Rating Action: Moody’s changes outlook on Energa to stable; affirms Baa2 ratings
Global Credit Research – 21 Jul 2020
Frankfurt am Main, July 21, 2020 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 issuer rating of Energa S.A. (Energa). Concurrently, Moody's has affirmed the Baa2 backed senior unsecured ratings and the (P)Baa2 guaranteed senior unsecured EMTN programme rating of Energa Finance AB (publ). The outlook on all ratings was changed to stable from negative. The rating action follows the change in outlook, to positive from negative, for Energa's majority owner, the listed Polish integrated oil and petrochemicals group Polski Koncern Naftowy ORLEN S.A. (PKN ORLEN) and affirmation of the Baa2 rating. The positive outlook follows PKN ORLEN signing a letter of intent with the Polish State Treasury to take over its 71.88% share in Poland's dominant natural gas company Polskie Gornictwo Naftowe I Gazownictwo S.A. (PGNIG, Baa2 stable) and European Commission approval for the takeover of Poland's second largest refining company Grupa Lotos S.A.. For further information, please refer to Moody's press release dated 16 July 2020 ( https://www.moodys.com/research/Moodys-affirms-PKN-ORLENs-Baa2-rating-changes-outlook-to-positive--PR_428674).
A full list of affected ratings is provided towards the end of this press release.
RATINGS RATIONALE RATIONALE FOR STABLE OUTLOOK The change of the outlook to stable reflects the potential for the anticipated improvement in PKN ORLEN's credit quality to benefit Energa. Specifically, it takes into account that the planned acquisitions, if successfully completed, will lead to a strongly improved diversification and scale for PKN ORLEN and increase its ability to provide support to Energa. PKN ORLEN is the majority shareholder in Energa with 85.20% of voting rights and 80.01% of capital and the credit quality of PKN ORLEN is a key driver for that of Energa. Support may not be necessary but, for example, Energa has a large investment programme. The outlook is not aligned with the positive outlook for PKN ORLEN because, at this time, there is little visibility on how Energa may sit within the future PKN ORLEN group and the scope and appetite for providing support to Energa. The planned acquisitions are expected to diversify the business profile of PKN ORLEN, thus stabilizing overall cash flows, and will significantly increase earnings and assets of the enlarged group. At the same time, consolidated leverage, measured as Moody's adjusted debt to EBITDA, is expected to remain moderate at 2.0 -- 2.5x. Assuming successful completion of the takeovers, PKN ORLEN's strategic importance for the Polish government will be strengthened as the company will be the key agent for Polish energy policy. The Polish state (A2 stable) owns 27.5% of PKN's share capital.
RATIONALE FOR RATINGS AFFIRMATION
Energa’s stand-alone credit risk profile is unchanged and Moody’s does not expect it to be directly impacted by the announced acquisitions by PKN ORLEN.
The Baa2 ratings reflect (1) Energa's overall lower business risk profile, compared to the enlarged PKN ORLEN group's oil, gas and petrochemicals businesses, given that the major share of the company's earnings (around 81% of preliminary group EBITDA in 2019) stems from regulated distribution network activities, which benefit from a relatively well-established regulatory framework; and (2) the current moderate leverage, with funds from operations (FFO)/net debt estimated at around 20-22% over the next years (21.3% in 2019). These positives are balanced by (1) the higher business risk profile of Energa's generation and supply businesses; (2) a structurally short generation/supply balance; and (3) execution risks related to a sizeable PLN20.6 billion investment programme over 2016-25, which is likely to weigh on the currently strong financial profile.
At the end of the first quarter 2020, Energa reported PLN647 million of cash and PLN469 million of unused bank limits. Energa's liquidity could come under pressure as a result of the company's investment plans and higher working capital demands stemming from the coronavirus pandemic. However, Moody's believes that (1) the company's long-standing relationship with its lenders; (2) its good access to the domestic banking system; and (3) the solid credit quality of its majority owner will strongly mitigate this risk and ensure Energa's continuing access to adequate liquidity sources.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The company's ratings could come under positive rating pressure if PKN ORLEN was upgraded and, concurrently, (1) Energa's standalone credit quality was to improve materially; or (2) the company were to benefit from tangible support by its parent company. Conversely, the ratings could come under negative pressure if (1) PKN ORLEN's rating was downgraded or its rating outlook deteriorated significantly; (2) the factors which partly mitigate PKN ORLEN's ability to take measures to the detriment of Energa's creditors were to disappear; (3) the integration of Energa into PKN ORLEN group appeared likely to have a material adverse effect on its credit profile; or (4) Energa's credit metrics, expressed as funds from operations (FFO) to net debt, fell below the mid-twenties in percentage terms on a sustained basis. The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. Headquartered in Gdansk, Energa S.A. is the third largest distribution grid operator in Poland and supplies around 3.1 million customers with electricity. The company owns and operates thermal plants and renewable installations with an installed capacity of around 1.35 gigawatt. In the first quarter of 2020 per end of March, Energa reported total revenues of PLN3,289 million and EBITDA of PLN568 million. LIST OF AFFECTED RATINGS Affirmations:
..Issuer: Energa Finance AB (publ)
…. Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa2
….Backed Senior Unsecured Regular Bond/Debenture , Affirmed Baa2
..Issuer: Energa S.A.
…. LT Issuer Rating , Affirmed Baa2
..Issuer: Energa Finance AB (publ)
….Outlook, Changed To Stable From Negative
..Issuer: Energa S.A.
….Outlook, Changed To Stable From Negative
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004. For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are unsolicited.
a.With Rated Entity or Related Third Party Participation: YES
b.With Access to Internal Documents: YES
c.With Access to Management: YES
For additional information, please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Mark Remshardt Vice President - Senior Analyst Infrastructure Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Paul Marty Senior Vice President/Manager Infrastructure Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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