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Rating Action:

Moody's places DONG Energy's Baa1 ratings on review for downgrade

13 Feb 2016

London, 13 February 2016 -- Moody's Investors Service has today placed on review for downgrade the long term Baa1 ratings of DONG Energy A/S (DONG) and DONG Energy Salg & Service A/S. Concurrently, Moody's has also placed DONG's provisional (P)Baa1 senior unsecured ratings and Baa3 hybrid security ratings on review for downgrade.

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

RATINGS RATIONALE

Today's rating action reflects DONG's exposure to a weakening commodity and power price environment, which could lead to lower earnings over time in Oil & Gas as hedges roll off.

Oil prices have deteriorated substantially in recent months and have reached nominal price lows not seen in more than a decade. Moody's has adjusted its view downward for the likely range of prices; Moody's now estimates Brent oil at $33/bbl in 2016 rising to $53/bbl in 2020. This sharp reduction in oil price assumptions is driven by the continuing oversupply in the global oil markets and continued tepid demand growth.

Gas prices have declined by 17% over the past three months, reflected in power prices in Great Britain which have declined by 11% over the same period. Current one-year forward baseload electricity prices of around GBP35/MWh are below Moody's previous expectation, published in June 2015, of a GBP42-46/MWh range.

Dong has limited exposure to outright power in its generation and renewables businesses, but retains significant exposure to oil and gas prices. In its recently announced 2015 results, DONG took impairment charges of DKK17 billion, of which DKK15.8 billion related to continued falls in oil and gas prices, reduced reserve estimates as well as project specific factors. The company has announced that it will keep Oil & Gas as part of the planned IPO but that it will, nonetheless, focus on necessary steps to de-risk the portfolio and concentrate on cash generation to support future growth in renewables.

The company has high levels of hedging on a post-tax basis in relation to its oil and gas exposure over 2016/17, however as these hedges roll off, absent offsetting measures, its earnings from this segment could fall significantly. This could cause the company's current strong financial metrics against Moody's guidelines for the current rating of FFO/net debt of around mid-thirties in percentage terms and RCF/net debt of around 30 percent (on Moody's calculations) to weaken.

The review will consider the actions that company may take to limit its exposure to O&G and safeguard its targeted financial profile. The company currently has a target payout ratio of 40%-60% but has said that this is subject to change in connection with the expected, upcoming IPO. This is scheduled to take place by Q1 2017.

The review will also take into account (1) the company's strong track record of maintaining its commitment to a Baa1 rating; (2) growing cash-flows from wind farm investments under stable regulatory regimes which, as more projects come on stream, should contribute to a growing proportion of revenues under fixed terms contracts, as most UK projects will be built under the contracts for differences regime; and (3) the low-risk contribution from DONG's network and heat operations reflecting the company's strong market position as Denmark's leading power and gas company.

DONG's Baa1 rating currently factors a one notch of uplift from its Baseline Credit Assessment (BCA) of baa2, a measure of standalone credit quality, under Moody's methodology for Government-Related Issuers for potential support from its majority owner, the government of Denmark (Aaa stable).

WHAT COULD MOVE THE RATING UP/DOWN

The rating could be confirmed if the company can demonstrate that it is likely to continue to have sufficient flexibility to meet the guidance for the current rating over the longer term.

The rating could move down if (1) the risks identified are not offset by mitigating measures that would allow the company to defend its credit profile over the longer term; or (2) the company's operating environment deteriorates further.

Moody's expects any downgrade as a result of the rating review would be limited to a maximum of one notch and also expects to conclude the review within 90 days.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

On Review for Downgrade:

..Issuer: DONG Energy A/S

....LT Issuer Rating, Placed on Review for Downgrade, currently Baa1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Baa1

....Pref. Stock Preferred Stock ("hybrid securities"), Placed on Review for Downgrade, currently Baa3

....Senior Unsecured MTN, Placed on Review for Downgrade, currently (P)Baa1

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

.... LT Issuer Rating, Placed on Review for Downgrade, currently Baa1

Outlook Actions:

..Issuer: DONG Energy A/S

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

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

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

DONG Energy A/S 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 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 - 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 places DONG Energy's Baa1 ratings on review for downgrade
No Related Data.
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