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Rating Action:

Moody's downgrades Energa's ratings to Baa2, outlook negative

29 Apr 2020

Frankfurt am Main, April 29, 2020 -- Moody's Investors Service (Moody's) has today downgraded to Baa2 from Baa1 the issuer rating of Energa S.A. (Energa). Concurrently, Moody's has downgraded to Baa2 from Baa1 the backed senior unsecured ratings and to (P)Baa2 from (P)Baa1 the guaranteed senior unsecured EMTN programme rating of Energa Finance AB (publ). The outlook on all ratings is negative. This concludes the review for downgrade which was initiated on 11 December 2019.

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

RATINGS RATIONALE

The rating action follows the announcement on 27 April [1] by the listed Polish integrated oil and petrochemicals group Polski Koncern Naftowy ORLEN S.A. (PKN ORLEN, Baa2 negative) that it has successfully completed its tender offer for 100% Energa's outstanding shares, subject to obtaining at least 66% of the company's voting rights.

The downgrade of Energa's ratings reflects the change in the company's ownership and Moody's view that the credit profile of Energa's new majority shareholder PKN ORLEN acts as a constraint on Energa's rating, given that there are no ring-fencing covenants in place which would insulate Energa's creditors from the credit risk of the wider PKN ORLEN group. Ownership and control, board oversight and effectiveness, and management are key elements of Moody's assessment of how governance affects creditworthiness.

At the end of the subscription period on 22 April, shares representing 80.01% of Energa's capital and 85.20% of its voting rights had been tendered to PKN ORLEN for an offer price of PLN8.35 per share, amounting to approximately PLN2.77 billion. The closing of the transaction has been subject to the fulfillment of certain conditions in addition to the voting rights threshold, among them (1) the competition approval by the European Commission which was granted on 31 March 2020; (2) certain changes to Energa's company by-laws to remove specific privileges for Energa's previous majority shareholder, the Polish state, which were approved by the special shareholder meeting on 22 April; and (3) the completion of a due diligence process.

Given that the documentation of the EUR300 million bond maturing in 2027 under the EUR1 billion guaranteed EMTN programme does not include a Change of Control clause, the bondholders are now fully exposed to the credit risk of PKN ORLEN.

Notwithstanding the majority control now exercised by PKN ORLEN, Energa's creditors benefit from the combination of (1) the company's minority listing on the Warsaw Stock Exchange; (2) various financial covenants under the majority of financial agreements with banks and financial institutions; and (3) an agreement closed between the Polish government (A2 stable) and PKN ORLEN on 18 April [2] as a pre-condition for the state tendering its shares to PKN ORLEN. The agreement - on pain of financial penalties - bindingly obliges the new majority owner for a period of at least ten years to assure the proper execution of the current and future obligations of Energa with respect to its core activities, including the operation and development of the distribution grid, the generation and delivery of heating services from its current installations and the maintenance of the currently installed renewables capacities.

The Baa2 ratings also reflect (1) Energa's overall lower business risk profile, compared to PKN ORLEN's traditional oil and petrochemicals business, given that the major share of the company's earnings (around 81% of preliminary group EBITDA in 2019) stems from regulated distribution network activities, which benefit from a relatively well-established regulatory framework; and (2) the current moderate leverage, with funds from operations (FFO)/net debt estimated at around 25-30% in 2019. These positives are balanced by (1) the higher business risk profile of the group's generation and supply businesses; (2) a structurally short generation/supply balance; and (3) execution risks related to a sizeable PLN20.6 billion investment programme over 2016-25, which is likely to weigh on the currently strong financial profile.

LIQUIDITY

Energa confirmed [3] the existence of change of control clauses in some credit agreements concluded with banks and international financial institutions which could be triggered by the acquisition but stated that it was in the process of negotiating the necessary waivers. The exercise of such clauses by lenders could put Energa's liquidity under pressure. Moody's believes that (1) the company's long-standing relationship with its lenders; (2) its good access to the domestic banking system; and (3) the solid credit quality of its new majority owner will strongly mitigate this risk and ensure Energa's access to adequate liquidity sources.

RATING OUTLOOK

The outlook on Energa's Baa2 ratings is negative, reflecting the negative outlook on PKN ORLEN's ratings.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade of Energa's ratings is unlikely in the short-term. In the medium term, the company's ratings could be upgraded if PKN ORLEN was upgraded and if concurrently Energa's stand alone credit quality was to improve materially. The outlook could be changed to stable if (1) Moody's were to stabilize the outlook on PKN ORLEN's ratings; and (2) the standalone credit profile of Energa does not deteriorate.

Conversely, the ratings could be downgraded if (1) PKN ORLEN's rating was downgraded; (2) the factors which partly mitigate PKN ORLEN's ability to take measures to the detriment of Energa's creditors were to disappear; or (3) Energa's credit metrics, expressed as funds from operations (FFO) to net debt, fell below the mid-twenties in percentage terms on a sustained basis.

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1059225. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Gdansk, Energa S.A. is the third largest distribution grid operator in Poland and supplies around 3.07 million customers with electricity. The company owns and operates thermal plants and renewable installations with an installed capacity of around 1.35 gigawatt and has the largest share of electricity generation from renewable sources amongst Polish state-owned utilities. In the first nine months of 2019, Energa reported revenues of PLN9,065 million and EBITDA of PLN1,742 million.

REFERENCES/CITATIONS

[1] PKN ORLEN, Regulatory announcement 24/2020; 27-Apr-2020

[2] PKN ORLEN, Regulatory announcement 20/2020; 18-Apr-2020

[3] Energa, Current report 3/2020; 29-Jan-2020

..Issuer: Energa Finance AB (publ)

Downgrades:

....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1

.... BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

..Issuer: Energa S.A.

.... LT Issuer Rating, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: Energa Finance AB (publ)

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Energa S.A.

....Outlook, Changed To Negative From Rating Under Review

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Mark Remshardt
Vice President - Senior Analyst
Infrastructure 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

Paul Marty
Senior Vice President/Manager
Infrastructure 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

No Related Data.
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