Rating agencies react to the resolution of remaining residual risks from gas replacement procurement at VNG
On Friday, December 2nd , EnBW published in a press release that VNG resolved the remaining risks from its gas replacement procurement and withdrew the application for stabilisation measures. An agreement with the German government on compensation for losses incurred in connection with the replacement procurement costs from the delivery contract with Gazprom Export LLC (GPE) enabled VNG to resolve the residual risks from replacement gas procurement. Consequently, VNG withdrew its application for stabilisation measures under section 29 of Germany’s Energy Security of Supply Act to the German Federal Ministry of Economics and Climate Action dated September 9th 2022. As a result, the government will not take an equity stake in VNG.
Based on these recent developments, both rating agencies Moody's and Standard & Poor's have taken this news positively and responded with publications.
On Tuesday, December 6th, S&P stated in a bulletin, that the agreement reached with the German government on December 2nd 2022 provides clarity on expected losses in the company's 2022 consolidated figures. EnBW’s subsidiary VNG has no volumes contracted in its supply business tied to these volumes from 2023 onward, which means that it will eliminate the exposure to Russian gas flows. The agency says that tightness in EnBW’s credit metrics for its current A- rating remains. The rating on EnBW still contemplates the company's strong commitment to maintain solid investment grade ratings and S&P’s view that EnBW's integrated nature should continue to prove it is more resilient than non-integrated peers to the changing conditions. According to S&P, the outlook could be revised to stable once there is more clarity on the company's full-year performance and its remedial measures to medium-term pressure on credit metrics.
Yesterday, Moody's issued a press release confirming EnBW's long-term issuer rating of Baa1 with a stable outlook. The affirmation of the rating reflects the view that EnBW will exhibit a credit profile commensurate with a Baa1 rating given that the residual financial risks associated with the procurement of gas by VNG - its 74% owned subsidiary - have now been substantially mitigated. In spite of incurring losses of more than €1 billion in 2022 related to gas contracts, Moody’s notes that EnBW has been able to offset the vast majority of these losses among others owing to higher earnings in its electricity generation segment. Whereas the electricity market revenue caps for some generation technologies proposed by the Government in Germany will restrict earnings growth, allowed revenues will likely be at high levels from a historical perspective which will support EBITDA and cash flow growth in 2023.