Fitch Ratings has assigned 'BB-'/'RR3' senior secured ratings for WEC US Holdings Ltd.'s (formerly Brookfield WEC Holdings Inc.) proposed senior secured revolving credit facility and term loan.

Fitch has also affirmed WEC US Holdings Ltd.'s asset-based lending (ABL) facility at 'BB+'/'RR1'. Fitch has also affirmed WEC US Holdings Ltd.'s Long-Term Issuer Default Rating (IDR) and senior secured debt at 'B+' and 'BB-'/'RR3', respectively. The Rating Outlook is Stable.

In addition, Fitch has assigned WEC US Holdings Ltd.'s new parent company, Watt New Sub-Aggregator L.P., a 'B+' Long-Term IDR (collectively referred to as WEC; dba Westinghouse Electric Company).

The ratings reflect Fitch's expectation that EBITDA leverage will reach 4.5x or lower in 2024, and the near future. This expectation is supported by recent order wins and a growing backlog that improve the visibility on the company's EBITDA expansion and deleveraging path. Fitch expects the company, under the new Brookfield Renewable Partners (BEP; BBB+/Stable) and Cameco ownership, to adopt a capital allocation and financial policy to pursue select bolt-on acquisitions, retain financial flexibility, and manage its leverage under 4.5x.

Fitch has affirmed and withdrawn Brookfield WEC Holdings Sub-Aggregator LP's Long-Term IDR following the reorganization of the rated entity.

Key Rating Drivers

Contract Wins Boost Visibility: WEC has successfully secured new orders, bolstered its backlog and improved long-term revenue visibility. As of Sept. 30, 2023, WEC orders entered reached $5.3 billion over the TTM from $3.2 million a year ago. WEC continues to gain market share in its nuclear fuel business as Eastern European countries look to expand their nuclear generation footprint, while also reducing their dependency on Russia. Nearly every utility operating a Water-Water Energetic Reactor (VVER) outside of Russia has now signed an agreement with WEC for fuel.

High Recurring Revenue Base: Fitch expects WEC's operating plant services and nuclear fuel businesses to grow in the low-single digits in the medium term, offsetting a decline in energy system contributions, while also improving business stability. WEC benefits from a large installed base with about 85% of its revenues coming from its recurring, nondiscretionary nuclear fuel and operating plant services (OPS) businesses.

Customer contracts are typically multi-year, with nuclear fuel contracts typically ranging from 10-15 years and outage services ranging from three to five years. The industry's high barriers of entry, regulatory requirements and long and costly switching process, coupled with the company's OEM status and technology content, also help keep customer retention high (95%+).

BEP and Cameco Ownership: BEP and its institutional partners own a 51% stake in WEC, and Cameco owns the remaining 49% stake. The companies intend to remain long-term partners, with WEC's industry leadership and the critical role nuclear has as a zero-carbon technology. BEP and Cameco will each have three directors on the board. Following the ownership change, Fitch expects the company to maintain a more disciplined financial policy and keep distributions at moderate levels.

According to management, the company will focus on sustainable long-term growth while prioritizing organic growth opportunities and managing to a conservative leverage profile. Fitch expects WEC to approach M&A in a balanced manner, targeting smaller bolt-on acquisitions with shareholder distributions, if any, funded by residual cash flow.

Positive Nuclear Outlook: The outlook for nuclear power has improved in recent years, particularly after the Russian invasion of Ukraine. Policy is increasingly supportive of nuclear energy as it is seen as an energy alternative for countries seeking to balance security of supply while transitioning away from fossil fuels. In a report published October 2023, The International Energy Agency (IEA) also noted improved prospects for nuclear power in leading markets, with lifetime extensions of existing nuclear reactors in Japan, Korea, and the U.S., and significant capacity growth expected in China and the rest of Asia.

Strong Financial Flexibility: WEC's flexibility is supported by expectations of solid liquidity and pre-dividend FCF generation. Fitch expects EBITDA interest coverage to be around 3x in 2023 and over the forecast period. WEC's coverage is stronger than the 'B' rating category midpoint for diversified industrial firms.

Leading Market Position and Technology: WEC has a leading technology position in the commercial nuclear reactor space, with approximately half of the world's nuclear reactors running on its technology. These reactors were either built by WEC or other companies that licensed its technology. In the U.S. and Europe, the company has a top one or top two market position in nuclear plant services, benefiting from intellectual property, technical expertise, intense regulations, high switching costs and an extended fuel licensing process. The company also has a presence in China, where much of the world's upcoming growth in nuclear energy generation is expected, though there is a risk of increased competition from local firms.

Parent Subsidiary Linkage (PSL): Fitch rates WEC on a standalone basis. Consistent with Fitch's approach with Brookfield affiliates, Fitch views Brookfield as financial investors and does not apply PSL linkage.

Derivation Summary

WEC's ratings reflect its leading market position servicing the nuclear reactor market, strong technological capabilities, recurring demand-focused offering and prospects of improving profitability. These factors are weighed against its concentration in the nuclear energy market, execution risks associated with its growth strategies. Fitch expects WEC's EBITDA margins to be around 18%-19% through the forecast period. EBITDA interest coverage is strong for the category while leverage is consistent.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer:

2023 revenues benefit from a full year of contribution from BHI and higher fuel volume. Sales growth is expected to moderate to low-single digit organic growth through the forecast with some variability largely due to fuel and outage cycles;

EBITDA margins of around 17% in 2023 and gradually improving to about 18%-19% as the company benefits from synergies with BHI and reported segment losses from the energy systems segment moderate in the latter part of the forecast period;

Restructuring and non-recurring deal costs remain elevated over the next couple of years. Catch-up pension contributions are made over the next few years;

Net leverage falls to around 4.0x over the forecast period, consistent with WEC's financial policies;

Capital intensity of around 4%-5%;

No large-scale transactions such as the sale of WEC or a large-scale acquisition is assumed;

Excess cashflow is distributed to shareholders;

Effective interest rate in the 7.0%-7.5% range through FY2026.

Recovery Analysis

The recovery analysis for a hypothetical future bankruptcy assumes that WEC would be considered a going concern (GC) in bankruptcy, and that the company would be reorganized rather than liquidated.

Fitch has assumed a 10% administrative claim.

The GC EBITDA estimate of $480 million reflects Fitch's view of a sustainable post-reorganization EBITDA level, upon which the agency bases the valuation of the company. It includes BHI after the divestiture of the power delivery business. The GC EBITDA reflects a conservative scenario where there is a long-term decline in the nuclear industry without incremental newbuilds, and the potential for significant liabilities arising from nuclear or environment incidents. The estimate also reflects Fitch's assumption that WEC can mitigate adverse conditions with additional cost reductions.

An enterprise value multiple of 6x is used to calculate a post-reorganization valuation and reflects several factors. The recent bankruptcy exit multiple for WEC, based on the $3.8 billion purchase price by Brookfield (including transaction costs) was 9x and 7x based on fiscal 2017 and 2018 EBITDA, respectively. In addition, the 2018 acquisition of WEC's key competitor, Framatome, was completed at approximately 8x EBITDA and BHI was completed at 9x EBITDA, before synergies.

The ABL facility and first-lien RCF are assumed to be fully drawn upon default. The ABL facility is senior to the first-lien RCF and term loans and was 71% drawn at the end of Sept. 30, 2023.

The waterfall results in a 'RR1' recovery rating for the ABL facility of $200 million, representing outstanding recovery prospects. The waterfall also indicates a 'RR3' for the first-lien RCF of $200 million and term loan of $3.5 billion, corresponding to good recovery prospects.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

WEC adheres to a disciplined financial policy supporting EBITDA leverage maintained below 4.0x;

New contracts wins and renewals lead to a growing backlog that support EBITDA expansion.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Decline in backlog and contract renewals that erode earnings and cash flow stability;

An aggressive financial policy leads to EBITDA leverage maintained above 4.5x or EBITDA interest coverage sustained below 2.5x;

Higher than expected investments or losses from the energy systems business.

Liquidity and Debt Structure

Sufficient Liquidity: Fitch considers WEC's liquidity to be sufficient given the company's cash, revolver availability and pre-dividend FCF generation. As of Sep 30, 2023, WEC had liquidity of $251 million including $131 million of cash and equivalents and $120 million of availability on its RCF, including its ABL.

Issuer Profile

Westinghouse Electric Company provides a variety of engineering services, nuclear fuel and various components for nuclear power plants globally. It was acquired out of bankruptcy by Brookfield Asset Management in 2018 and is now owned by BEP and Cameco.

ESG CONSIDERATIONS

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire