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Rating Action:

Moody's affirms Baa1 ratings of DONG Energy and DONG Naturgas; stable outlook

05 Dec 2013

London, 05 December 2013 -- Moody's Investors Service has today affirmed the Baa1 long-term issuer ratings of DONG Energy A/S ("DONG") and DONG Naturgas A/S. Concurrently, Moody's has also affirmed DONG's Baa1/provisional (P)Baa1 senior unsecured ratings and Baa3 preferred stock ratings. The outlook on the ratings is stable.

RATINGS RATIONALE

The affirmation reflects the signing on 29th November 2013 of an agreement between New Energy Investment S.a.r.l. (a subsidiary of Goldman Sachs Group, Inc. (The), Baa1 Stable ), Danish pension funds Arbejdsmarkedets Tillaegpension and PFA Pension Forsikringsaktieselskab and the government of Denmark (Aaa stable) to inject DKK11 billion (EUR1.5 billion) of equity into DONG. The rating affirmation further factors in (1) the positive impact on DONG's prospective financial profile of the reduction in the company's net debt through the sale of DKK11.3 billion (EUR1.52 billion) of non-core assets as at December 2013; and (2) the expected cashflow benefit in 2014 and 2015 from the positive redetermination of DONG's interest in the large Norwegian oil & gas field, Ormen Lange.

DONG's Baa1 ratings reflect (1) the company's strengthening financial profile as a result of divestments and the equity injection, (2) the low-risk contribution from its heat and network operations reflecting the company's strong market position as Denmark's leading power and gas company, (3) its extensive upstream oil and gas assets and low uplift costs, (4) the growing cash-flows from its wind farm investments and (5) state support for the company, given its ownership by the government of Denmark.

DONG's credit quality is constrained by (1) the rising risks to cash flow due to the company's increasing exposure to commodity price and output risks from gas and oil investments; (2) the exposure to wind forecasting risk; and (3) Moody's expectation that DONG will remain free cash flow negative due to ongoing significant levels of development capital expenditure of around net DKK15 billion (EUR2 billion) per year. The proportional contribution made to DONG's EBITDA by low-risk regulated network operations and regulated gas and electricity sales will decrease, as DONG commissions new investments in off-shore wind farm assets, and exploration and production (E&P) oil & gas assets.

As a result of the equity injection, Moody's expects that DONG's funds from operations (FFO)/debt ratio will reach the mid-thirties in percentage terms and retained cash flow (RCF)/debt ratio will be around 30%. Moody's expects DONG to maintain these minimum credit metrics on a sustainable basis for its Baa1 rating positioning, notwithstanding possible fluctuations from time to time as a result of volatility in prices and output.

Moody's notes the transitional phase of DONG's cash flows in 2013 and 2014, reflecting new contributions from its upstream E&P activities and the newly commissioned wind farms. DONG's credit rating will therefore become more heavily exposed to unhedged long-term gas price risk, and, to a lesser extent, wind-forecasting risk.

DONG's Baa1 senior unsecured ratings incorporate a one-notch rating uplift relating to the credit quality of the company's majority shareholder, reflecting Moody's assessment that there is a moderate probability of government support in the event of financial distress. Moody's expects that the government of Denmark will maintain majority ownership of DONG, its ownership share falling to approximately 60% following the equity injection, subject to equity take up by the minority shareholders. In Moody's view, the Danish government remains committed to DONG, and both government and opposition parties support maintaining majority ownership and control. Moody's expects that the government would fund a DKK 6-8 billion equity injection itself in the event that the DKK11 billion injection did not go ahead for any reason.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the Baa1 ratings reflects Moody's expectations that DONG's FFO/net debt will be in the mid-30s in percentage terms on average, and RCF/net debt will be around 30% taking into account fluctuations in commodity prices. The higher levels of guidance for the Baa1 ratings is appropriate as they reflect the ongoing decline in the contribution to DONG's total cash flows from its low risk utility business, and the increase in contribution from upstream gas development and wind farm investment, weakening the company's business risk profile. In Moody's view, the reduction in the government's share of ownership as a result of the DKK11 billion equity injection does not affect the level of support.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's does not expect any upward pressure on DONG's ratings in the foreseeable future, as the company will continue to pursue a large investment programme in wind energy and E&P, and be increasingly exposed to commodity price movements, amongst other factors. However, Moody's could upgrade the ratings if DONG were to exhibit, on a sustainable basis, materially stronger credit metrics than indicated above.

Conversely, negative pressure on the ratings could result if the company failed to consistently maintain the financial metrics indicated for the rating. Moody's may take a negative view of DONG's credit quality if (1) there is a significant structural reduction in gas prices; (2) wind forecasts prove to be optimistic; or (3) the increase in the company's debt levels as a result of continuing investment is not matched by new revenues from investments.

In line with Moody's methodology for government-related issuers (GRIs), the ratings could also be negatively affected by a reduction in DONG's state ownership substantially below 50%, but would not be affected by a limited deterioration in the rating of the government of Denmark.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

DONG is a 81.02% Danish state-owned company that was initially established as the country's state gas company. DONG is Denmark's largest integrated energy group, with additional interests in other Northern European countries notably Norway (E&P), UK (E&P, supply and renewables), and gas and electricity supply in the Netherlands, Germany and Sweden (mainly gas supply). For the full year ending December 2012, DONG reported revenues of DKK67 billion (EUR8.98 billion). DONG Naturgas is the energy procurement and supply company for DONG Energy.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Paul Lund
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Baa1 ratings of DONG Energy and DONG Naturgas; stable outlook
No Related Data.
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