Fitch Affirms Westinghouse Electric's IDR at 'B+'; Outlook Stable

Published: 2025-04-24 04:36:13 ET CCJ

Fitch Ratings has affirmed WEC US Holdings Inc.'s Long-Term Issuer Default Rating (IDR) at 'B+'.

The Rating Outlook is Stable. Fitch has also affirmed WEC US Holdings Inc.'s asset-based lending (ABL) facility at 'BB+' with a Recovery Rating of 'RR1' and senior secured revolving credit facility and term loan at 'BB-'/'RR3'. Fitch has additionally assigned the ultimate parent company, Watt New Aggregator L.P. (collectively referred to as WEC; dba Westinghouse Electric Company), a 'B+' Long-Term IDR.

WEC's rating reflects its market leadership in nuclear power, business stability, improved industry outlook, and strong profitability. WEC's operating profile is comparable to low-investment grade peers, balanced against weaker leverage and coverage metrics. Fitch expects WEC will manage its EBITDA leverage around 4.5x while executing on its growth strategy, which includes capital investment in organic growth opportunities and bolt-on acquisitions.

Fitch has affirmed and withdrawn the intermediary holding company's, Watt New Sub-Aggregator LP', Long-Term IDR rating Fitch following the reorganization of the rated entity.

Key Rating Drivers

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.

WEC continues to gain market share in Eastern Europe as 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, helping to improve 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 years-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%+).

Positive Nuclear Outlook: The outlook for nuclear power has improved in recent years as power demand is expected to grow and 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 meet growing energy needs and balance security of supply while transitioning away from fossil fuels. In a report published by the International Energy Agency (IEA), it 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.

EBITDA Leverage to Moderate: Fitch forecasts EBITDA leverage to trend towards 4.5x, from 4.9x in 2024, as the company deleverages through EBITDA expansion. Under the ownership of Brookfield Renewable Partners (BEP; BBB+/Stable) and Cameco, 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.

Strong Financial Flexibility: WEC's flexibility is supported by Fitch's expectations of solid liquidity and pre-dividend FCF generation. Fitch expects EBITDA interest coverage to be around 3x in 2025 and over the forecast period. WEC's coverage is stronger than the 'B' rating category midpoint for diversified industrial 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.

Peer Analysis

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% through the forecast period. EBITDA interest coverage is strong for the category while leverage is consistent.

Key Assumptions

Sales growth in the low-single digit organic growth through the forecast with some variability largely due to fuel and outage cycles;

EBITDA margins improving to about 18% as the company benefits reported segment losses from the energy systems segment moderate in the latter part of the forecast period;

Elevated Capital intensity of around 7.5% in 2025 and 2026 moderating to about 6% over the forecast horizon;

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

Excess cashflow is distributed to shareholders;

Effective interest rate of 6.0%-6.5% range.

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. 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 is assumed to be fully drawn upon default while the revolving credit facility is assumed to be 80% drawn upon default.

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 $300 million and term loan of $3.5 billion, corresponding to good recovery prospects.

RATING SENSITIVITIES

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 5.0x or EBITDA interest coverage sustained below 2.5x;

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

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.

Liquidity and Debt Structure

Fitch considers WEC's liquidity to be sufficient given the company's cash, revolver availability and pre-dividend FCF generation. As of Dec 31, 2024, WEC had liquidity of $678 million including $178 million of cash and equivalents and $500 million of availability on its revolving credit facility 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.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

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.