Moody's may never downgrade the US or France for that matter, but when it comes to its stable assessment of Dong Energy, its rock solid analysis truly stands out.
And yes, we are that mature.
From Moody's [6]
Moody's Disclosures on Credit Ratings of Dong Energy
The following release represents Moody's Investors Service's summary credit opinion on DONG Energy A/S and includes certain regulatory disclosures regarding its ratings. This release does not constitute any change in Moody's ratings or rating rationale for DONG Energy A/S.
Moody's current ratings on DONG Energy A/S are:
Long-Term Issuer (foreign currency) ratings of Baa1
Senior Unsecured (foreign currency) rating of Baa1
Subordinate rating (foreign currency) of Baa3
Pref. Stock (foreign currency) rating of Baa3
Senior Unsecured MTN (foreign currency) rating of (P)Baa1
RATINGS RATIONALE
The ratings on DONG Energy A/S are Baa1 with a Stable outlook. The ratings reflect our assessment of DONG in line with our methodology for Government-Related Issuers (22 July 2010). The ratings reflect the following:
- A baseline credit assessment (BCA) of 9 (on a scale of 1 to 21, where a 9 is equivalent to a Baa2).The BCA reflects DONG's strong market position as Denmark's leading power and gas company, although we recognise that it operates in a broader competitive market. The rating also factors in DONG's exposure to volatile commodity prices, mitigated by its structurally vertically integrated position, including a significant equity gas position, and other hedging strategies the company deploys, offset by the reduction in gas supplied by DUC.
We expect that, over time, the proportional contribution made to DONG's EBITDA by low risk regulated network operations and regulated gas and electricity sales will become lower, as DONG's significant investments in off-shore wind farm assets and E&P gas and oil assets contribute more greatly.
As a result of higher power prices on the European Energy Exchange (EEX) and revenue from investments, we expect that DONG will maintain a funds from operations (FFO) debt ratio of around 25% and a retained cash flow (RCF)/debt ratio of around 20%. Such ratios would reflect a comfortable positioning in the Baa1 rating category. However, we expect some fluctuations in these metrics over time as a result of some volatility in prices and output.
The rating also incorporates a one notch uplift from the BCA based on our GRI methodology as follows:
- The Aaa local currency rating of the Danish government.
- Moderate dependence. Our assessment of moderate default dependence between DONG and the state reflects the importance of Denmark as a domestic market for the company. However, it also recognises the fact that DONG derives revenues from selling gas and electricity outside of its home market.
- Moderate support. Our assessment of moderate support reflects the current 76% Danish state shareholding and our expectation that the government will maintain its current share until at least 2015. Our rating assessment recognises the fact that the Danish government is adamantly non-interventionist. We believe that the authorities would hesitate to intervene except in the most extreme circumstances. We note that the present Danish government is unlikely to sell any of its stake in DONG.
The stable outlook on the Baa1 rating reflects our expectation that DONG's performance will be stable in 2011 when compared with 2010, when the company benefitted from high power prices. Aside growth from new assets, DONG's cash flows tend to fluctuate year-on-year. These variations are explained by commodity price fluctuations and changing margins in the company's generation business, which are driven by water levels and carbon pricing in the Nordic area.
We expect that DONG's RCF/net debt will fluctuate between 15%-25% and its FFO/net debt between 20%-30%, moving towards the higher end of the band when commodity prices are higher and conversely towards the lower end when prices or margins are lower. Nonetheless, in order to maintain a comfortable positioning within the Baa1 rating category, we would expect the company to achieve ratios that are, on average, at least in the middle of the indicated ranges, as stated above.
We expect that DONG will maintain an appropriate financial structure in the event that the change in the contribution from upstream gas development and wind farm investment substantially alters the business risk.
We do not envisage an upgrade of DONG's ratings in the intermediate term. This is because we believes that DONG will continue to pursue a large investment programme and is likely to remain subject to some volatility in earnings as a result of commodity exposure, amongst other factors.
Negative pressure on the rating could result if the company were to consistently exhibit financial metrics that were substantially below the average level indicated for a stable rating. In line with our methodology for GRIs, the rating could also be affected by a very significant reduction in the state ownership of DONG, although no such privatisation is envisaged under the recently elected government.
The principal methodology used in this rating was Unregulated Utilities and Power Companies published in August 2009. Please see the Credit Policy page on www.moodys.com [7] for a copy of this methodology.