S&P raises Powergen rating

13 September 2002 – Standard & Poor’s Ratings Services said today it raised its long-term corporate credit ratings on the UK-based electricity utility Powergen PLC and its UK operating subsidiaries to single-‘A’ from triple-‘B’-plus.

All ratings are removed from CreditWatch with positive implications. The outlook is stable.

The rating action follows the €16bn ($15.6bn) acquisition of the Powergen group by the German utility company E.ON AG (AA-/Stable/A-1+), completed on July 1, 2002, and a review by Standard & Poor’s of the operational and financial links between the companies.

At the same time, the long-term senior unsecured debt ratings on Powergen US Funding LLC were raised to single-‘A’-minus from triple-‘B’. This reflects the reliance on the credit quality of the $1.2bn bond due 2004 guaranteed by Powergen PLC and Powergen U.S. Holdings Ltd., and the view that these guarantees are structurally subordinated to debt held at Powergen UK PLC.

“The ratings balance Powergen’s more moderate stand-alone position with the benefits of being part of the E.ON group, and the expectation that it will play an important and long-term role in E.ON’s portfolio,” said Standard & Poor’s Infrastructure Finance credit analyst Anthony Flintoff. “Powergen is E.ON’s most significant acquisition of the past few years, and the UK is considered to be one of the company’s key markets. Further acquisitions are possible,” continued Mr. Flintoff.

Powergen’s stand-alone credit quality is supported by the more stable regulated business East Midlands Electricity Distribution PLC. The natural hedge available to Powergen through vertical integration (generation and supply), however, only partially mitigates its exposure to low wholesale electricity prices and generation overcapacity in the UK, which is expected to remain the situation for some years.

The finances of the Powergen group and Louisville Gas & Electric Co. (LG&E; A-/Stable/A-2) remain linked owing to the guarantee structure supporting the $1.2 billion bonds until their expiry in 2004, at which point the companies will be more structurally separated in line with the revised ownership structure. It is expected that, by the beginning of 2003, LG&E will be transferred from the Powergen group to ownership by an E.ON subsidiary. The financial profile of the Powergen group has been weakened by much lower wholesale power prices in the UK market, which have substantially offset the proceeds of asset sales by Powergen from fiscal 2000and 2001.

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