uniper se...2020/09/02 · uniper benefits from its diverse generation portfolio, regulated or...

Uniper SE

Primary Credit Analyst:

Bjoern Schurich, Frankfurt (49) 69-33-999-237; [email protected]

Secondary Contacts:

Per Karlsson, Stockholm (46) 8-440-5927; [email protected]

Pierre Georges, Paris (33) 1-4420-6735; [email protected]

Gerardo Leal, Frankfurt +49 69 33999 191; [email protected]

Research Contributor:

Philip Steinkeller, London + 44 20 7176 0192; [email protected]

Table Of Contents

Credit Highlights

Outlook

Our Base-Case Scenario

Company Description

Business Risk

Financial Risk

Liquidity

Environmental, Social, And Governance

Group Influence

Issue Ratings - Subordination Risk Analysis

Ratings Score Snapshot

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 31, 2020 1

Table Of Contents (cont.)

Related Criteria

Related Research


Uniper SE

Business Risk: SATISFACTORY

Vulnerable Excellent

Financial Risk: MODEST

Highly leveraged Minimal

bbb+bbb bbb

Anchor Modifiers Group/Gov't

Issuer Credit Rating

BBB/Negative/--

Credit Highlights

Overview

Key strengths Key risks

Stable nonmerchant power generation earnings base that

provided about 50% of EBITDA in 2019.

Unclear investment strategy following majority buyout by Finland's energy

producer, Fortum.

Uniper SE is one of the largest European generators and has a

diversified asset base across technologies and markets, with 24

gigawatt (GW) capacity across Europe, and another 11GW

internationally.

Larger carbon-emission-heavy power generation portfolio than peers, which

increases political, regulatory, and reputational risks. It also increase the

transformation risk associated with Europe's decarbonization strategy.

Positive outlook for its gas generation and storage business, in

light of European energy transition (security of supply).

Exposure to volatile commodity prices (about 50% of EBITDA), for power

generation with some delay due to hedging strategy.

Supportive hedging strategy for outright generation (100% for

2020 and above 80% for 2021, as of August 2020) provides good

earning stability/cash flow visibility.

Exposure to country risk in Russia, notably foreign exchange (FX) risk and

geopolitical risks (about 20%-25% of EBITDA), mitigated by stable capacity

payments.

Uniper has committed to a supportive financial policy that

supports the rating and has the ability to manage its metrics.

Exposure to large working capital swings and liquidity needs because it uses

commodity trading extensively for hedging and supply business. It has gas

storage capacity of about 90 terawatt hours (TWh) (7.7 billion cubic meters).

Fortum's stake in Uniper now exceeds 75%, increasing its influence. That said, we do not currently consider Uniper to

be under the direct control of its majority shareholder. Under German law, full control (that is, a shareholder giving

binding instructions to management) can only occur if it implements a domination and profit-and-loss transfer

agreement (DPLTA). Fortum has ruled out any such agreement with Uniper until the end of 2021. At this stage, we do

not consider that Fortum has the financial capacity to implement a DPLTA without diluting the group's credit quality.

That said, under German corporate governance laws, the size of its stake in Uniper means that Fortum fulfils the

prerequisites to nominate all six shareholder supervisory board representatives, and to implement all steps leading to a

DPLTA or squeeze-out in the short term.

Fortum increased its Uniper holdings and voting rights, first to 73.4% from 49.99% (after acquiring two tranches that

closed in March and May 2020) and then to 75.01% on Aug. 19. The increase required regulatory approvals by Russian

and U.S. authorities (see "Uniper SE 'BBB' Rating Affirmed On Russian Regulatory Approval; Outlook Negative,"

published on March 20, 2020). The remaining holdings are in free-float. In April 2020, Fortum increased its

representation on Uniper's supervisory board to four of the six shareholder representatives. Two directors remain


unaffiliated with either the executive board or the controlling shareholder, as recommended by German law.

Chart 1 Chart 2

We understand Uniper and its majority owner Fortum are strongly committed to maintaining the current rating. In our

view, the combined group has a solid incentive to preserve its rating, because the performance of Uniper's trading and

global commodities business is strongly linked to its creditworthiness. We consider that Uniper's financial policy and

management's operational track record support the assigned rating and that Fortum is committed to maintaining the

current rating on Uniper (see "Fortum Oyj 'BBB' Rating Affirmed On Russian Regulatory Approval; Outlook Negative

As Material Uncertainties Remain," published March 19, 2020). That said, we still lack clarity regarding Fortum's

investment strategy. Therefore, we factor into our base case neither upside or downside business risk (e.g., synergies

for Uniper. Both companies are expected to provide more details of their joint strategy in December 2020. Even

though Uniper has no ambition to exit the Russian market, we believe these operations within Uniper, as well as

Fortum itself, could prove to be more of concern to majority owner Fortum because of the high degree of carbon

emissions in Russia, and the lack of local economic incentives for their decarbonization.

Although the COVID-19 pandemic has made conditions in the power market tougher, we believe Uniper can maintain

funds from operations (FFO) to debt above 55% and adjusted debt to EBITDA at or below 1.7x. This would be in line

with the assigned rating. Uniper's operating performance is likely to be affected in 2021 and 2022 by the testing

conditions in the power price markets, and potentially ruble depreciation over euro and lower power demand from

COVID-19 restrictive actions. We still consider the downside pressure is contained, thanks to the actions the group has

taken over recent years to strengthen its business risk profile. These include reducing its merchant power market

exposure, and improving its hedging strategy, risk management, and capital expenditure flexibility.

Uniper's almost fully hedged 2020 merchant power generation (100%/90% Germany/Nordic at the end of June)

benefits from achieved power prices that, at €46 per MWh in the German market and €29 per MWh in the Nordic

market, were higher than previous years, but lower than we expected. Compared with our previous year's base case,

we estimate the impact from lower power prices on power generation to be about €250 million combined over 2020

and 2021. Its midstream business benefits from optimization along a sudden steep decrease in gas prices, which

temporarily improved margins on gas supply in the first quarter of 2020. We do not anticipate that this temporary


Uniper SE

effect will cause margins to come under pressure going forward, as they will return to normalized levels.

Corresponding atypical high gas storage levels for the season (89% EO in the second quarter, 71% EO in the first)

should delay working capital cash inflows.

A further decline in electricity market prices would have a limited effect on the 2021 European generation business

because 85%/80% of German/Nordic outright exposure is hedged (as of the end of June). The main short-term effect

of the pandemic on investments was the delayed restoration of Uniper's Russian 754MW lignite plant Berezovskaya

Block 3, which is now expected to return to production half way through 2021, instead of the third quarter of 2020,

contributing to monthly EBITDA with RUB1.4 billion in capacity payments.

Chart 3


Uniper SE

Chart 4

We view as positive Uniper's strategy to drive decarbonization and its green portfolio transformation. In July 2020, the

German parliament passed a law to ensure that the country would stop using coal no later than 2038. Uniper recently

announced its own accelerated coal exit plan, which includes shutting down nearly all of its coal-fired power plants in

Germany over the next five years. The sole exception is the newly built, highly efficient Datteln 4 plant which

contributes about €100 million a year to EBITDA. We expect this plant to run until at least 2035. The hard coal plants,

Wilhelmshaven and Scholven, which have a combined capacity of 1.5GW, are expected to go offline in 2022. A further

1.4GW in hard coal capacity (Staudinger and Heyden) are scheduled to close by 2025.

Uniper is exiting European lignite generation by disposing of its 58% stake in the 900 megawatts (MW) Schkopau plant

in Germany in Saxony-Anhalt to EPH, effective in October 2021. By 2025, Uniper plans to operate only two coal plants

in Europe: Datteln 4 and the Dutch Maasvlakte 3. We understand that the timing Uniper will enter hard coal plants into

auctions is subject to consideration of Uniper's existing off-take agreements and employee job security factors, as well

as security of supply needs (cold reserve), as declared by German regulator Bundesnetzagentur and German

transmission system operators (TSOs). We expect limited auction proceeds from coal exit as an unprofitable market

environment for hard coal generation (coal to gas switch) gives most operators an incentive to enter plants into

auctions as early as possible. Hard coal generators can expect a maximum of €165 million/GW for the first 4GW

capacity in September 2020, transitioning to a maximum of €89 million/GW by 2027.

However, given the real estate scarcities in Europe, and Germany specifically, we anticipate growth opportunities in

the company's brownsite development. Converting coal plant sites to greener usage, such as efficient gas plants, waste

incineration, commercial scale storage solutions, data centers, biomass, or other renewable generation, faces low

permit hurdles and limited public opposition.


Uniper SE

To further decarbonize Uniper's operations, the company plans to refit its gas flows and gas plants via blue and green

hydrogen. We expect income from discontinued coal generation to be mitigated by the switch to gas generation,

Datteln 4, lease income from reserve capacities to network providers, and brownsite development.

Chart 5


Uniper SE

Chart 6

We do not expect U.S. sanctions to have a direct impact on Uniper, despite its financial involvement in the Nord Stream

2 project. The threatened U.S. sanctions are unlikely to affect Uniper directly because potential sanctions won't be

applied retroactively and we understand the five Western finance partners do not need to provide further financing for

the Nord Stream 2 project, which is intended to double the Nord Stream corridor capacity by 55 billion cubic meters

per year. That said, any actions that would avoid or delay gas or money flows could have indirect financial

implications for the company's up to €950 million loan and corresponding interest income of about €70 million-€80

million annually.

The U.S. administration considers the sanctions on the pipeline relate to a potential threat to its national security and

foreign policy interests. We understand the U.S. is facing increased competition for its liquefied natural gas (LNG)

exports to Europe. In our base case, we do not assume any Nord Stream 2 income for 2020 and 2021.


Uniper SE

Outlook: Negative

The negative outlook reflects that on Uniper's majority owner, Fortum. It indicates risks related to maintaining

sufficient financial strength for the assigned rating. We consider the Fortum group's efforts to carry out remedy

measures and execute on a joint strategy as key determinants. At present, we lack clarity on that joint strategy and

potential synergies.

Downside scenario

A downgrade of Fortum would likely lead to a downgrade of Uniper, unless we see evidence that Uniper is

insulated, thereby reducing the risk of Uniper being impaired by its parent's weakened credit quality. Furthermore,

we could lower our rating on Uniper if we revise our assessment of its SACP to 'bbb-' from 'bbb'; that is, if we

anticipate that the company will not be able to maintain adjusted FFO to debt (including lease income and

accounting for margin movements) above 55% or adjusted debt to EBITDA (accounting for margin movements) of

maximum 1.7x.

Upside scenario

We could revise the outlook on Uniper to stable in line with that on Fortum, if we believe that the group's leverage

is gradually declining in line with Fortum's stated intentions and we are gaining clarity on the group's strategy.

An improvement of the group's business risk profile as a result--for example, of meaningful further reduction of

merchant power market exposure--could also lead to an outlook revision to stable. However, we consider this

scenario to be less likely.

Our Base-Case Scenario


Uniper SE

Assumptions

In our base case for 2020-2021, we assume:

• A real GDP contraction of 7.8% in the eurozone in 2020 and growth of 5.5% in 2021.

• A real GDP contraction of 6.2% in Germany in 2020 and 4.4% growth in 2021.

• German outright generation hedges: 100% hedged at about €46 per megawatt-hour (/MWh) for 2020 and 85%

hedged at €46/MWh for 2021.

• Swedish outright generation hedges: 90% hedged at about €29/MWh for 2020 and 80% hedged at €27/MWh

for 2021.

• Swedish and German run-of-river hydro coefficient: 98%

• Wholesale power prices in Germany of €37-€40/MWh over 2020-2021.

• Wholesale power prices in Nordics of €15-€22/MWh over 2020-2021.

• 1.1GW German hard coal plant Datteln 4 in operation from mid-2020, and contributing about €100 million or

more to EBITDA annually.

• Nord Stream 2 cash-effective income to contribute about €70 million-€80 million annually to adjusted FFO (up

to €950 million loan), from 2022, instead of 2021.

• No meaningful sanctions due to Nord Stream 2 investment, no indirect impact via write-downs of its up to €950

million loan.

• Berezovskaya Block 3 (754MW) lignite plant commercial return following repair and modernization delayed to

the first half of 2021 from the third quarter of 2020 and receiving capacity payments under the Russian capacity

supply agreement scheme (CSA) until 2024; all together contributing about RUB1.4 billion per month to

EBITDA (average capacity price of RUB1,500/MW/month).

• Capex of below €2 billion, including about €700 million for maintenance and replacement in 2020 and 2021

combined.

• No restructuring, no asset disposals, and no integration of operations into Fortum.

• Dividends of about €420 million in 2020, plus about €40 million payments to minority interests; in 2021,

dividend distributions of about €500 million and minority interests of about €40 million.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic.

The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will

remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half

of 2021. We are using this assumption in assessing the economic and credit implications associated with the

pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our

assumptions and estimates accordingly.

We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a

surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global

Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit

Pressure," published on March 17).


Uniper SE

Key metrics

Uniper SE--Key Metrics*

--Fiscal year ended Dec. 31--

(Mil. €) 2018a 2019a 2020e 2021f

EBITDA 1,489.0 1,702.0 >1,500 >1,500

Funds from operations (FFO) 1,432.0 1,490.0 ~1,400 ~1,400

Capital expenditure 588.0 566.0 ~950 850-950

Dividends 302.0 361.0 ~460 480-550

Debt 1,401.0 1,580.4 N/A N/A

Debt (excluding margin impact§) 1,679.0 1,743.4 2,000-2,100 2,350-2,450

Debt to EBITDA (x) 0.9 0.9 N/A N/A

Debt to EBITDA (x) (excluding margin impact§) 1.1 1.0 ~1.4 ~1.6

FFO to debt (%) 102.2 94.3 N/A N/A

FFO to debt (%) (excluding margin impact§) 85.3 85.5 65-70 >55

*All figures adjusted by S&P Global Ratings. §At the end of 2019, margin receivables amounted to a negative cash balance of €336 million (€698

million in 2018) and margin liabilities to a positive cash balance of €499 million (€976 million), overstating our adjusted accessible cash by €163

million (€278 million). a--Actual. e--Estimate. f--Forecast.

• FFO to debt above 55% (including lease income and accounting for margin movement); and

• Debt to EBITDA of below 1.7x (accounting for margin movement).

As a result of the above assumptions, we see adjusted FFO of about €1.4 billion in 2020 and 2021, compared with

about €1.5 billion at end-2019. We expect 2021 figures to be supported by full-year income contribution of Datteln 4

and Irsching 4 and 5. Nord Stream 2 and Irsching 6 won't contribute before 2022. We still view Uniper as well

positioned compared with merchant power producers, because of its asset repositioning in recent years and its prudent

hedging policy.

In addition, the group's updated strategic plan provides further derisking of the portfolio in the coming years, with an

acceleration of closures of its coal and lignite plants, investments skewed toward stable nonmerchant business, and

greater flexibility to adjust the pace of investments and preserve cash.

We therefore consider that Uniper has the commitment and ability to maintain solid credit metrics, despite the current

headwinds. We understand Uniper's management is willing to preserve its 'bbb' SACP and to maintain FFO to debt

above 55%, and debt to EBITDA below 1.7x. When computing these ratios, we adjust for margin movements and lease

income.

Company Description

Uniper is an international, diversified energy company that operates in more than 40 countries and has about 11,000

employees. Its operations include power generation, commodity trading, energy storage, energy sales, and energy

services. Its core markets are Germany, Russia, the U.K., Sweden, the Netherlands, and North America.

The company owns and operates a well-diversified power generation portfolio, including facilities running on fossil


Uniper SE

fuels such as gas (17.4GW) and coal (9.2GW), as well as hydroelectric (3.6GW as of end-2019) and Swedish nuclear

(1.4GW). It has a total generation capacity of 23.5GW based in Europe and another 10.8GW in international

generation, based in Russia.

Uniper was created in 2016 from the spinoff of the gas and power activities of E.ON SE. Fortum owns about 75% of

Uniper.

Chart 7

Peer comparisonTable 1

Uniper SE--Peer Comparison

Industry sector: Energy

Uniper SE Fortum Oyj Statkraft AS Orsted A/S Verbund AG

Ratings as of Aug. 31, 2020 BBB/Negative/-- BBB/Negative/A-2 A-/Stable/A-2 BBB+/Stable/A-2 A/Stable/--


(Mil. €) 2019 2019 2019 2019 2018

Revenue 65,804.0 5,447.0 4,482.2 9,079.0 2,847.9

EBITDA 1,702.0 2,008.0 2,024.8 2,363.1 902.1

Funds from operations (FFO) 1,490.0 1,666.0 1,228.3 1,410.5 746.7


Uniper SE

Table 1

Uniper SE--Peer Comparison (cont.)

Cash interest paid 165.0 177.0 97.1 310.2 73.8

Cash flow from operations 843.0 2,015.0 1,160.0 1,695.3 678.5

Capital expenditure 566.0 695.0 586.0 2,957.7 292.4

Free operating cash flow (FOCF) 277.0 1,320.0 574.0 (1,262.4) 386.1

Discretionary cash flow (DCF) (84.0) 320.0 (292.7) (2,448.9) 208.0

Cash and short-term investments 871.0 1,432.0 1,686.5 2,978.2 29.3

Debt 1,580.4 6,477.7 1,767.0 4,356.0 2,228.4

Equity 11,942.0 13,234.0 10,214.3 11,100.3 5,941.0

Adjusted ratios

EBITDA margin (%) 2.6 36.9 45.2 26.0 31.7

Return on capital (%) 7.3 10.1 14.9 10.5 8.8

EBITDA interest coverage (x) 9.6 9.6 30.9 6.1 7.0

FFO cash interest coverage (x) 10.0 10.4 13.6 5.5 11.1

Debt/EBITDA (x) 0.9 3.2 0.9 1.8 2.5

FFO/debt (%) 94.3 25.7 69.5 32.4 33.5

Cash flow from operations/debt (%) 53.3 31.1 65.6 38.9 30.4

FOCF/debt (%) 17.5 20.4 32.5 (29.0) 17.3

DCF/debt (%) (5.3) 4.9 (16.6) (56.2) 9.3

Business Risk: Satisfactory


Uniper SE

Chart 8

Uniper benefits from its diverse generation portfolio, regulated or contracted at about 50% of EBITDA. It has exposure

to different power markets in Europe, split between Germany, the U.K., Sweden, the Netherlands, and Hungary. It

generated about 57.6TWh in 2019 (67.3 TWh in 2018). Uniper generates more than 46TWh outside Europe--mainly in

Russia--constituting about 40% of overall regulated or contracted Uniper EBITDA.

Russia's recent extension of its CSA program to foster investment in the sector (see "The Energy Transition: The

Implications Of Slow Decarbonization For Russia's Power Sector", published Dec. 11, 2019), and the U.K. capacity

market's recovery, provide a tailwind to Uniper's stable regulated earnings (see also "The Energy Transition: What It

Means For European Power Prices And Producers", published Nov. 7, 2019).

Although European energy policy is increasingly focused on renewables, we believe that European countries,

specifically Germany, are in increasing need of highly flexible electricity generation and storage capacities, which

offers opportunities for grid stability contracts with network providers. For example, Uniper is constructing the

300MW simple cycle Irsching 6 plant, which is contracted to provide off-market security of supply service to German


Uniper SE

largest TSO, TenneT, from 2022. In the medium- to long-term, the market outlook for Uniper's gas plants is favorable

given the opportunities for contracts with network providers and commercial solutions alike. For example, the recent

and expected development of clean spark spreads and coal-to-gas-switch caused Uniper to take its highly efficient

combined cycle gas turbines (CCGTs; Irsching 4 and 5) out of the cold reserve; entering merchant operation from

October 2020, they are expected to contribute about €50 million to EBITDA annually.

In our view, the company's business profile is constrained by carbon dioxide-intensive generation, exposure to merchant

power markets, country risk, and commodity trading. In our business risk assessment, we consider greenhouse gas

emission heavy activities by generators as negative. Governments increasingly regulate these activities and coal

generation especially faces an existential threat throughout Europe, combined with growing risks connected to waste

and pollution through the creation of coal ash and particulates. Uniper's high degree of exposure to merchant power,

which comprises about 25% of EBITDA, exposes it to volatile wholesale market power prices. Uniper has mitigated

this through its credit-supportive hedging strategy.

Within its international power segment, the vast majority of generation is covered by Russian capacity payments,

making earnings more stable. That said, we consider Uniper exposed to country risk because of its operations in

Russia. Issues include the lack of predictability in domestic price and tax regulations, a relatively weak banking system,

geopolitical pressures, and related exchange rate risk. Despite Uniper's global commodities segment's limited costumer

concentration risk, the company still has a significant procurement exposure to Russian government-controlled

Gazprom through the company's long-term supply contracts, which run into the 2030s. We understand proprietary

trading is very limited in the company's global commodities segment and Uniper has set tight limits and strict controls.

However, the high volumes traded by Uniper, especially physical gas, can lead to substantial working capital

swings--and hence significant liquidity needs.


Uniper SE

Chart 9

We balance Uniper's carbon dioxide-intensive generation portfolio, especially coal, against its strategic orientation to

enable the European energy transition. For example, we believe Europe's energy transition provides for a favorable

utilization for Uniper's gas transport, gas storage, regasification, and flexible gas generation capacities. Although it is

thermal, Uniper's gas generation (51% of net capacity in 2019) will benefit from future forced coal-plant

closures--notably in Germany.

Although we understand that unlimited use of natural gas is not compatible with Europe's eventual decarbonization

targets, gas generation will remain important, at least in Europe, for the next decade. The large planned closures of

nuclear and coal-fired capacities and the need for immediate response and flexible generation capacity will be crucial

to balance the increasing share of volatile renewable energy sources (see "The Energy Transition: What It Means For

European Power Prices And Producers," published Nov. 7, 2019, on Ratings Direct), at least until large energy storage

capacities are available.

Furthermore, we favorably view the company's long-term strategy to become carbon-neutral in the European

generation business by 2035. The company is introducing a timetable for an accelerated exit from its European hard

coal and lignite generation and plans to refit plants to green gas or combine with carbon capture and storage. We

understand carbon-intensive generation is under less political and social scrutiny in Russia, even though the country

signed the Paris Climate Agreement, than in Uniper's other markets. The vast majority of income in Russia constitutes

stable and credit-supportive capacity payments.


Uniper SE

We consider Uniper has an attractive generation asset portfolio, although it is not free of emissions. We consider

Uniper has achieved an industry-adequate profitability--its S&P Global Ratings-adjusted estimated return on capital for

2020 is about 6% (7% in 2019). We see limited asset concentration risk and well-diversified asset technology mix by

capacity. Specifically, its outright nuclear and hydro generation plants benefit from zero carbon emissions and a

favorable position in the merit-order, even if it is exposed to wholesale market prices after its hedges run out. The

weaker merit-order position of its thermal portfolio is offset by long-term contracting or capacity payments.

Even though Uniper is not planning to meaningfully enter renewable generation, we view the company's ambition to

decarbonize its generation portfolio as favorable, improving its asset quality going forward. As one of Europe's and

Russia's largest generators (measured by installed capacity) Uniper can favorably hedge procurement requirements

and has a track record of reducing controllable cost. For example, Uniper has been able to periodically renegotiate its

fuel contracts, reducing its earnings exposure to volatile commodity prices, including delinking procurement costs

from oil prices. Under supportive capacity payments, Uniper's Russian arm Unipro modernized its generation fleet and

expanded its highly efficient CCGT share. In the past 10 years, Unipro has increased its overall capacity by over 30%.

We assess Uniper's business profile as weaker than its peers. Peers such as Statkraft, Verbund, and Örsted all generate

a higher proportion of total power through more environmental friendly renewables, and have less exposure to Russia

and commodities trading. Uniper is also more exposed to volatility because of Russian currency exchange-rate risk.

Financial Risk: Modest

We forecast that Uniper's FFO to debt (including lease income and accounting for margin movements) will be above

55%, and that adjusted debt to EBITDA will remain at a maximum of 1.7x (accounting for margin movements). We

consider these ratios to be commensurate with the ratings, and we understand they are supported by Uniper's financial

policy (for example, a target of net debt to EBITDA of below 2x, according to Uniper's definition and the company's

commitment to the assigned rating).

Uniper's financial risk profile benefits from its hedging strategy, notwithstanding the recent pandemic-driven drop in

commodity prices. Uniper has benefited by achieving higher power prices for its outright generation in its main

markets than in previous years, notably Germany and the Nordics. Wholesale power prices are currently suppressed

and we expect this to weigh mainly on 2021 and 2022 EBITDA results of the company's outright generation, compared

with our last year's power price expectations. We estimate that the impact on the segment's earnings will be about

€250 million over 2020 and 2021 combined. That said, the company has shown its ability to benefit from falling

commodity prices via its global commodities segment. We believe the company has sufficient means to maintain

metrics in line with the assigned rating.

Large share of earnings are not exposed to wholesale prices, providing stable returns. The company's remaining

generation fleet benefits from predictable capacity payments and contracted or subsidized generation.

Under International Financial Reporting Standards (IFRS) accounting, once a generation plant is contracted for

exclusive use by an offtaker, the corresponding lease income will constitute "interest income" and as such will not be

included in operating earnings. We expect this share of Uniper's core business earnings to increase materially to above

€100 million by 2023 (from €17 million in 2019) and we consider it as part of the company's core business earnings. As

such, when analyzing our credit metrics on Uniper, we also consider the effects of related lease income.


Uniper SE

Uniper's credit metrics are highly sensitive to changes in the pension discount rate and mark-to-market valuation of

derivative contracts. A change in the euro discount rate to 1.5% (and 2.17% noneuro discount rate) in 2019 from 2.3%

(3.08%) in 2018, contributed to a 28% increase (to €1,031 million) in pension liabilities (net of plan assets). Swings in

Uniper's mark-to-market valuation of derivative contracts do not necessarily reflect an increase in credit risk. These

primarily constitute power, carbon dioxide, gas and liquefied natural gas, and coal price hedge positions that can lead

to significant margin receivables and margin liabilities on Uniper's balance sheet, suppressing or boosting our adjusted

debt. Margin receivables correspond to the cash outflow and margin liability to the cash inflow for respective collateral

postings.

An out-of-the-money or in-the-money margin posting at contract settlement offsets favorable or unfavorable price

movements for Uniper's European generation business. However, we acknowledge the liquidity risk related to margin

positions. As a result, we also analyze our financial metrics excluding the impact of margins paid or received (margin

receivables or margin liabilities) before comparing this with our set outlook triggers. At the end of 2019, margin

receivables amounted to a negative cash balance of €336 million (€698 million in 2018) and margin liabilities to a

positive cash balance of €499 million (€976 million), overstating our adjusted accessible cash by €163 million (€278

million). Our adjusted FFO to debt (excluding margin impact) is therefore 85.5% (85.3%) as opposed to 94.3% for

FY2019 (102.2% for 2018).

We do not factor into our base case any synergies that could emerge from a partnership with or increasing influence

from Fortum. Furthermore, we do not consider any deviations from Uniper's stated financial policy and financial

position.

Chart 10


Uniper SE

Financial summaryTable 2

Uniper SE--Financial Summary

Industry sector: Energy


2019 2018 2017

(Mil. €)

Revenue 65,804.0 78,176.0 72,238.0

EBITDA 1,702.0 1,489.0 1,780.5

Funds from operations (FFO) 1,490.0 1,432.0 1,289.4

Cash interest paid 165.0 124.0 159.1

Cash flow from operations 843.0 1,191.0 1,410.4

Capital expenditure 566.0 588.0 757.0

Free operating cash flow (FOCF) 277.0 603.0 653.4

Discretionary cash flow (DCF) (84.0) 301.0 417.4

Cash and short-term investments 871.0 1,378.0 915.0

Gross available cash 971.0 1,461.0 1,019.0

Debt 1,580.4 1,401.0 2,064.9

Equity 11,942.0 11,445.0 12,789.0

Adjusted ratios

EBITDA margin (%) 2.6 1.9 2.5

Return on capital (%) 7.3 5.7 6.0

FFO cash interest coverage (x) 10.0 12.5 9.1

Debt/EBITDA (x) 0.9 0.9 1.2

FFO/debt (%) 94.3 102.2 62.4

Cash flow from operations/debt (%) 53.3 85.0 68.3

FOCF/debt (%) 17.5 43.0 31.6

DCF/debt (%) (5.3) 21.5 20.2

ReconciliationTable 3

Uniper SE--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. €)

--Fiscal year ended Dec. 31, 2019--

Uniper SE reported amounts

Debt

Shareholders'

equity EBITDA

Operating

income

S&P Global

Ratings'

adjusted

EBITDA

Cash flow

from

operations

Capital

expenditure

Reported 1,117.0 11,386.0 2,672.0 922.0 1,702.0 932.0 655.0

S&P Global Ratings' adjustments

Cash taxes paid -- -- -- -- (47.0) -- --

Cash interest paid -- -- -- -- (76.0) -- --

Reported lease liabilities 817.0 -- -- -- -- -- --


Uniper SE

Table 3

Uniper SE--Reconciliation Of Reported Amounts With S&P Global Ratings' Adjusted Amounts (Mil. €) (cont.)

Postretirement benefit

obligations/deferred

compensation

657.0 -- 1.0 1.0 -- -- --

Accessible cash and liquid

investments

(971.0) -- -- -- -- -- --

Capitalized interest -- -- -- -- (89.0) (89.0) (89.0)

Dividends received from

equity investments

-- -- 40.0 -- -- -- --

Asset-retirement obligations 468.0 -- -- -- -- -- --

Income (expense) of

unconsolidated companies

-- -- (58.0) -- -- -- --

Nonoperating income

(expense)

-- -- -- 124.0 -- -- --

Noncontrolling

interest/minority interest

-- 556.0 -- -- -- -- --

Debt: Derivatives (499.0) -- -- -- -- -- --

Debt: Put options on

minority stakes

96.0 -- -- -- -- -- --

Debt: Shareholder loans (104.7) -- -- -- -- -- --

EBITDA: Gain/(loss) on

disposals of PP&E

-- -- (6.0) (6.0) -- -- --

EBITDA: Foreign exchange

gain/(loss)

-- -- 22.0 22.0 -- -- --

EBITDA: Derivatives -- -- (789.0) (789.0) -- -- --

EBITDA: Valuation

gains/(losses)

-- -- (174.0) (174.0) -- -- --

EBITDA: Business

divestments

-- -- (6.0) (6.0) -- -- --

Depreciation and

amortization: Other

-- -- -- 874.0 -- -- --

Total adjustments 463.4 556.0 (970.0) 46.0 (212.0) (89.0) (89.0)

S&P Global Ratings' adjusted amounts

Debt Equity EBITDA EBIT

Funds from

operations

Cash flow

from

operations

Capital

expenditure

Adjusted 1,580.4 11,942.0 1,702.0 968.0 1,490.0 843.0 566.0

Liquidity: Strong

We assess Uniper's liquidity as strong, since we expect liquidity sources will cover cash uses by more than 2x over the

24 months, starting July. 1, 2019. We also anticipate that sources will cover uses sufficiently, even if EBITDA were to

decline by 30%.

Principal Liquidity Sources Principal Liquidity Uses


Uniper SE

For the 12 months from July 1, 2020, we assume the

following liquidity sources:

• Available cash of about €750 million;

• Available committed facilities of about €2 billion,

with a maturity in September 2024; and

• Our projection of operating cash flows (after cash

provisions) of about €1 billion.

For the same period, we assume the following liquidity

uses:

• Debt maturities of about €300 million;

• Capex at approximately €1.0 billion; and

• Dividend payment of about €500 million.

Uniper's solid relationship with banks and proven

access to capital markets further underpins our

assessment of its liquidity. We understand Uniper is

committed to manage its liquidity in line with a strong

assessment and against significant liquidity needs due

to its commodity trading (including hedging) activities.

Debt maturities

Debt Maturities

Mil. € H1 2020 2021 2022

Commercial Papers 170 0 0

Lease Liabilities 95 70 54

Bank Loans 5 31 8

Source: Company data.


Uniper SE

Environmental, Social, And Governance

Environmental factors are an important credit factor for Uniper, thanks to its carbon emission-heavy power

generation portfolio and the increasingly stringent German and European environmental rules. Its carbon intensity

was 474 grams per kilowatt hour in 2019 (499g/KWh in 2018) and it generated 22.1 million metric tons from

European generation in the same period (34.2 million metric tons in 2018) and 24.9 million metric tons from

Russian generation in 2019 (25.3 million metric tons in 2018).

The company is therefore more vulnerable to political, regulatory, and reputational risks. Uniper's installed

capacity split by fuel type comprises 53% gas (17.4GW) and 27% coal (9.1GW). Germany is Uniper's main market

and it is to exit coal generation no later than 2038, as part of the country's efforts to curb climate change. The

German government will compensate coal plant operators for early closures. However, the level of compensation

remains unknown, given the lack of profitability of coal generation and hence the potential for high competition at

hard coal exit auctions.

We balance Uniper's carbon-intensive generation portfolio against its strategic orientation to enable the European

energy transition; for example, via its gas transport, gas storage, regasification, and flexible gas generation

capacities. Immediate response capacity is crucial for the European energy transition, to balance the increasing

share of volatile renewable energy sources and fadeout of stable base load capacity. Also, it is the group's declared

strategy to decarbonize its gas flows and generation via green and blue hydrogen.

We also believe the group's governance will become a more important factor for our rating on Uniper, given

Fortum became its majority owner, increasing its ownership to above 75% as of August 2020. Fortum's investment

strategy remains unclear. The relationship between the majority owner and Uniper has been difficult, leading to the

departure of Uniper's executive board (the CEO, chief financial officer, and chief operating officer departed in 2019;

the chief commercial officer departed this year). That said, we understand that, so far, the takeover has not led to a

change in strategy or disrupted operations, and both companies have begun to explore operational partnerships

and synergies. Fortum has ruled out any DPLTA with Uniper until the end of 2021.

Group Influence

In line with the increased ownership, we are fully consolidating Uniper into Fortum, and we link the ratings, but do not

believe the change in ownership will impair Uniper's SACP. We typically use the same scope of consolidation as in the

parent's IFRS statements (see "Corporate Methodology: Ratios And Adjustments," published April 1, 2019). We assess

Uniper as a highly strategic part of Fortum group (consolidated Fortum-Uniper group), and we are linking our rating on

Uniper to the issuer credit rating on Fortum because we consider Uniper:

• Unlikely to be sold;

• To operate in business lines complementary to the parent's operations, markets and costumers; and

• To have Fortum's commitment and incentive to support Uniper's credit quality.


Uniper SE

Uniper provides a meaningful 50% contribution to the group's EBITDA. As such, our issuer credit rating on Uniper is at

the same level as that of Fortum, or one notch lower, depending on Uniper's SACP. We acknowledge that at present

Uniper has stand-alone funding, and no cash pooling, with no cross-default with any debt of the parent, Fortum. At the

same time, we see that Uniper's credit quality cannot be effectively insulated from that of Fortum.

Issue Ratings - Subordination Risk Analysis

Capital structure

Uniper's financial debt consists primarily of senior unsecured debt at the parent company. It also has a minor amount

of debt outstanding at the subsidiary level.

Analytical conclusions

The company has sufficiently low leverage, and we see no significant elements of subordination risk in its capital

structure. Our issue ratings on Uniper are at the same level as the issuer credit rating.

Ratings Score Snapshot

Issuer Credit Rating

BBB/Negative/--

Business risk: Satisfactory

• Country risk: Low

• Industry risk: Moderately high

• Competitive position: Satisfactory

Financial risk: Modest

• Cash flow/leverage: Modest

Anchor: bbb+

Modifiers

• Diversification/portfolio effect: Neutral (no impact)

• Capital structure: Neutral (no impact)

• Financial policy: Neutral (no impact)

• Liquidity: Strong (no impact)

• Management and governance: Satisfactory (no impact)

• Comparable rating analysis: Negative (-1 notch)

Stand-alone credit profile : bbb

• Group credit profile: bbb


Uniper SE

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019

• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

• Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate

Issuers, Dec. 16, 2014

• Criteria | Corporates | Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28,

2014

• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

• General Criteria: Methodology: Industry Risk, Nov. 19, 2013

• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

Related Research

• WEBCAST/SLIDES: Power Markets Outlook And Credit Implications In The Age Of COVID-19, July 10, 2020

• Energy Transition: The Outlook For Power Markets In the Age of COVID-19, June 25, 2020

• Despite COVID-19 Disruption, European Utilities Are Set For Growth, June 25, 2020

• Gazprom PJSC, Jun 08, 2020

• The Energy Transition And What It Means For European Power Prices And Producers: Midyear 2020 Update, June

8, 2020

• Unregulated Power Update: Independent Power Producers Navigate Falling Demand And Credit Risks In Wake Of

Economic Shock, May 6, 2020

• EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors, March 24, 2020

• COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020

• COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020

• EMEA Utilities: Slides From The 2019 Infrastructure Roadshow, Dec. 5, 2019

• Five Issues To Keep An Eye On For European Utilities' Credit Quality, Dec. 5, 2019

• Industry Top Trends 2020: EMEA Regulated Utilities, Nov. 13, 2019

• Industry Top Trends 2020: EMEA Unregulated Utilities, Nov. 13, 2019

• Fortum Oyj And Uniper SE Ratings On CreditWatch Negative Following Fortum's Purchase Of Additional Stake In


Uniper SE

Uniper, Oct. 9, 2019

• Credit FAQ: Will Fortum Become Uniper's Majority Shareholder? Aug. 20, 2019

• Fortum Oyj, Aug. 14, 2019

• A Trio Of "Special Situations" M&A In European Utilities And Their Rating Implications, April 18, 2019

• Fortum Oyj, Dec. 5, 2018

• German Power And Gas Co Uniper Upgraded To 'BBB' On Reduced Event Risk And Strengthening Business Risk;

Outlook Stable, April 27, 2018

• The Fortum-Uniper-E.ON Deal And Its Credit Consequences, Feb. 23, 2018

• Fortum Affirmed At 'BBB' Following Final Outcome Of Takeover Offer For Uniper; Outlook Remains Negative, Feb.

16, 2018

• German Energy Company Uniper 'BBB-' Ratings Affirmed; Outlook Remains Positive, Jan. 18, 2018

Business And Financial Risk Matrix

Business Risk Profile

Financial Risk Profile

Minimal Modest Intermediate Significant Aggressive Highly leveraged

Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+

Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb

Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+

Fair bbb/bbb- bbb- bb+ bb bb- b

Weak bb+ bb+ bb bb- b+ b/b-

Vulnerable bb- bb- bb-/b+ b+ b b-

Ratings Detail (As Of August 31, 2020)*

Uniper SE

Issuer Credit Rating BBB/Negative/--

Senior Unsecured BBB

Issuer Credit Ratings History

20-Mar-2020 BBB/Negative/--

09-Oct-2019 BBB/Watch Neg/--

27-Apr-2018 BBB/Stable/--

18-Apr-2017 BBB-/Positive/--

10-May-2016 BBB-/Stable/--

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.


Uniper SE


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