Correction: Fitch Affirms E.ON, Powergen Ratings On Acquisition of TXE's Retail Business

Business Wire, Oct 22, 2002

Business Editors

LONDON & NEW YORK--(BUSINESS WIRE)--Oct. 22, 2002

(This is an amended version of an earlier press release which includes revised bond programme and available facility amount details in paragraph five.)

Fitch Ratings, the international rating agency, has affirmed the Senior Unsecured 'AA-' (AA minus)/'F1 ' ratings of E.ON AG ('E.ON') and the 'A'/'F1' ratings of Powergen plc ('PG') and Powergen UK plc ('PGUK'). This follows the announcement of an agreement by TXU Europe Ltd. (TXE, rated 'C'/'C') to sell its 5.3 million gas and electricity customers and 2.9 gigawatts of generation in the UK to PGUK for a total cash consideration of GBP1.37 billion. The ratings of E.ON, PG and PGUK remain on Outlook Negative.

The transaction, while subject to European Commission ('EC;) approval, has been granted a derogation, which allows it to proceed prior to completion of the approval process. Fitch understands that the transaction completed early on 21 October and that funds were transferred to the TXE group in payment for the acquisition. PGUK funded the acquisition largely through drawings on available intercompany financing from the parent, E.ON AG. Whilst this will act to increase intercompany borrowings within the PG group, the existing Senior Unsecured rating differential between the PG group and E.ON remains intact as a result of E.ON's intention and ability, following the recently arranged low cost EUR15bn syndicated facility, to refinance and restructure more debt in the PG Group.

As PGUK has purchased the individual contracts relating to the retail business, rather than the relevant legal entity within the TXE group, PGUK has been able to avoid assuming the above-market Power Purchase Agreements (PPAs) which have been at the root of TXE's recent woes. The sale takes PGUK's UK customer base up to c.8.4m, making it the number two supplier of electricity and gas to retail customers, after Centrica with 18.3m customers, and ahead of Innogy plc ('BBB '/'F2'/Watch Positive) with c.7.5m customers. PGUK publicly ascribed minimal value to the generation component of the acquisition - the acquired plant is ageing coal plant without flue gas desulphurisation and Fitch would expect that it would require further investment if it is to have a long-term future within the group. This in turn implies that the acquisition largely reflected the valuation of the customer base, or a per-customer price of c.GBP250 per customer. Comparable transactions are difficult to find - the recent acquisition by London Electricity Group plc (A/F1) of CSW Investments ascribed an apparent cost of GBP309 per customer, but this also included a distribution network with a regulated asset value of GBP550m. In relative terms, as profitability of more than GBP10 per customer per year by Fitch calculations has been difficult to establish, the price - even in a distressed auction - appears a full one, notwithstanding the protection afforded to PGUK's wholesale business.

The acquisition of TXE's physical generation assets will in the short term contribute to hedging PG's larger retail base. Prior to this acquisition, the group was nearly balanced, with 33 terrawatt hours ("TWh") of generation output against a 29 TWh retail base during FY01.

Fitch's rating of E.ON reflects the group's plans for further acquisitions in the UK and the US with some EUR29bn - including PG (EUR15.4bn including assumed debt) and Ruhrgas (EUR7.1bn including assumed debt) - budgeted for the period 2002-2004. E.ON's acquisition plans are backed by disposal proceeds totaling c. EUR30bn over the past three years and a further EUR10bn forecast for 2003. In addition, the group has a EUR20bn Euro MTN programme and EUR5bn CP programme, and has recently announced its intention of increasing committed bank funding lines from EUR4bn to up to EUR15bn. Taking account of the agreement announced today, and the relative quantum of the acquisition to E.ON's existing financial flexibility, the group's ratios remain within the range of the current rating category, though as the credit exposure in the UK market increases, the gradual dilution of E.ON's 'AA-' (AA minus) profile, identified in the Negative Outlook, will continue. The Outlook also incorporates the likelihood that the execution of heavily-trailed substantial expansion plans in the US may eventually lead to negative rating action.

The ratings of PG and its subsidiaries reflect the degree of their integration within the E.ON group and in particular E.ON's centralised treasury strategy. For more information on Powergen plc and E.ON AG, and the relationship between the group companies' ratings, please refer to the recent Fitch research reports on each company, dated 10 October 2002, and available on www.fitchresearch.com.