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Rating Action:

Moody's assigns B1 definitive rating to CE Energy's notes; outlook stable

11 Feb 2014

London, 11 February 2014 -- Moody's Investors Service has today assigned a definitive B1 rating to the EUR500 million of senior notes due 2021 issued by CE Energy, a.s. (CE Energy). The corporate family rating (CFR) of CE Energy at Ba2 and the probability of default rating (PDR) at Ba2-PD remain unchanged. The outlook on the ratings is stable.

RATINGS RATIONALE

The assigned CFR of Ba2 with stable outlook is supported by (i) the low business risk profile and stable cash flow generation of the CE Energy group's German lignite coal mining activities that are supported by long-term off-take contracts, (ii) the low business risk profile and stable cash flow generation of the fully regulated monopoly heating activities, (iii) the moderate risk profile of power generation activities, considering that the existing plants are well positioned in the merit order, (iv) the low business risk profile of regulated electricity distribution activities, which extend CE Energy's value chain and diversify its business mix, (v) relatively low capex requirements enabled by well invested and efficient mining assets and the good technical shape of the heating distribution infrastructure and (vi) management's current intention to refrain from further major acquisitions.

The rating is, however, constrained by (i) CE Energy group's relatively small size compared to the wider group of European peers, (ii) the nature of the group's vertical integration with high exposure to lignite as a single dominant fuel, (iii) a short track record of financial consolidation, following the past aggressive acquisition strategy, (iv) a lack of history of stable and predictable performance of the group in its current form given it has been created through acquisitions in the relatively recent past, (v) a history of re-leveraging activities and dividend distributions to shareholders.

The CFR is an opinion of the CE Energy group's ability to honour its financial obligations and is assigned to CE Energy as if it had a single class of debt and a single consolidated legal structure. The B1 / LGD-6 rating of the CE Energy notes reflects the structural subordination of the notes in the CE Energy group structure. More particularly, CE Energy is the holding company for a group of companies owned by EP Energy, a.s., (EPE), which is financed by a mixture of notes and bank debt.

CE Energy has a solid position in its respective business segments. It is the largest heating supplier and the second-largest electricity generator in the Czech Republic, the third-largest lignite producer in Germany, and the second largest electricity distributor in the Slovak Republic. However, any potential growth in the heating segment is technically and geographically limited due to specifics of the central heating sector. Moreover, CE Energy is relatively small compared to the wider group of European utilities. Furthermore, the company has limited price-setting ability, as (i) coal production sales are based on long-term contracts, (ii) heating sales in the CR and electricity distribution and retail supply in Slovakia are fully regulated and (iii) electricity production is predominantly sold on an energy exchange.

Management's aim to reduce financial leverage over the next few years, including the Net Debt / EBITDA target of 2.5x for EPE and 3.5x for CE Energy on a consolidated basis, is credit positive, but lacks a track-record. Moreover, CE Energy's dividend payout targets suggest a bias towards shareholders. The future development of CE Energy's financial profile is also exposed to the credit quality of the wider group that owns CE Energy (EP Holding), and its appetite for extracting dividends from CE Energy -- while still maintaining compliance with existing financial covenants -- could finally constrain financial ratios of CE Energy.

Following the raising of the bond and recapitalisation of the CE Energy group, CE Energy's standalone liquidity profile is considered to be adequate. It will be based on (i) the expected retention of only modest cash balances on an ongoing basis given the expected payment of dividends to EP Holding and, (ii) cash flow generation driven solely by periodic dividends up-streamed from EPE, which are themselves dependent on EPE's ability to make payments in accordance with its financial documentation. The EPE debt documentation contains restrictions on payment of dividends if certain financial ratios are not met. This will leave the debt service prospects of the CE Energy bond largely dependent on the availability and timely payment of dividends to CE Energy, although there is expected to be sufficient covenant headroom at the EPE level.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects Moody's expectation that CE Energy's operating business is robust and resilient against unfavourable market conditions, in particular thanks to the existence of long-term supply contracts for lignite produced. The outlook also reflects expected stable regulatory environments for heat activities in the Czech Republic and electricity distribution in the Slovak Republic.

WHAT COULD CHANGE THE RATING UP/DOWN

Material deleveraging of the CE Energy group in the context of a track record of meeting longer term leverage targets, in circumstances where the wider EP Holding group was not a constraint on the CE Energy ratings, could move the rating up. Material deleveraging could arise from positive developments in commodity prices (especially the recovery in hard coal and power prices).

A reduction in FFO Interest Cover of below around 4 times and / or a reduction in FFO / Net Debt of less than 20% could result in a downgrade in the rating. This could arise from (i) negative developments in commodity prices or (ii) further debt financed acquisitions or change of debt leverage policy. In addition, any material reduction in the credit quality of the wider EP Holding group could result in downwards rating pressure on CE Energy. Furthermore, there could be negative rating pressure on the CE Energy bond rating if there was an increased likelihood that dividends due from EPE were likely to be reduced to levels that would question the viability of CE Energy to service and repay the CE Energy bond.

PRINCIPAL METHODOLOGY

The methodologies used in this rating were Unregulated Utilities and Power Companies published in August 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Prague, Czech Republic, CE Energy owns 100% of the shares in EPE, a utility company, which is active in lignite mining in Germany (via its 100% subsidiary MIBRAG), production of heat and power (predominantly in the Czech Republic but also Germany), distribution and supply (predominantly via SSE in the Slovak Republic) and renewable power generation. CE Energy is 100% owned by Energeticky a prumyslovy holding, a.s. (EP Holding), a private equity owned group.

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.

Matthias Heck
Vice President - Senior Analyst
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

Moody's assigns B1 definitive rating to CE Energy's notes; outlook stable
No Related Data.
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