S&P lowers Innogy ratings

14 March 2003 – Standard & Poor’s rating Services said Thursday it had lowered its long and short-term ratings on U.K.-based vertically integrated energy company Innogy PLC to ‘A-‘ from ‘A’, and to ‘A-2’ from ‘A-1’, respectively. The outlook is negative.

“The rating actions reflect a weakening in Innogy’s stand-alone credit quality, the erosion of its financial strength indicators to below expected levels, and more challenging U.K. wholesale and retail energy supply markets,” said Standard & Poor’s credit analyst Paul Lund. The company’s financial profile is weaker than expected owing to higher debt levels and increased costs resulting from greater customer turnover in the competitive retail business. Further financial pressure is likely to come from rising capital expenditure relating to renewable generation assets and payment of a larger dividend to its parent company RWE AG (A+/Negative/A-1).

The ratings also reflect Innogy’s stand-alone business position as a leading player in the U.K.’s competitive electricity and gas market, and the continuing expectation that it will play an important and long-term role in RWE’s portfolio. Although no further major acquisitions are anticipated in the near future, Innogy could benefit from organic growth in the U.K., which RWE considers to be a key market.

With about 7 million customers, Innogy is the third-largest electricity and gas supplier in the U.K. after Centrica PLC (A/Stable/A-1) and Powergen U.K. PLC (A/Watch Neg/A-1). To the detriment of operating profitability, sustained strong retail prices in the U.K., combined with low wholesale electricity prices, are likely to lead to erosion of domestic supply margins in the medium term. This is offset by the fact that Innogy’s domestic supply volumes are matched to its low-cost generating portfolio, with very limited exposure to out-of-the-money contracts.

Innogy has a cash-pooling arrangement with RWE and Thames Water PLC (A+/Negative/A-1), which provides it with much cheaper short-term funding and deposit arrangements. If any new core funding requirements arise, these will be met by bilateral term loans from RWE AG.

“The negative outlook reflects the negative outlook on Innogy’s parent, RWE, as well as the short term stresses on Innogy’s financial profile pending the delivery of expected cost savings and increasing competitive conditions in the U.K. domestic supply market,” said Mr. Lund. “Any lowering of the ratings on RWE would result in a further lowering of the ratings on Innogy.”