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Polskie Gornictwo Naftowe I Gazownictwo S.A. -- Moody's affirms PGNiG's Baa2 rating; outlook stable

·15 min read

Rating Action: Moody's affirms PGNiG's Baa2 rating; outlook stable

Global Credit Research - 22 Jul 2020

Frankfurt am Main, July 22, 2020 -- Moody's Investors Service (Moody's) has today affirmed the Baa2 issuer rating of Polskie Gornictwo Naftowe I Gazownictwo S.A. (PGNiG). The outlook remains stable.

RATINGS RATIONALE

The rating action follows the announcement on 14 July [1] by the listed Polish integrated oil and petrochemicals group Polski Koncern Naftowy ORLEN S.A. (PKN ORLEN, Baa2 positive) that it has signed a Letter of Intent (LoI) with the Polish State Treasury concerning taking capital control of PGNiG. Ownership and control, board oversight and effectiveness, and management are key elements of Moody's assessment of how governance affects creditworthiness.

The rating affirmation reflects Moody's expectation that (1) the transfer of control to PKN ORLEN is likely to be completed; and (2) the credit profile of PGNiG under a new controlling shareholder PKN ORLEN would not be negatively affected. Moody's notes, however, that at this time there is little visibility on the impact of the potential transaction on PGNiG. Should the transaction be consummated, Moody's will assess the impact of the change of ownership on the credit quality of PGNIG, taking into account (1) the enlarged PKN ORLEN group's future business and financial risk profile; (2) the level of integration of PGNiG within PKN ORLEN post-transaction, including potential parent support; and (3) PGNiG's investment and funding strategy in the context of the enlarged PKN ORLEN group.

While the LoI is non-binding, details of the transaction have yet to be determined and the takeover is subject to relevant competition approvals, Moody's deems the transfer of a controlling ownership to PKN ORLEN likely, given the involvement of the Polish government (A2 stable) as PGNiG's 71.88% majority owner and PKN ORLEN'S main (27.59%) shareholder. The involved parties assume that the transaction could take more than one year to complete.

The stated rationale for the takeover is the joint aim of the Polish government and PKN ORLEN to create an integrated Polish multi-utility group, which as a large, diversified energy conglomerate would be able (1) to reap synergies; (2) to benefit from a more balanced cash flow profile; and (3) to compete successfully in international markets. The formation of a Polish multi-energy group headed by PKN ORLEN is already in progress, following the successful completion of a tender bid for Energa S.A. (Energa; Baa2 stable), the third largest domestic electricity distribution grid operator, now majority owned (80.01% of capital, 85.20% of voting rights) by PKN ORLEN, in April 2020. In addition, PKN ORLEN announced also on 14 July the conditional antitrust approval of the European Commission to take over Grupa LOTOS S.A., the second largest Polish refining group.

The rating affirmation also reflects that PGNiG's current Baa2 rating remains underpinned by the following factors: (1) The company's dominant position as vertically integrated incumbent in its domestic gas market in Poland; (2) the sizable and fairly stable earnings contributions from its regulated distribution, heat and storage activities; (3) the group's strong financial profile reflected by a funds from operations (FFO) to net debt ratio of around 108% at the end of 2019; and (4) the expectation of a strong likelihood of support from the Polish government which reflects PGNiG's role as agent for the Polish government's "security of supply" policy for gas. Should the transaction be consummated, Moody's will assess the extent of direct parental support or indirect government support under PKN ORLEN's control, given PGNiG's importance for Poland's gas supply.

At the same time, PGNiG's rating is constrained by (1) its earnings volatility caused by its exposure to commodity prices; (2) the investment and execution risk in the Exploration & Production segment; and (3) uncertainties regarding development of the European gas market in terms of supply volumes and prices over the next years.

Given PGNiG's current 71.88% ownership by the Government of Poland, Moody's considers the company to be a government-related issuer. The Baa2 rating incorporates a one-notch uplift from PGNiG's standalone credit quality, expressed as a baseline credit assessment (BCA) of baa3. The uplift reflects the combination of (1) high default dependence, given the company's strong domestic focus, with over 75% of sales emanating from Poland; and (2) Moody's assumption of a strong likelihood of extraordinary support provided by the Polish government in case of financial distress. If the change in ownership were to happen, Moody's will consider whether PGNiG will continue to be categorized as a government-related issuer.

RATING OUTLOOK

The outlook on PGNiG's Baa2 rating is stable, reflecting Moody's expectation that the potential acquisition by PKN ORLEN is unlikely to have a material impact on the company's credit quality.

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

An upgrade of PGNIG's rating is unlikely in the short term. The rating could be upgraded (1) if the takeover was completed; (2) PKN ORLEN was upgraded; and (3) concurrently PGNiG's standalone credit quality would materially improve.

Conversely, the rating could be downgraded if PKN ORLEN acquired PGNiG and the acquisition was to have a material negative effect on the credit profile of PGNiG post-transaction. The rating could also be downgraded if the company's stand-alone credit quality materially deteriorated, as reflected in the company's ratio of FFO/net debt falling below 40% on a sustained basis.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Warsaw, Poland, PGNiG is the parent company for Poland's incumbent vertically-integrated gas utility group. PGNiG achieved revenues of around PLN42 billion (about EUR9.4 billion) and an EBITDA of around PLN5.5 billion (about EUR1.2 billion) in the financial year ended 31 December 2019.

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

This rating is solicited. 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

REFERENCES/CITATIONS

[1] PKN ORLEN, Regulatory announcement 45/2020; 14-Jul-2020

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

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