EWE AG. Update following publication of 2016 results. CREDIT OPINION 16 May Update. Summary Rating Rationale

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1 CREDIT OPINION EWE AG Update following publication of 2016 results Update Summary Rating Rationale RATINGS EWE AG Domicile Germany Long Term Rating 1 Type LT Issuer Rating - Fgn Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Stefanie Voelz Senior Credit Officer stefanie.voelz@moodys.com Neil Griffiths Lambeth Associate Managing Director neil.griffiths-lambeth@moodys.com The 1 rating of EWE AG (EWE) reflects (1) the relatively stable and predictable cash flows generated by its monopoly-regulated energy distribution activities; (2) long-term contracts that stabilise the competitive businesses of power generation, gas storage and waste-to-energy; (3) the company's fairly strong market position in its core region, which somewhat reduces the risk inherent in its competitive supply activities; (4) its growing expertise in renewable generation, particularly on- and offshore wind, and intelligent network developments, both of which are key factors in the current German energy policy; and (5) our assumption that the company's interest in international markets, particularly in Turkey, and their contribution to consolidated cash flows will remain small over the medium term. German utilities currently face a difficult operational environment with low market prices for conventional power generation, partly a reflection of a revised national energy policy and partly linked to low commodity and CO2 prices. EWE is less exposed to these developments than larger German peers, given the focus on monopoly-regulated network activities, and its increased financial flexibility following the April 2016 sale of the company's stake in German natural gas company Verbundnetz Gas Aktiengesellschaft (VNG). Exhibit 1 EWE's operating EBIT dominated by regulated and long-term contracted activities Renewables, Grid & Storage swb Sales & Trading Holding International operating EBIT E Note: The swb-segment also includes regulated grid network activities. Source: EWE, Moody's calculations and forecast The rating remains constrained by the company's financial profile, which has been volatile in the past in relation to the company's gas activities, stemming from adverse weather patterns and contract terms. However, following the VNG sale, we expect EWE's metrics to remain well positioned within the current guidance over the coming three years, with funds from

2 operations (FFO) to net debt above the high teens and retained cash flow (RCF) to net debt above the mid-teens, both in percentage terms. Credit Strengths» Multi-utility with focus on energy distribution and supply activities as well as telecommunication and information technology services» Stable network operations and limited generation create some buffer against negative wholesale price developments affecting other generators» Sale of VNG stake creates financial headroom in the medium term Credit Challenges» Low power prices reduce margins for conventional thermal generation but EWE's exposure largely mitigated by limited conventional generation capacity compared with German peers and generally long-term capacity contracts to sell power or generation capacity benefiting from renewable subsidies» Regulated network tariffs will reduce with the start of the next regulatory period in 2018/19 due to lower allowed equity returns Rating Outlook The rating outlook is stable, reflecting the company's core focus on regulated network activities and renewable generation, limited exposure to negative power price developments compared with its larger German peers. It also considers the successful conclusion of the VNG sale in April 2016 with proceeds being largely used to repay a portion of existing debt, leading to a commensurate improvement in financial flexibility, which we expect the company to maintain. Factors that Could Lead to an Upgrade While a rating upgrade is unlikely over the short-term, upward pressure could result from a sustainable improvement in financial metrics, with FFO/Net Debt at least in the low twenties and RCF/Net Debt comfortably in the high teens, for example due to deleveraging of the EWE group, or the successful execution of the company's ongoing efficiency and disposal programme. Any potential upgrade would also have to consider the probability that EWE may choose to support its shareholders in acquiring the remaining EWE shares from its minority shareholder EnBW Energie den-württemberg AG (EnBW, A3 negative) by Factors that Could Lead to a Downgrade EWE's 1 ratings could come under downward pressure if the company were to exhibit financial metrics consistently below the minimum parameters outlined for the current rating of FFO/Net Debt in the high teens and RCF/Net Debt in the mid-teens, in percentage terms. Furthermore, we could consider a downgrade in case of a change in EWE's business risk profile that would increase exposure to higher risk countries, such as Turkey, and/or result in increasing volatility of cash flows. Key Indicators Exhibit 2 Improved metrics following VNG sale 12/31/ /31/ /31/ /31/ x 4.3x 3.3x 4.0x 4.0x (CFO Pre-W/C) / Net Debt 22.8% 18.9% 13.6% 18.4% 17.9% RCF / Net Debt 13.0% 16.2% 10.9% 15.6% 15.0% (CFO Pre-W/C + Interest) / Interest 12/31/2012 Note: All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations Source: Moody's Financial Metrics This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Detailed Rating Considerations Focus on low-risk regulated and long-term contracted activities, which, however, will see cash flows squeezed over the medium term Approximately 50-60% of EWE's operating profits are derived from regulated infrastructure businesses, which generate stable and predictable cash flows. Given the high contribution these activities make to the company's earnings, the regulatory and political framework, within which it operates, is an important consideration in our assessment of EWE's business risk. We consider the German regulatory regime to be well-defined, with key aspects of the revenue building blocks enshrined in law, and designed to provide adequate and fair remuneration for operating expenditure and investments. Introduced in 2009, the German incentive-based regime has a shorter track record than other Western European jurisdictions and regulatory principles are still evolving. The current regulatory period runs from for gas distribution and for electricity distribution networks, providing some certainty of cash flows over that period. Allowed equity returns for the current regulatory period are set at 9.05% p.a. (nominal pre-corporate tax and post-trade tax) or 7.14% for asset built before 2006, which is higher than seen in most other jurisdiction. However, the regulator is recognising that the persistently low interest rate environment is resulting in lower funding costs for network companies, and the allowed equity returns will reduce to 6.91% (or 5.12% for pre-2006 assets) for the third regulatory period. Exhibit 3 Fall in allowed equity return from st Period Germany (2009/10-12/13) 2nd Period Germany (2013/14-17/18) BNetzA decision rd Period Germany (2018/19-22/23) Risk-free rate 4.23% 3.80% 2.49% Market risk premium 4.55% 5.44% 3.80% Equity risk premium 3.59% 3.59% 3.15% Cost of Equity (post-tax) - new assets 7.82% 7.39% 5.64% 9.29% 9.05% 6.91% 1.45% 1.56% 1.46% 7.56% 7.14% 5.12% Equity Beta Cost of Equity (pre-tax) - new assets Inflation factor Cost of Equity (pre-tax) - old assets Note: Under the German regime, the cost of equity allowance differs for assets acquired or built before 2006 ('old' assets) and after 2006 ('new' assets). Old assets receive a real equity return adjusted for inflation, new assets receive a nominal return. Source: BNetzA, Moody's calculations While the proposed cut follows a trend seen across many European jurisdictions and is broadly in line with our expectations, given the methodological approach of calculation, it will result in reduced financial flexibility across network companies. The regulator is also still considering the individual and sector-wide efficiency targets for the third regulatory period, which may create some additional pressure on the network cash flows. We note, however, that EWE's electricity and gas networks are considered to be among the most efficient by national comparison. Approximately 8-10% of EWE's operating profits come from renewable generation, which we view as lower risk than conventional generation, given the feed-in tariffs guaranteed by the German government. This regime limits EWE's risks essentially to the output of the plants, which is subject to weather conditions and technical losses. However, existing installations are not exposed to market price risks. While existing generation capacity may start to come off feed-in tariffs from 2021, the earliest plants are comparably small, and we expect the impact on cash flows to be limited. The cash flow volatility of some of EWE's other activities is reduced due to existing long-term contracts. This is particularly the case in the gas storage business (15-20% of group operating profits), with more than two-thirds of capacity being contracted for a remaining 3

4 contract lifetime of 5-17 years (50% is for own use). This protects divisional profits from adverse effects of low gas storage prices in the context of a generally oversupplied German gas market and compressed winter-summer spreads. Moreover, ca. 60% of input volumes of EWE's waste-to-energy operations are contracted on medium to long-term contracts. We note the current market trend towards shorter term contracts, which will become a consideration once the original contracts expire; however, given remaining contract life times, we expect no negative implications over the rating horizon of three to five years. Reduction of exposure to power generation and gas supply markets... EWE owns and operates a conventional thermal generation fleet of approximately 1.2 giga watts (GW) installed capacity, and renewable generation, primarily on- and off-shore wind, of around 0.4 GW. The profitability of conventional plants in Germany has suffered from weak fuel prices (coal and natural gas), low carbon prices as well as compressed generation margins (both clean dark and spark spreads). Key reasons are the weakness of the global economy, increasing supply of commodities (especially natural gas), an oversupply of EU carbon certificates and the material expansion of renewable generation capacities. In this unfavourable environment, however, EWE has managed to de-risk more than half of its generation portfolio by entering into or amending existing bilateral supply contracts with several industrial consumers. We understand that these individual contracts transfer market risks to customers, while, at the same time, EWE will safeguard a small level of profitability for the underlying generation capacities. Overall, EWE is much less exposed than its larger German peers, E.ON SE (2, stable outlook) and RWE AG (3, negative outlook), to the low forward baseload prices in Germany, which albeit increased from very low levels of around 20-25/MWh in early 2016 remain below 30/MWh. Exhibit 4 German power prices, spreads and CO2 German Power 1-Y Fwd ( /MWh) German Clean Spark (49% effic.) 1-Fwd ( /MWh) German Clean Dark (36% effic.) 1-Fwd ( /MWh) EU CO2 1-Y Fwd ( /tonne) ( /MWh) ( /tonne) Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Source: FactSet Taking into account the contracted capacity and generally small generation portfolio, which is primarily coal-fired, we have estimated that a decline in clean dark spreads by 3/MWh would result in around 1% reduction in operating profits. On the gas side, EWE has a number of long-term take-or-pay arrangements. In common with the major German gas importers and integrated utilities, EWE's profitability has been affected negatively by the movement of the gas/oil spread, which meant that the oil-price linked contracts were more expensive than buying gas on the spot market. We understand that EWE has managed to renegotiate more than 95% of its supply portfolio to market-based pricing going forward. As a result, gas/oil spread risks have declined considerably. resulting in low exposure to decarbonisation risks The European Union has committed to reduce greenhouse gas emissions by 40% from 1990 levels and to increase the contribution of renewables to energy demand to 27% by These targets, agreed in 2014, formed the basis of the EU s Nationally Determined 4

5 Contributions incorporated into the Paris Agreement, and are designed to significantly decarbonise the region s economies. We believe that unregulated utilities, which account for 40% of EU carbon emissions, will need to deliver a significant share of the reductions, and that this will create a variety of risks and opportunities for individual utilities. EWE faces low risk compared with peers, given its very small generation exposure as well as focus on renewables and network activities. Moody s framework for assessing the risk associated with decarbonisation in this industry is set out in Carbon Transition Brings Risks and Opportunities for Unregulated Utilities, published in October Domestic supply activities are subject to strong competition, but local roots enhance customer 'stickiness' EWE's domestic sales & trading activities are subject to intensifying competition and could suffer pressure on supply margins. Domestically, the company has greater exposure to electricity sales than gas, which generally face more intense competition. However, in line with its smaller municipal peers, the so-called Stadtwerke, EWE benefits from its regional roots and strong brand recognition, typically resulting in better customer retention. Risk of international activities remains manageable at their small size International operations are focused on Turkey and Poland and largely related to gas distribution and sales activities. While we consider these activities to be of higher risk than the core domestic business, particularly considering ongoing political and economical developments in Turkey, their contribution to operating profit remains small (accounting for around 5% of consolidated operating EBIT). We note that the current rating and outlook do not assume a material growth in this area, and any potential future increasing exposure would have to be offset by additional strengthening of the consolidated financial profile. Financial profile significantly improved as proceeds from VNG sale create financial flexibility in the medium term To counteract a challenging market environment, EWE focused on increasing its efficiency and achieved cost savings over , and management targets further efficiencies in the coming years. The strong financial year ending December 2016 benefitted from one-off items, particularly the restructuring of the pension plan at swb, but also the reduction in financial debt following the sale of VNG. EWE owned a 47.9% minority stake in the German natural gas company VNG from 2004, but became the majority shareholder in 2014 when it increased its stake to 63.7%. In July 2015, EWE acquired a further 10.52% of the shares from Gazprom Germania GmbH, taking its stake to 74.2%. In October 2015, EWE announced that it would sell its stake in VNG to EnBW, which itself would divest of its 26% shareholding in EWE. EWE bought 10% of its own shares for a consideration of million. Its then 74% owner, the Ems-Weser-Elbe Versorgungsund Entsorgungsverband (EWE Verband), an association of municipalities and provinces in the area of EWE's core operations, also purchased 10% in EWE's shares and will acquire the remaining 6% by The sale concluded in April 2016, with EWE receiving the differential between the value of the agreed price for VNG's shares and the million the company spent on acquiring its own shares. Overall proceeds amounted to around 1.5 billion and the company applied these, in part, to repay a portion of its existing debt. While EWE will also consider additional investments to further ongoing business opportunities in its core focus areas, including renewables and smart grid developments, the company will be much more comfortably positioned within its current rating category, providing financial flexibility in a challenging market environment. 5

6 Exhibit 5 Moody's projected metrics and positioning against minimum guidance for 1 rating FFO/Net Debt minimum guidance for 1 RCF/Net Debt minimum guidance for 1 30% 25% 20% 15% 10% E 2018-E 2019-E Note: (1) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. (2) Projections represent Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's While EWE's credit metrics improved following disposal of the VNG stake, the company also paid a portion of the proceeds to its shareholders in form of a special dividend. Management may also decide to support the EWE Verband in funding acquisition by 2019 of the remaining 6% of shares in EWE still held by EnBW. However, EWE and the EWE Verband aim to find a new strategic partner over the coming years to invest in up to 26% of EWE's shares, providing some mitigation against this risk. Ongoing compliance review unlikely to impact EWE's credit risk EWE's network subsidiary is currently undergoing an audit review of its compliance processes, following allegation of compliance breaches by individual employees. Management does not currently expect negative spill-over into the company's operations, but auditors will deliver final results of the review only in summer this year. sed on currently available information, we believe that the known incidents relate to individuals and there is no indication that there are wider organisational compliance breaches. We, therefore, see limited credit risk implications for EWE's operational or financial performance at this point in time. Liquidity Analysis EWE's liquidity position is strong. As of December 2016, the company reported cash and cash equivalents of 351 million. In addition to that, EWE has 750 million committed funds available under a syndicated revolving credit facility which matures in July 2021 (with two one-year extension options). The company also has available short-term bilateral facilities of around 410 million, of which 120 million were drawn at December All credit facilities are reported to be free of restrictive covenants and MAC clauses, and represent reliable sources of liquidity. EWE's main uses of cash in the next months include capital expenditure, an annual dividend payment of typically around 90 million, though higher in 2016 to reflect the book gain achieved from the VNG sale, and total debt repayments of around million in

7 Exhibit 6 VNG sale proceeds partly applied to cover near-term debt maturities EWE's bond maturities (in millions) thereafter Source: EWE annual report 2016 Corporate Profile Headquartered in Oldenburg, Germany, EWE AG is one of Germany's largest regional utilities and provides energy distribution and supply as well as telecommunications and IT services to customers in the federal state of Lower Saxony and parts of eastern Germany. EWE is currently owned 6% by EnBW and 84% by two holding companies which altogether represent 21 local cities and municipalities/ counties located in the state of Lower Saxony. The remaining 10% are held by EWE itself. Exhibit 7 EWE owned 84% by local cities and municipalities Source: EWE AG 7

8 Rating Methodology and Scorecard Factors EWE is rated under the rating methodology for Unregulated Utilities and Power Companies, published October Compared with most of its German peers, EWE benefits from (1) a much lower direct exposure to merchant generation power prices in the challenging German power market (nevertheless, it must continue to manage its procurement strategy and margins in respect of its downstream customer base); (2) an entrenched and rather stable customer base in its core markets; and (3) a materially higher proportion of earnings from low risk monopoly-regulated network activities. These comparative strengths support a final rating that is higher than the grid-indicated rating. Exhibit 8 EWE AG - Rating Factors Grid Unregulated Utilities and Unregulated Power Companies Industry Grid [1][2] Factor 1 : Scale (10%) a) Scale (USD Billion) Moody's Month Forward View As of May 2017 [3] Current FY 12/31/2016 Measure Score Measure Score A A A A Factor 2 : Business Profile (40%) a) Market Diversification b) Hedging and Integration Impact on Cash Flow Predictability c) Market Framework & Positioning d) Capital Requirements and Operational Performance e) Business Mix Impact on Cash Flow Predictability Aaa Aaa Aaa Aaa Factor 3 : Financial Policy (10%) a) Financial Policy Factor 4 : Leverage and Coverage (40%) a) (CFO Pre-W/C + Interest) / Interest (3 Year Avg) 3.8x 4x - 7x b) (CFO Pre-W/C) / Net Debt (3 Year Avg) 18.0% 20% - 25% c) RCF / Net Debt (3 Year Avg) 13.4% 14% - 17% Rating: a) Indicated Rating from Grid b) Actual Rating Assigned Note: (1) All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. (2) As of 21/31/2016. (3) This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Financial Metrics Given its ownership structure, EWE's final rating also takes into account the joint default analysis under our rating methodology for government-related issuers, published in October 2014, inter alia reflecting (1) our assessment of low probability of extraordinary support by the municipalities that own EWE, due to the fragmented nature of EWE's municipal ownership; and (2) our assessment of moderate dependence, which takes into account that a large part of EWE's revenues are generated within the regions and cities that also comprise EWE's municipal owners, but part of EWE's earnings are generated outside of Lower Saxony. Given the low support assumption under a generally fragmented municipal ownership structure, EWE's 1 rating is in line with the company's stand-alone credit quality absent any extraordinary assumed support, the so-called baseline credit assessment (BCA). While EWE's ratings may be impacted by changes in the GRI input factors, e.g. the credit quality of the supporting municipalities, or our assessment of default dependence and support, we note that given the assumed low probability of support from EWE's ultimate municipal shareholders, the potential for rating uplift from the BCA remains generally limited. 8

9 Ratings Exhibit 9 Category EWE AG Outlook Issuer Rating Senior Unsecured -Dom Curr Moody's Rating Stable 1 1 Source: Moody's Investors Service 9

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