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Rating Action:

Moody's assigns Baa3 rating to hybrid notes issued by DONG Energy; stable outlook

05 May 2015

London, 05 May 2015 -- Moody's Investors Service has today assigned a Baa3 long-term rating to the EUR600 million issuance of Callable Subordinated Capital Securities due 3015, (the "Hybrid") by DONG Energy A/S ("DONG"). The rating outlook is stable in line with that of DONG's Baa1 senior unsecured rating.

RATINGS RATIONALE

The rating on the securities of Baa3, which is two notches below the senior unsecured rating of Baa1 for DONG, reflects the features of the Hybrid. At 1,000 years to maturity, it is very long-dated, deeply subordinated and DONG can opt to defer coupons on a cumulative basis.

In Moody's view, the Hybrid has equity-like features that allow it to receive basket 'C' treatment (i.e., 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes). Please refer to Moody's Cross Sector Rating Methodology "Hybrid Equity Credit" (March 2015) for further details (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_156230).

As the Hybrid's rating is positioned relative to another rating of DONG, a change in either (1) Moody's relative notching practice or (2) the Baa1 senior unsecured rating of DONG, could affect the Hybrid's rating.

DONG's Baa1 ratings reflect (1) the company's strengthened financial profile as a result of the completed financial action plan including the equity injection in February 2014; (2) the low-risk contribution from its network and heat 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 lifting costs; (4) the growing cash-flows from its wind farm investments under stable regulatory regimes; and (5) state support for the company, given its ownership by the government of Denmark.

DONG's credit quality is constrained by (1) the risks to cash flows due to the company's exposure to commodity price and output risks from gas and oil investments; (2) exposure to wind forecasting, developer and construction risks related to its large targeted investments in offshore wind; and (3) our expectation that DONG will remain free cash flow negative due to ongoing significant levels of net capital expenditure of around DKK35-40 billion (EUR4.7-5.3 billion) over the 2015-16 period. The proportional contribution made to DONG's EBITDA by low-risk regulated network and heat operations will remain a relatively modest contributor, as DONG commissions new investments in off-shore wind farm assets and exploration and production (E&P) oil & gas assets. However, as wind projects come on stream they should contribute a growing proportion of revenues under fixed term contracts as most new UK projects will be built under the new contracts for differences regime.

Whilst production has been boosted by the Ormen Lange field in 2014 which have benefited from catch-up volumes, Moody's expects that production should decline in 2016/17 as these volumes normalise. The ratings agency believes that the company will proceed more cautiously in terms of E&P investments, in line with its recently revised strategy in the context of the difficult, low price operating environment.

Moody's expects that DONG should be able to maintain funds from operations (FFO)/net debt ratio in the mid-thirties in percentage terms and retained cash flow (RCF)/net debt ratio of around 30% 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. We expect that the company would use means at its disposal, such as varying dividend and capex levels, to maintain a financial profile in line with the current guidance were pressures on cash flows to build as a result of weaker commodity prices.

In the context of a weak commodity price environment, DONG has a high hedge ratio over the 2015-16 period for both its oil and gas price exposures. The company is helped by the short position from oil-indexed gas sourcing contracts broadly offsetting its long E&P oil position, which acts as a natural hedge. The company estimates that its total oil and gas exposure after hedging for 2015-16 is very limited. Nonetheless, from 2017 onwards DONG will be more exposed to the effects of lower oil and gas prices as these more favourable hedges roll off.

DONG's Baa1 senior unsecured ratings incorporate a one-notch rating uplift from its baseline credit assessment of baa2, reflecting Moody's assessment that there is a moderate probability of Danish government(Aaa stable) support in the event of financial distress. The government's ownership share fell to 58.8% following the equity injection, however, in Moody's view, the government remains committed to DONG. Both government and opposition parties support the government maintaining majority ownership and control.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the ratings reflects Moody's expectations that DONG's FFO/net debt will generally 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 guidance for the rating factors in 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 vis-à-vis the regulated network business.

WHAT COULD MOVE THE RATINGS 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, particularly in wind energy, and to a lesser extent in E&P, and will remain exposed to commodity price movements and construction and development risks amongst other factors. However, positive pressure could develop on the rating if DONG were to exhibit, on a sustainable basis, materially stronger credit metrics than indicated above.

Negative pressure on the ratings could result if the company failed to consistently maintain the financial metrics indicated for the rating. This could be caused by (1) a significant and prolonged structural reduction in gas and oil prices with a negative effect on profitability which cannot be mitigated by hedging or other corporate measures; (2) wind forecasts which prove to be overly optimistic; or (3) an increase in the company's debt levels as a result of continuing investment which is not matched by new revenues.

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 ratings of the government of Denmark.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

DONG Energy A/S (DONG, Baa1 stable) is a 58.8% Danish state-owned company, initially established as the country's state gas and oil company. DONG is Denmark's largest integrated energy group providing heat and power to around one million customers, the largest builder and owner of offshore wind farms in Europe and one of the 10 largest owners of oil and gas assets in the North Sea.

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.

Helen Francis
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

Neil Griffiths-Lambeth
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 Baa3 rating to hybrid notes issued by DONG Energy; stable outlook
No Related Data.
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