Polish Oil & Gas Co. Downgraded To 'BBB-' On Adverse Regulation And Weak Credit Metrics; Outlook Stable
November 28, 2012
In our view the regulatory framework for Poland's gas market appears to
prevent the Polish Oil & Gas Company (PGNiG) from passing on the price of
natural gas imports to its end consumers, making the group highly
vulnerable to volatility in commodity markets.
We believe the company's agreement with Gazprom on gas imports will stem
the increase in gas trading losses and enhance profitability and
liquidity. But key credit metrics will likely be significantly below
previous guidance for 2012.
We are lowering our rating on PGNiG to 'BBB-' from 'BBB' and removing it
The stable outlook reflects our anticipation that PGNiG's fair business
risk profile and significant financial risk profile will not weaken over
the next two years.
FRANKFURT (Standard & Poor's) Nov. 28, 2012--Standard & Poor's Ratings
Services said today it had lowered its long-term corporate credit rating on
Polish Oil & Gas Company SA (PGNiG) to 'BBB-' from 'BBB'. We removed the
rating from CreditWatch, where we placed it with negative implications on
Sept. 5, 2012. The outlook is stable.
"The downgrade reflects our view that the Polish gas market regulatory
framework does not support PGNiG's domestic gas supply operation," said
Standard & Poor's credit analyst Tuomas Erik Ekholm. "Furthermore, there was a
steep decline in PGNiG's key credit ratios because of losses on oil-indexed
and U.S. dollar-based imported natural gas in 2012 and high investment
PGNiG sells gas on the domestic market under regulated prices that are below
its import costs. The regulator's refusal to allow timely pass-through of a
significant increase in the cost of imported gas in 2012 resulted in
unprecedented trading losses for the group.
We have revised our view of the group's business risk profile to fair from
satisfactory and that on the financial risk profile to significant from
intermediate, as defined in our criteria. The ratings also reflect our
methodology for rating government-related entities and our opinion that there
is a "moderately high" likelihood that the Republic of Poland (foreign
currency A-/Stable/A-2, local currency A/Stable/A-1) would provide timely and
sufficient extraordinary support to PGNiG in the event of financial distress.
This is based on our view of PGNiG's "strong" link with, and "important" role
for, the Polish government. As a result, the ratings currently benefit from a
one-notch uplift from the stand-alone credit profile (SACP), which we now
assess at 'bb+', down from 'bbb-'.
On Nov. 6, 2012, PGNiG announced a commercial agreement with OAO Gazprom
amending the pricing formula for its gas imports under the important Yamal
contract. The new pricing terms, which according to the group include European
gas market-based pricing components, will in our view stop gas trading losses
from increasing and help stabilize the group's financial performance and key
credit metrics. Furthermore, the positive impact on profitability will help
the group secure unrestricted access to its key domestic credit facilities,
restricted by covenants, thereby improving liquidity, in our view. Our
base-case scenario underlying the rating of the group includes significant
improvement of key credit metrics from 2013, as reflected in the stable
outlook for the rating.
"The outlook is stable because we don't anticipate any weakening of PGNiG's
fair business risk profile or significant financial risk profile over the next
two years," said Mr. Ekholm.
We consider a ratio of adjusted funds from operations (FFO) to debt of more
than 20% to be in line with the current financial risk profile and the rating,
provided that the group's business risk profile does not deteriorate. We
expect the group to achieve this level, but not necessarily by the end of
2012. For the current rating level we further presume that the group's
liquidity will remain at least "adequate" and no changes to our opinion on the
likelihood of extraordinary government support for PGNiG in the event of
A negative rating action could result from an adverse impact on the group's
business risk profile caused by difficulties related to gas supply,
distribution, or storage, due to regulatory developments, or underperformance
of the exploration and production activities abroad or the domestic heat or
power activities. Also, weakening of the key ratios, in particular adjusted
FFO to debt, to unexpectedly low levels could trigger a negative rating
A positive rating action could follow if we saw significant strengthening of
the company's financial risk profile, barring any weakening of the business
risk profile. This could be achieved with an FFO-to-debt ratio consistently
higher than 35% and more careful balancing of liquidity, investments, and debt
levels with sustainable cash generation.
Company — PGNiG
Full namePolish Oil and Gas Company S.A.
IndustryOil and gas