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Rating Action:

Moody's reviews Energa's Baa1 ratings for downgrade

11 Dec 2019

Frankfurt am Main, December 11, 2019 -- Moody's Investors Service ("Moody's") has today placed on review for downgrade the Baa1 issuer rating of Energa S.A. (Energa). Concurrently, Moody's has placed on review for downgrade the Baa1 backed senior unsecured ratings and the (P)Baa1 guaranteed senior unsecured EMTN programme rating of Energa Finance AB (publ).

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

RATINGS RATIONALE

The rating review follows the announcement on 5 December by the listed Polish integrated oil and petrochemicals group Polski Koncern Naftowy ORLEN S.A. (PKN ORLEN, Baa2 stable) that it intends to acquire 100% of Energa's outstanding shares through a tender offer.

PKN ORLEN, which currently does not own any Energa shares, offers PLN7 per share to Energa's shareholders, amounting to approximately PLN2.9 billion for all shares. PKN ORLEN will accept tendered shares if at least 66% of voting rights are tendered during the subscription period which runs from 31 January to 9 April 2020. The stated rationale for the bid is PKN ORLEN's intention to create an integrated multi-utility corporation to reap efficiency gains and to ensure better resistance of the merged business to market volatility and other risks in the light of ever more competitive fuel and energy markets.

The transaction is subject to competition approval by the European Union Commission which PKN ORLEN expects to receive within three months. Other conditions for closing the transaction include changes to Energa's company by-laws that currently grant certain voting and other privileges to Energa's majority shareholder (51.52% of capital, 64.09% of voting rights), the Polish state, and the completion of a due diligence process. Energa's board of directors has not indicated yet whether it intends to accept the offer.

The review for downgrade reflects Moody's expectation that, should the acquisition be completed, the credit profile of Energa's new majority shareholder PKN ORLEN may act as a constraint on Energa's rating. The rating review will therefore consider the impact of the potential change of ownership on the credit quality of Energa, taking into account (1) PKN ORLEN's future business and financial risk profile and (2) the level of integration of Energa within PKN ORLEN post-transaction and the extent to which Energa's creditors could be partially insulated from PKN ORLEN's credit quality.

Bondholders of the 2013 bond issue in amount of EUR500 million under the EUR1 billion guaranteed EMTN programme benefit from a Change of Control clause under which they would be entitled to exercise a put option provided that certain conditions are met, including a credit rating downgrade to non-investment grade. Given that the 2013 bond issue will mature on 19 March 2020, Moody's views the possible exercise of the put option as less likely. The documentation of the EUR300 million bond issued in 2017 excludes the Change of Control clause. Energa may have additional Change of Control clauses in the financial documentation concluded with banks and international financial institutions which could be triggered by the acquisition. The exercise of such clauses, if it takes place, could put Energa's liquidity under pressure.

Energa's current Baa1 rating is underpinned by the following factors: (1) the low business risk profile of the company's distribution network's activities, which benefit from a relatively well-established regulatory framework and accounted for 91% of group EBITDA in 2018; and (2) the current moderate leverage, with funds from operations (FFO)/net debt of 41.0% in 2018. 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 increasingly absorb the currently strong financial flexibility.

Given Energa's current 51.52% ownership by the Government of Poland (A2 stable), Moody's considers the company to be a government-related issuer. The Baa1 rating incorporates a one-notch uplift from Energa's standalone credit quality, expressed as a baseline credit assessment (BCA) of baa2, based on Moody's assessment of strong support and very high dependence. Moody's assumption of strong support takes account of (1) the strategic importance of Energa's electricity distribution grid; and (2) the Polish government's track record of intervention. Given the potential change in ownership, the rating review will also consider whether Energa will continue to be categorized as a government-related issuer.

RATING OUTLOOK

The Baa1 ratings are under review for downgrade, reflecting the potential impact of the acquisition by PKN ORLEN on the company's credit quality.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the review for downgrade, an upgrade of Energa's ratings is unlikely. The ratings could be confirmed if the acquisition does not take place and Energa remains in its current form under the Polish state's direct ownership.

Conversely, the ratings could be downgraded if PKN ORLEN acquired Energa. The magnitude of a potential downgrade would depend on (1) the degree of linkage between the credit profiles of Energa and PKN ORLEN post-transaction; and (2) PKN ORLEN's own credit quality post-transaction.

..Issuer: Energa Finance AB (publ)

On Review for Possible Downgrade:

....Backed Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)Baa1

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

..Issuer: Energa S.A.

.... Issuer Rating (Local Currency), Placed on Review for Downgrade, currently Baa1

Outlook Actions:

..Issuer: Energa Finance AB (publ)

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

..Issuer: Energa S.A.

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

The methodologies used in these ratings were Regulated Electric and Gas Networks published in March 2017, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

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.

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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