Ratings Downgrades

At Utilities, No Credit for Past Glory

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Will dismantling it cost more than building it?
  • Why it matters

    Why it matters

    Energy companies are unhappy with the government commission’s nuclear plant demolition and storage proposal but may have little leverage to make any significant changes.

  • Facts

    Facts

    • The utilities are worried that the commission proposal will adversely affect their credit ratings.
    • They are expected to contribute €23.3 billion to the fund, or about €6 billion more than the roughly €17 billion they had set aside.
    • The three major rating agencies have already downgraded the credit ratings of the nuclear plant operators.
  • Audio

    Audio

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The German government’s intentions were undoubtedly good. The nuclear commission it appointed last fall was supposed to reach consensus over how the country should pay for the nuclear phase-out.

And its 19 members did so last week, when they unanimously approved a concept designed to guarantee the demolition of reactors and disposal of fuel rods.

There is only one snag: Those who are supposed to pay for the effort aren’t pleased.

Energy giants E.ON, RWE, EnBW and Vattenfall have rejected the concept. In a joint statement, they said that it would undermine their economic performance.

Specifically, they’re worried the additional costs would weigh on their credit ratings, depriving them of the financial strength they need to restructure as Germany moves from fossil and nuclear to renewable energy sources.

According to industry insiders, RWE, the largest utility serving the German market, is particularly concerned.

“From our perspective, this is too expensive and not financially responsible,” RWE Chief Financial Officer Bernhard Günther said at a press conference in Frankfurt on Monday.

“Even if we were only required to contribute the reserves, it would adversely affect our position with the rating agencies.”

Bernhard Günther, RWE Chief Financial Officer

The nuclear commission wants to deposit a portion of the money utilities set aside in a public fund. While the companies remain responsible for reactor demolition, the money would be used for interim and permanent storage of fuel rods.

Nuclear plant operators are expected to contribute €23.3 billion ($26.8 billion) to the fund. This is about €6 billion more than the roughly €17 billion the companies have already set aside in reserves for this purpose. The risk markup is supposed to cover possible cost increases.

The new model is intended to safeguard the task of decommissioning and waste disposal, which will take decades, against the potential bankruptcy of a utility. But industry experts claim the risk markup could actually make bankruptcy more likely.

 

03 p19 RWE Lost Trust-01

 

Although Mr. Günther doesn’t share this assessment, he sees the company’s rating in jeopardy. “Even if we were only required to contribute the reserves, it would adversely affect our position with the rating agencies,” he said.

 

Originally, Mr. Terium’s aim was to calm communal shareholders, who were still unsettled about last year’s dividend cutback. Source: Bloomberg
RWE CEO Peter Terium’s isn’t happy about the government commission’s proposal. Source: Bloomberg

 

So far, rating agencies have assumed that RWE would need the bulk of funds in 20, 30 or 40 years, according to Mr. Günther. But under the government’s new plan, the billions in reserves would have to be paid directly into the fund.

Because of the long-term nature of the liabilities, the rating agencies would even count a portion as equity, and they would also acknowledge that the reserves are conservative by international standards.

“The higher the risk markup, the worse it is for the rating,” Mr. Günther noted.

Standard & Poor’s, Moody’s and Fitch have already placed the creditworthiness of RWE and E.ON under review weeks ago, and, to some extent, their ratings of EnBW and Vattenfall, as well. One of the reasons cited by the rating agencies was the uncertainty surrounding the nuclear issue.

RWE, in particular, can hardly afford another downgrade if it hopes to continue to obtain financing at a reasonable cost. RWE lost its high A rating after the reactor disaster in Fukushima, Japan. S&P and Fitch now rate RWE’s creditworthiness at only BBB, while Moody’s rates it at Baa2.

According to the scales used by central banks, this means that RWE’s credit rating is still moderate. But RWE is now only two steps from non-investment grade, a rating for weak borrowers.

The situation is hardly any better at E.ON, Europe’s largest utility, which is rated only one level higher than RWE.

“The manner in which this risk markup was determined is not okay,” said an E.ON executive, who asked to remain anonymous. “The outcome ignores the facts.”

EnBW and Vattenfall agree. Company insiders say the commission focused too heavily on the risks of a cost increase, and they point out that it is still possible to bring down the costs of interim and final storage. In internal documents, they estimate the potential for reducing costs at up to €9 billion.

The commission’s proposal was initially well received by the stock market. The RWE share shot up by almost 7 percent on the first day, although it has lost ground since then.

“In the short term, our company doesn’t depend on the share price but on access to the capital market,” said Mr. Günther. “The rating is more essential to us.”

The energy companies want to pull out all the stops to improve the commission’s proposal. Strictly speaking, the concept is merely a proposal, one that the German government still has to shape into a law.

For this reason, the utilities are focusing on talks with the government.

“We can’t simply accept the outcome,” said a source at one of the big German energy companies, noting that the commission’s proposal is “nothing more than a basis for discussion.”

Mr. Günther noted that RWE is still examining the proposal. “We remain available for talks,” he said.

But the chances of that happening are slim. The commission includes representatives of churches, business and unions, as well as politicians with the center-right Christian Democratic Union, the center-left Social Democratic Party and the Green Party – and the government has already welcoming the proposal.

 

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A crane lift in Neckarwestheim moves part of a cooling tower put into operation in 1976, and demolished in 2012. Source: Franziska Kraufmann / dpa

 

Jürgen Flauger covers the energy market for Handelsblatt. Andrea Cünnen covers finance from Frankfurt. Klaus Stratmann is the deputy chief of the Berlin burea and covers energy policy. To contact the authors: flauger@handelsblatt.com, cuennen@handelsblatt.com and stratmann@handelsblatt.com

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