Bloomberg News

Dong Cost Cuts Will Help Credit Profile, Moody’s, S&P Say

November 02, 2012

Dong Energy A/S, Denmark’s biggest utility, will improve its credit profile with yesterday’s plans to cut jobs and sell assets, according to Standard & Poor’s and Moody’s Investors Service.

“Cutting costs will help cash flow generation and the disposal of assets will help improve the financial risk profile,” Alf Stenqvist, an S&P credit analyst, said by phone from Stockholm. “The financial risk profile should benefit from selling assets and reducing debt, which should out-weigh the loss of cash flow from the disposed assets.”

Dong Energy yesterday said it will cut as many as 600 jobs as part of a plan to lower annual costs by 1 billion kroner ($175 million) after declines in the natural gas market eroded earnings. Chief Executive Officer Henrik Poulsen, who took charge of the Skaerbaek, Denmark-based company in August, will also sell non-core assets worth about 10 billion kroner over the next two years to help returns and improve capital.

“It appears the new CEO has identified cost cuts and that he will really focus on keeping costs down,” Paul Lund, a London-based Moody’s analyst, said by phone. “Finding additional cost cuts will help the company offset the problems faced in the energy markets.”

Net Loss

Dong yesterday reported a third-quarter net loss of 3.16 billion kroner compared with a 760 million-krone profit in the same period a year earlier, after writing down the value of German gas storage facility contracts by 2.3 billion kroner. Net debt was 33.2 billion kroner at the end of September compared with 27.3 billion kroner a year earlier.

Dong Energy has a BBB+ rating with a negative outlook at S&P after the rating company on Oct. 24 downgraded the utility from A-, citing challenges in the gas and power markets. Dong is rated Baa1 at Moody’s.

“In our base-case we believe that the company has the ability and the willingness to improve its financial risk profile in line with our expectations for the ratings,” Stenqvist at S&P said yesterday. “The measures the company announced today are showing evidence of this willingness.”

The yield on Dong’s 6.5 percent note maturing May 2019 declined to 2.13 percent today from 2.17 percent yesterday, according to composite Bloomberg bond trading bid prices. That compares with this year’s high of 3.51 percent on Jan. 24.

‘Weak’ Results

“Dong Energy delivered another weak set of results in the third quarter,” Jakob Magnussen, a credit analyst at Danske Bank A/S in Copenhagen, said in a note dated yesterday. “While acknowledging that the business risk has increased, we maintain our buy recommendation on the name, as the group offers an attractive spread pickup to Nordic peers.”

Dong, which also produces oil and gas and develops offshore wind power parks, sold bonds in September for 750 million euros ($970 million). It was the second time this year that the company, which is partly owned by the Danish state, tapped the debt market amid growing demand for Nordic haven assets.

CEO Poulsen declined on a conference call with analysts yesterday to identify which assets the company plans to sell. “In some cases we are already in an active divestment process,” he said.

The plan to sell assets is “credit neutral,” according to Lund at Moody’s. “It’s already part of our rating that they sell non-core assets. They have been selling non-core assets in the past and we expect them to continue to do so.”

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.


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