(The following statement was released by the rating agency)
Nov 28 -
-- 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 from CreditWatch.
-- 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.
On Nov. 28, 2012, Standard & Poor's Ratings Services 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. 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 levels. 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.