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Rating Action:

Moody's affirms ENERGA's Baa1 ratings; stable outlook

09 Feb 2017

London, 09 February 2017 -- Moody's Investors Service (Moody's) has today affirmed the Baa1 issuer rating of Energa S.A. (ENERGA), and the Baa1 senior unsecured debt rating and provisional (P)Baa1 rating on the EUR1 billion MTN programme of Energa Finance AB (publ), guaranteed by ENERGA. The outlook remains stable.

RATINGS RATIONALE

The affirmation of the ratings reflects Moody's view that ENERGA's earnings will continue to be underpinned by its regulated distribution activities. The high visibility on this segment's cash flow generation is supportive of ENERGA's credit profile in light of (1) its sizeable investment programme which is likely to result in weaker credit metrics; and (2) challenges faced by the group's generation portfolio in an environment of low power prices and reduced support for renewable energy assets following regulatory changes in 2016.

ENERGA's distribution activities are operated under a fairly well-established and transparent regulatory framework. The revised methodology for the 2016-20 regulatory period nonetheless presents challenges as a result of (1) a lower cost of capital, primarily driven by the low interest rate environment; (2) the inclusion of quality and innovation components which could result in lower returns; and (3) demanding operating expenditure efficiency targets. Earnings from this segment should, however, be supported by a growing asset base as a result of a high level of investments focused on network expansion and modernization, as well as the installation of smart metering equipment.

Moody's expects the group's financial profile to deteriorate over the medium term as a result of sizeable investments and growing debt levels. In November 2016, ENERGA presented its updated strategy including an investment plan for 2016-25 of PLN20.6 billion, with significant dedicated capital expenditure. Over 60% of investments are earmarked for the distribution segment. The plan also includes the resumption of the project to build a new 1 gigawatt coal-fired unit (Block C) at ENERGA's Ostroleka complex, with an expected commissioning date in late 2023. As a result of a 50/50 joint venture agreement with Enea S.A. (unrated), ENERGA will cover half of the project's total capital expenditure estimated at PLN6 billion, around 16% of the strategic plan investments over the plan period.

In mitigation, the company plans the issuance of up to EUR250 million of hybrid debt in 2017 to be placed with the European Investment Bank. This transaction could benefit from a certain degree of equity credit under Moody's Hybrid Equity Credit methodology. Furthermore, we expect ENERGA to align its dividend policy with its capital expenditure programme, as the company indicated at the time of its strategic plan update. As a result, the current ratings assume that the company's financial profile will deteriorate from current strong levels of funds from operations (FFO)/net debt of over 30% but that it will stay within our revised guidance of FFO/net debt of mid-twenties in percentage terms, retained cash flow (RCF)/net debt of at least 20%, and FFO Interest Cover of around 5.0x. The ratings also factor that the contribution of distribution activities to group EBITDA could decline from current high levels of 85% but should remain above 75% over the next three years.

The ratings assume that ENERGA does not embark on any large-scale acquisitions that would materially exceed the amount of capital expenditure defined in the recent strategic update. Nonetheless, Moody's notes the potential acquisition of Electricite de France's (EDF) assets in Poland, following the bid submitted by a consortium of Polish state-controlled energy groups, including ENERGA, in September last year. The outcome of the process is still uncertain but, following the government's veto on the sale of EDF's portfolio to privately-owned investors and the subsequent start of negotiations with EDF in late January, there is a possibility that these assets will be acquired by the Polish energy companies.

The ratings continue to factor the higher business risk profile of the group's generation and supply business. ENERGA has a short position in generation, coupled with high asset concentration. Cash flows in the generation segment have been negatively affected by changes in the support mechanism for renewable energy assets in Poland implemented during 2016 and lower production volumes. Output should, however, improve in 2017 as one-off outages affected production from conventional sources in 2016. In addition, there remain uncertainties relating to the future shape of the Polish energy market and its proposed capacity mechanism. Additional support is likely to be needed to ensure the profitability of new investments in coal-fired plants, including Ostroleka Block C.

Given the majority ownership by the Government of Poland (A2 negative), ENERGA is considered as a Government-Related Issuer (GRI) under Moody's methodology. Accordingly, and based on our assumption of strong support in case of financial distress, the Baa1 rating factors in one notch of uplift from the company's standalone credit quality expressed as a baseline credit assessment (BCA) of baa2.

RATIONALE FOR THE STABLE OUTLOOK

The current stable outlook assumes that the company will be able to maintain credit metrics of FFO/net debt in the mid-twenties in percentage terms, RCF/net debt of at least 20% and FFO Interest Cover of around 5.0x.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure could develop if ENERGA's credit metrics were materially stronger than currently anticipated. However, in light of the company's sizeable capital expenditure plans and the expected deterioration in credit metrics, we do not envisage any positive rating pressure in the near term.

The ratings could come under negative pressure if (1) ENERGA were unable to maintain a financial profile commensurate with the current rating guidance. This could potentially be as a result of budget overruns in its capital expenditure programme and/or additional investments or acquisitions and/ or failure to bolster its capital structure through the issuance of hybrids; (2) a deterioration in the operating environment, potentially as a result of negative developments in the regulatory framework for distribution and/or the future energy market framework proving to be insufficiently supportive for new coal fired assets under construction; and/or (3) a deterioration in the credit quality of the Government of Poland and/or a reduction in the support assumptions currently incorporated into Moody's assessment.

The methodologies used in these ratings were Regulated Electric and Gas Networks published in November 2014, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Energa S.A. is a holding company for a utility group covering north-central Poland. The group's businesses are (1) electricity distribution; (2) power generation, which is mainly based on coal and a diversified renewable generation portfolio; and (3) supply of electricity to some 2.9 million customers. The company is currently approximately 51.5% owned by the Government of Poland.

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 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.

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.

Helen Francis
VP-Sr 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

Andrew Blease
Associate Managing Director
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

No Related Data.
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