OREANDA-NEWS. September 15, 2015.  Fitch Ratings believes that E.ON SE's management still has scope to steer its financial profile within ratio guidelines for a 'BBB+' rating after it announced its intention to retain nuclear generation operations in Germany. However, we note that the choice of capital structure and financial policies will need to support the target metrics. Ultimately, the dividend policy, growth aspirations of management and other financial policies following the upcoming demerger will be the initial key determining factors for E.ON's credit profile.

Based on our existing assumptions, which include dividends to external shareholders of EUR800m, capital expenditure in line with previous communicated guidelines and the nuclear provision utilisations included in funds from operations (FFO) to increase to approximately EUR850m/year by 2020, we estimate lease and nuclear adjusted FFO net leverage of around 4.5x for the future E.ON. We will review our estimate once there is more clarity around the policies and we can update our assumptions and earnings contributions from the business segments.

While we view E.ON's business risk with the nuclear business to be incrementally higher in the medium term, there will be significantly less net financial debt compared with our previous expectations. Nevertheless, retaining the nuclear decommissioning liabilities is likely to leave adjusted leverage at comparable levels, close to our post-demerger indicative guideline (see "Fitch Downgrades E.ON to 'BBB+', Stable Outlook", dated 2 September 2015 at www.fitchratings.com).

In the revised format of the spin-off, the nuclear business will be managed by a separate entity, PreussenElektra, which will operate E.ON's remaining three operational nuclear stations as well as already decommissioned reactors in Germany. Although consolidated, it will be viewed as a non-strategic asset. Otherwise, Uniper's spin-off is expected to take place as scheduled.

The new E.ON will still focus on renewables, energy networks and customer solutions. The majority of earnings will come from network assets and renewables with remuneration such as feed-in tariffs or other support mechanisms while around 20% of earnings will come from retail and customer services and around 10% from nuclear generation.

We view the spin-off as removing some risks for E.ON, such as working capital swings in the midstream gas business as well as rouble and oil price exposure, largely reducing risks related to power generation, but risks related to nuclear decommissioning will now remain.