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Rating Action:

Moody's changes outlook on DONG Energy's ratings to stable from negative; affirms ratings

13 Jun 2017

London, 13 June 2017 -- Moody's Investors Service (Moody's) has today changed to stable from negative the outlook on the long-term Baa1 senior unsecured and issuer ratings of DONG Energy A/S (DONG Energy) and the long-term Baa1 issuer rating of DONG Energy Salg & Service A/S (DESS). Concurrently, the rating agency stabilised the outlook on the provisional Senior Unsecured MTN programme at (P)Baa1 long-term senior unsecured rating and the Baa3 hybrid (Pref.Stock ) instrument ratings of DONG Energy. Moody's has also affirmed all of these ratings.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

Today's rating action recognises DONG Energy's solid performance in 2016 and the company's continued strong track record in offshore wind project delivery. It further takes account of the added financial flexibility stemming from the announced divestment of the higher risk Oil & Gas (O&G) activities later this year and management's stated commitment to maintaining strong credit quality in the context of the heavy investment programme associated with DONG Energy's strategy of growing its renewable energy portfolio.

Moody's expects DONG Energy's earnings from continued operations to weaken in 2017 compared with the previous year, when financial performance was boosted by the positive impact of the DKK4.3 billion (EUR610 million) one-off payments associated with renegotiation of its gas contracts. Nevertheless, the Baa1 rating factors in the expected improvement in DONG Energy's credit metrics once new offshore wind farms, including Walney Extension and Race Bank, become operational in 2018. It further assumes that DONG Energy will continue to use partnership contributions to limit the increase in debt burden associated with the technically challenging development of offshore wind projects.

With the divestment of the O&G activities, DONG Energy will increasingly focus its investments in the offshore wind industry. The company's strategy assumes that it will almost double its offshore wind capacity to 6.5 gigawatts (GW) by 2020 and with the current pipeline, which includes the two largest offshore wind parks once built -- Walney Extension and Hornsea 1, the company is on track to exceed this target. The ambition of growing installed capacity to 11-12 GW by 2025 will depend on the market opportunities and is subject to DONG Energy's commitment to maintain a financial profile commensurate with the current ratings.

Moody's considers that there are material risks associated with offshore wind development, albeit these are somewhat mitigated by DONG Energy's strong track record of delivering projects on time and budget. The financial impact of the significant investments is limited by the contributions from partners, which typically assume a 50% stake in a project under development. Whilst the use of a partnership model reduces DONG Energy's reliance on third party financial debt, it also exposes the company to greater construction risk than its ownership would imply. Moody's believes that this contingent risk is limited at present, but may increase as the projects become more complex due to, for example, increasingly large turbines, distance to shore and water depths. These risks are, however, mitigated by (1) DONG Energy's experience as the world's largest offshore wind developer and operator; (2) the fact that many of the developments reflect an evolution of existing technologies; and (3) supplier warranties that will cover the next generation of turbines.

Going forward, and given the company's strategy of renewables growth, DONG Energy's earnings will be largely driven by the performance of its offshore wind farms, which typically operate under long-term contracts, with fixed tariffs and limited power exposure. Moody's estimates that offshore wind power earnings derived from the projects in Denmark, UK and Germany will account for around 80-90% of DONG Energy's operational EBITDA, i.e. excluding construction and divestment gains, until 2020. The remainder will be generated by a mixture of businesses, of which the largest contributors are regulated distribution and heat activities.

Overall, DONG Energy's Baa1 rating positively reflects (1) the company's experience as the leading offshore wind developer with a growing portfolio of operational offshore wind assets; (2) the significant contribution from long-term contracted cash flows under generally predictable and well-established regulatory regimes, with limited merchant power exposure; and (3) the presence of relatively low risk Danish utility business. The rating is, however, constrained by (1) the execution and financing risks associated with development of offshore wind; (2) a degree of concentration risk for its operational portfolio; (3) reliance on contributions from partners to fund new development projects; and (4) exposure to greater development and construction risks than its ownership would imply under the partnership model. From a financial risk perspective, the Baa1 rating factors in the company's moderate leverage, which provides a degree of financial flexibility as DONG Energy continues with its heavy investment programme, and management commitment to a strong credit quality.

The Baa1 senior unsecured rating incorporates an uplift for potential government support to DONG Energy's standalone credit quality, which is expressed by Moody's as a baseline credit assessment (BCA) of baa2. The uplift to the BCA, of one notch, results from the credit quality of DONG Energy's shareholder, the Government of Denmark (Aaa stable), and Moody's assessment of there being "moderate" probability of government support in the event of financial distress, as well as "moderate" default dependence, i.e. degree of exposure to common drivers of credit quality.

The Baa3 long-term rating on the hybrid securities, which is two notches below the senior unsecured rating of Baa1 for DONG Energy, reflects the features of the hybrids that receive basket 'C' treatment, i.e. 50% equity or "hybrid equity credit" and 50% debt for financial leverage purposes.

The affirmation of the Baa1 issuer rating of DESS follows that of DONG Energy, its parent. DESS's credit quality on a standalone basis is weaker than that of the DONG Energy group. However, the company's rating is based on its strategic importance to DONG Energy and the very high probability of parent company support, as evidenced by the past equity injections and DONG Energy's strong commitment to preserving DESS's creditworthiness.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that (1) DONG Energy will be able to maintain financial metrics in line with the guidance for the current rating, with funds from operations (FFO) (excluding construction, development, divestment gains and the related tax expense)/net debt above 30%; and (2) the company will continue to manage its portfolio of development projects on time and on budget.

The stable outlook on DESS's rating is in line with that of its parent, DONG Energy.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on DONG Energy's ratings is unlikely in the medium term considering the company's heavy investment programme and the risks associated with offshore wind farm development.

An upgrade of DONG Energy's rating could result in an upgrade of DESS' rating.

Downward pressure on DONG Energy's ratings could develop if (1) the company's financial profile deteriorates such that (FFO) (excluding construction, development, divestment gains and the related tax expense)/net debt falls below 30%; (2) the company's development projects incur significant delays and/or cost overruns; (3) wind forecasts prove to be overly optimistic; or (4) the company's debt levels increase as a result of continuing investment, which is not matched by new revenues. A reduction in the government support assumption incorporated into DONG Energy's rating would also likely result in a downward rating adjustment.

A downgrade of DONG Energy's rating would result in a corresponding downgrade of DESS's ratings. A negative rating pressure could also develop as a result of (1) a revision of the support assumption incorporated into DESS's rating; or (2) a material deterioration in DESS's business or financial risk profile.

The principal methodologies used in rating DONG Energy A/S were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers published in October 2014.

The principal methodologies used in rating DONG Energy Salg & Service A/S were Trading Companies published in June 2016, and Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: DONG Energy A/S

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured MTN Programme, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

....Pref. Stock, Affirmed Baa3 (hyb)

..Issuer: DONG Energy Salg & Service A/S

....LT Issuer Rating, Affirmed Baa1

Outlook Actions:

..Issuer: DONG Energy A/S

....Outlook, Changed To Stable From Negative

..Issuer: DONG Energy Salg & Service A/S

....Outlook, Changed To Stable From Negative

DONG Energy A/S is a Danish energy company. Initially established as the country's state gas and oil company, DONG Energy transformed itself into a large developer and operator of renewable energy portfolio. The company also remains Denmark's largest utility providing heat and power to one million customers. DONG Energy's largest shareholder is the Government of Denmark, which holds 50.1% of the company's shares.

DONG Energy Salg & Service A/S is 100% owned by DONG Energy A/S. Its primary activity includes buying and selling of gas and power, as well as related products and services in Northern Europe. DESS generated revenues of DKK34.3 billion (EUR4.9 billion) in 2016.

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
Client Service: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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