customer base as well as gas storage capacities which offer good potential for arbitrage in gas trading. As such, Uniper demonstrates good resilience to adverse developments relating to volatile commodity pricing, temporary disruptions in power generation and adverse currency effects, primarily stemming from a further weakening of the Russian rouble.

Following the formation and stabilisation of its business model in recent years, Uniper is gradually moving into an expansion and investment mode, targeting low-risk utility segments, such as low-carbon generation, hydrogen and the post-decommissioning utilisation of former power plant sites. Around 30% of Uniper’s European generation capacity is currently related to power generation from hard coal and lignite, which exposes the company to environmental, reputational and cash flow risks (ESG factor: credit-negative risk). However, Scope views positively the accelerated decarbonisation strategy of its European generation portfolio amid rising CO2 prices and the fuel switch from coal to gas. With the earlier-than-expected decommissioning of the Heyden and Wilhelmshaven power plants at YE 2020 and in 2021 respectively, Uniper is likely to accelerate the reduction of CO2 output from its European generation assets beyond the more than 50% that was already saved from 2016 to 2020. As such, the company is well on the way to limiting its exposure to coal-based power generation to less than 10% by 2025 (Maasvlakte 3 and Datteln 4) after the scheduled disposal of Schkopau in Q4 2021 and the decommissioning of Scholven, Staudinger 5 and Ratcliffe by 2025 at the latest. At the same time, Scope sees good opportunities for Uniper to accelerate the greening of its generation portfolio through investment in renewable generation capacities (with the aim of ramping up a renewables capacity ex hydro of around 1 GWp by 2025 and 3 GWP by 2030), which is among its top priorities for expansion capex. Overall, Scope sees the accelerated transition towards lower-risk utility segments and the decarbonisation of Uniper’s European power generation fleet as a positive ESG-related credit risk factor.

Scope is not overly concerned about potential cash flow risk from rising CO2 prices forcing a coal-to-gas switch, although this is negative for Uniper’s remaining coal-fired generation exposure in the medium term. Based on Uniper’s total power generation portfolio, Scope expects the company to benefit slightly from a rising CO2 price as: i) the hedged position for CO2 widens the achievable margin in outright unhedged power generation in the short term; ii) unneeded credits can be sold to the market thereby generating a material trading profit; iii) a rising CO2 price naturally boosts wholesale power prices, which will result in widened margins for power generation from hydro and nuclear capacities; and iv) a significant portion of contracts do not bear CO2 price risks for Uniper as such contracts are based on a cost-plus approach with rising prices passed on to the customer. In the medium-to-long term, Scope assumes that a high CO2 price will be cash flow-accretive for the whole generation portfolio in Europe as Uniper’s generation portfolio is dominated by hydro, nuclear and gas. Margins for hydro and nuclear volumes (more than 40% of generation volume) are widened, while margins for gas (more than 30% of generation volume) remain unchanged with the pass-through of increased costs.

Scope regards a floor of about EUR 1.5bn on Uniper’s group EBITDA with a high cash conversion of more than 75% into operating cash flow as sustained. While around 40% of recurring EBITDA is likely to be generated from regulated and quasi-regulated activities, downside risks for the more volatile unregulated generation business and commodity trading are mitigated by the wide extent of hedging. Generation volumes in Germany and the Nordpool are almost fully hedged for 2021 and 2022 at record prices in Germany of close to EUR 50/MWh and in the mid-twenty EUR/MWh range in the Nordics, which is at least higher than in the trough years of 2016/17.

Uniper’s issuer rating remains strongly supported by its sound financial risk profile. The company’s indebtedness of around EUR 3bn continues to be largely driven by debt-like provisions for pensions and asset retirement, which make up about 60% of the total gross debt exposure. The company’s envisioned growth strategy earmarks annual capex of slightly below EUR 1bn per annum for a granular set of investment projects. Nevertheless, Scope believes that Uniper is likely to retain its financial profile, as displayed by a sustained Scope-adjusted leverage of below 1.8x. Scope anticipates that scheduled maintenance and growth capex are likely to be fully funded internally, bolstered by forecasts of a robust EBITDA level of about EUR 1.5bn and above per annum with good chances of some upside in 2021 (stemming from compelling opportunities for Uniper’s gas midstream business in the US), and a high cash conversion. Dividends in the area of EUR 500-550m p.a., which Scope believes will be determined linked to the availability of potential extra investment opportunities, are expected to put little pressure on Uniper’s leverage. With slightly negative discretionary cash flow, Scope’s rating case incorporates a gradually deteriorating leverage, measured by SaD/EBITDA of 1.5-1.8x between 2021 and 2023.

According to Scope’s sensitivity analysis, the company has ample headroom on both net debt and unexpected shortfalls in EBITDA before reaching the agency’s 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 400-500m communicated), while EBITDA can fall short by around EUR 150-200m in 2020/21 (15%-20% against Scope’s estimates). Scope thinks this is unlikely in the short term, given Uniper’s recent update of its 2021 guidance amid strong Q1 results and good visibility on the remainder of 2021. Debt protection, as measured by EBITDA/interest cover, remains comfortably above 10x. This is thanks to the limited need for external financing and fairly stable group EBITDA over the next three years but also reduced net interest payments going forward following increasing interest income from loans provided to finance Nordstream 2, which is nearing commercial operation.

Uniper’s liquidity remains very solid, as displayed by liquidity ratios above 200% (both internal and external sources) at all times. The company faces debt repayments adding up to roughly EUR 1,400m between 2021 and 2023, which includes about EUR 600m (as per Q1 2021) related to margining positions for electricity and gas trading. Whereas margining positions are widely balanced by similar receivables, the remaining debt maturities are expected to be comfortably covered by the company’s unrestricted cash buffer of more than EUR 900m as of March 2021, an untouched volume of EUR 1.8bn from multi-year syndicated credit lines which are committed through to 2025 and consistently positive expected free operating cash flow.

Scope regards Uniper as firmly committed to preserving its solid investment-grade rating of at least BBB, which is highly important for the company’s commodity trading activities. This commitment is primarily demonstrated by the treasury’s updated leverage ceiling of a maximum debt factor of 2.5x (economic net debt/EBITDA as per Uniper’s definition). While this debt factor was raised against last year, it would still correspond to Scope’s leverage maximum of 1.8x. That is because Scope’s leverage definition (Scope-adjusted debt/EBITDA) results in a structurally lower number due to adjustments and haircuts on long-term pension provisions, asset retirement obligations and margining to reflect their pay-out character and asset coverage. Moreover, Scope regards the company’s dividend policy as being aligned with maintaining the current credit profile. While the company has pleased shareholders over the past few years with a steadily rising dividend payout, Scope believes that management would be likely to compromise on dividend payouts in the future if it required additional funding for investment opportunities to further stabilise the business profile or keep leverage low.

Outlook and rating-change drivers

The Stable Outlook reflects Uniper’s status as an independent company and strong ratings support from its financial risk profile, with a leverage of 1.5-1.8x. The Outlook assumes that Uniper is likely to balance its capex and dividend payments in order to keep its robust financial position.
A negative rating action could be considered if Uniper lost its status as an independent company and developed a more aggressive stance on leverage and dividends, leading to a persistently weaker financial position. A negative rating action could also be warranted if Scope expected Scope-adjusted debt/EBITDA to reach above 1.8x for a prolonged period.

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

Long-term and short-term debt ratings

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

Uniper’s short-term rating is affirmed at S-2, based on consistently strong liquidity and good, unchallenged access to external funding channels.

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 Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Utilities, 18 March 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed
Lead analyst: Sebastian Zank, Executive Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 13 June 2017. The Credit Ratings/Outlook were last updated on 25 May 2020.

Potential conflicts 
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.