Frankfurt am Main, December 13, 2019 -- Moody's Investors Service ("Moodys") has today affirmed
the issuer rating of Polski Koncern Naftowy ORLEN S.A. ("PKN
ORLEN" or "company") at Baa2 and also affirmed the baseline
credit assessment (BCA) at baa3. Concurrently, Moody's has
also affirmed at Baa2 the rating of the EUR 500 million due 2021 and EUR
750 million due 2023 senior unsecured bonds issued by ORLEN Capital AB
(publ) and guaranteed by PKN ORLEN. The outlook on all ratings
has been changed to negative from stable.
"Today's outlook change reflects the uncertainty regarding PKN ORLEN's
future growth strategy consisting of additional acquisitions and large
capex investments, while the company's Moody's adjusted
leverage is likely to increase to around 2.5x debt/EBITDA pro forma
of the envisaged acquisitions of Energa S.A. and Grupa Lotos
S.A. proforma based on combined EBITDA of the acquired companies
and the increased debt/EBITDA level, from currently 1.1x.
Furthermore, we note that so far no separate financing for both
acquisitions has been announced and that Energa S.A. still
intends to build the coal power plant Ostroleka C with an installed capacity
of 1000MW, while also its financing has not yet been fully secured",
says Janko Lukac, an AVP -- Analyst and Moody's lead analyst
for PKN ORLEN.
RATINGS RATIONALE
The outlook on PKN ORLEN's rating has been changed to negative from
stable, reflecting the company's intention to acquire 100%
of the capital of one of the largest Polish utilities Energa S.A.
(Baa1 ratings under review) for about PLN 2.9 billion (around EUR
680 million), while being in the process of taking over the second
biggest Polish refiner Grupa Lotos S.A. with a market cap
of around PLN 16 billion (EUR 3.7 billion). At the same
time PKN ORLEN is committed to substantial capex investments in its petrochemical
operations and plans to increase its exposure to power generation and
renewables. Furthermore, until there is more clarity on PKN
ORLEN's strategic direction, Moody's sees a risk of
additional debt-financed acquisitions which further weaken the
company's financial profile.
During the next 12-18 months Moody's will monitor the group's
strategic direction, M&A activity as well as investment plans
and its impact on the group's leverage which Moody's estimated
to reach pro forma for both acquisitions 2.5x adj. debt/EBITDA,
which is on the upper end of our expectations for PKN ORLEN's baa3
BCA. This also assumes the takeover of only 66% of Grupa
Lotos' share capital. We will also monitor when, and
how the contemplated acquisitions will be financed.
PKN ORLEN aims to close both transactions during the course of 2020 (Energa
S.A. in H1 and Grupa Lotos S.A. in H2) subject
to regulatory approval and certain deal-specific conditions.
Both, Energa S.A. and Grupa Lotos S.A.
are owned partially by the Government of Poland (A2 stable) by 51.5%
and 53.2%, respectively. Energa S.A.
operates an energy distribution network in North and Central Poland with
access to around 2.8 million end customers and operates power plants
with 1.34 GW of installed capacity. The potential acquisition
would strengthen PKN ORLEN's position as the fourth largest producer
of electricity in Poland and increases the share of EBITDA of its energy
activities to 29% pro forma from 14% in 2019. Electricity
distribution activities will help to offset the inherent volatility of
PKN ORLEN's refining business, but we see limited strategic
fit between both companies' activities and hence a limited potential
for synergies.
The acquisition of the polish refiner Grupa Lotos S.A. was
announced in November 2018 and is currently investigated by the European
Union. So far no price to public shareholders has been offered
but an agreement with the Polish State Treasury regarding its 51%
share in Grupa Lotos S.A. was made in August 2019.
This transaction would enhance the market position of PKN ORLEN in Poland
and give it access to the complex refinery (Nelson complexity of around
10) in Gdansk, which is likely to yield significant production synergies.
The baa3 BCA also reflects (1) PKN ORLEN's strong presence in Central
and Eastern Europe (CEE), with a dominant presence in the downstream
segment; (2) the smaller scale of its upstream operations; (3)
the above-average complexity of its refineries, which are
able to process heavy crude oil; (4) the high level of integration
among its refining, retail and petrochemical businesses; and
(5) its leading presence in the Polish wholesale and retail fuel markets.
However, the baa3 BCA also reflects the inherent exposure of the
group's operating performance and financial results to the volatility
of refining margins. This is only partly mitigated by the stabilizing
effect on its operating results from its retail division and the company's
efforts to invest heavily in the construction of new petrochemical facilities
to increase its margins and resilience.
With 27.5% of its share capital held by the Polish state,
PKN ORLEN falls within the scope of Moody's rating methodology for Government-Related
Issuers (GRIs). Under this methodology, Moody's assumes moderate
dependence and moderate support from the Government of Poland (A2 stable).
This reflects PKN ORLEN's strategic importance to the Polish state as
a market leader in the petroleum retail sector, its contribution
to GDP, and its status as a major employer within Poland.
Hence, PKN ORLEN's Baa2 rating benefits from a one-notch
uplift relative to the baa3 BCA.
LIQUIDITY
Moody's deems PKN ORLEN's liquidity as adequate. The
group has PLN 6.750 million cash on its balance by the end of Q3
2019 and access to an undrawn PLN 4,300 million multicurrency revolving
facility maturing in April 2021, which is more than sufficient to
cover working capital swings and in combination with operational cash
flows to fund the CAPEX program. However, we note that the
acquisitions will require additional external funding, which we
expect to be secured timely.
OUTLOOK
The outlook on PKN ORLEN's rating is negative, reflecting
the uncertainty regarding future acquisitions and already significant
investment plans at a time when the announced acquisitions will increase
the group's leverage towards the upper end of our guidance at 2.5x
adj. debt/EBITDA for PKN ORLEN's baa3 BCA. Furthermore,
the 50% stake of Energa S.A. in the Ostroleka C coal
power plant with an estimated total construction cost of PLN 6 billion
included in Energa S.A.'s large PLN 21 billion investment
plan (2016-25) might increase PKN ORLEN's leverage further.
It also takes into account the uncertainty of the company's future
growth strategy and the need to still obtain committed financing for the
acquisitions.
WHAT CAN CHANGE THE RATING UP / DOWN
Moody's currently does not consider to upgrade PKN ORLENS Baa2 rating
as a result of the expected weakening in its credit metrics and execution
risks around the integration of the acquired companies. A positive
rating action could be considered if (1) PKN ORLEN successfully increases
its geographic diversification supported by a more balanced business profile,
with its significant exposure to the inherent volatility of the business,
2) deleverage its balance sheet towards below 1.5x adjusted debt/EBITDA
on a sustained basis, and (3) continues to show positive free cash
flow (FCF) generation, combined with strong liquidity.
The Baa2 rating could be strained if adverse downstream conditions result
in markedly weaker operating performance, or if leveraging related
to its growth strategy hurts the company's credit metrics, resulting
in adjusted debt/EBITDA exceeding 2.5x on a sustained basis.
Negative FCF generation or pressure on PKN ORLEN's liquidity could also
result in a downgrade. Reduced support assumptions from the Polish
government could also result in a downgrade.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONCERNS
Environmental considerations for PKN ORLEN include the risk that environmental
concerns, penetration of electric cars and regulation result in
a declining demand for PKN ORLEN's main products gasoline,
diesel and other derivatives of oil. Moody's monitors this
closely and notes that PKN ORLEN is expanding its production of petrochemicals
and plans to develop an 1.200 MW offshore wind park in the Baltic
Sea by 2024. A successful acquisition of Energa would further increase
PKN ORLEN's exposure to renewables and add a sizeable electricity
distribution network, but at the same time exposes PKN ORLEN to
the already ongoing construction of the coal power plant Ostroleka C (50%
stake) with an installed capacity of 1.000 MW expected to be completed
by 2023 for an estimated PLN 6 billion (EUR 1.4 billion).
Furthermore, Energa holds a 15% stake in the largest Polish
coal miner Polska Grupa Gornicza.
Governance considerations for PKN ORLEN include the dominant position
and influence of the Polish government on PKN ORLEN, despite controlling
only 27.5% of its share capital. The Polish Government
has a track of actively shaping the group's strategy and exchanging
top management frequently. Both ongoing acquisitions are likely
to be influenced by the Governments strategy to create national champions
in strategic industries such as the energy sector. Moody's
will closely monitor the Polish Governance stance on PKN and notes that
Government-induced capital investment plans could result in a deterioration
in the financial profile of the group.
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Refining and Marketing Industry
published in November 2016, and Government-Related Issuers
published in June 2018. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
COMPANY PROFILE
Polski Koncern Naftowy ORLEN S.A. (PKN ORLEN), with
an annual revenue of PLN109.7 billion EUR25.3 billion) and
707,000 bpd refining capacity in 2018, is the largest oil
refining and retail group with well-integrated petrochemical and
chemical production and operates more than 2,800 gas stations in
Poland, Germany, the Czech Republic, Lithuania and Slovakia.
It was formed from state monopolies in 1999 and currently has a public
float of 72.5%, with the State Treasury holding the
remaining 27.5% stake. The Articles of Association
entitle the State Treasury to appoint and recall one member of the supervisory
board and one member of the management board, giving the government
effective control over PKN ORLEN's strategy and operations. The
Polish government has a long track record of interfering in PKN ORLEN's
strategy and frequently changing management and supervisory board members.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Janko Lukac
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
