OREANDA-NEWS. Fitch Ratings says that DONG Energy A/S's Issuer Default Rating of 'BBB+'/Stable is not affected by a large DKK16bn (EUR2.1bn) asset write-down in the oil and gas exploration and production (E&P) division. However, the asset write-down, which is driven by the continued decline in oil and gas prices, reduced reserve estimates as well as by project-specific factors, erodes the company's headroom in the medium term within our leverage target for the rating.

DONG Energy announced the E&P asset write-down together with its intent to retain its E&P business as part of the planned IPO following E&P's strategic review.
The impact of the fall in oil and gas prices on DONG Energy's E&P cash flows is mitigated by the company's extensive hedging position. This includes financial hedging, with a high hedge ratio for the next two years on a rolling basis and also the natural hedge with oil-linked gas purchase contracts in gas midstream (for DONG Energy's oil production). However, DONG Energy's exposure to the E&P segment, which we view as cyclical and as carrying high business risk, is large compared with other integrated European utilities. We expect the relative importance of DONG Energy's E&P business to the overall group profile to decrease in the next few years in line with lower expected capex for E&P following the strategic review.

We expect operating cash flows in E&P to be impacted more by lower prices in 2018-2019 once existing hedges of oil and gas prices roll off and move closer to current low price levels. The lower projected operating cash flows will be mitigated by the company's reduction of E&P capex in line with lower commodity prices but also due to the company's strategic focus on investments in renewable energy, mostly off-shore wind farms. These projects benefit from quasi-regulated revenue and cash flow visibility in the company's countries of operations, including Denmark, the UK and Germany.

The rating reflects DONG Energy's prudent financial policy with a focus on maintaining solid credit metrics. The company's current credit metrics are strong for the rating mainly due to an equity increase in 2014 of DKK13bn (EUR1.7bn), together with other elements of the implemented 2013-14 Financial Action Plan, such as asset disposals. Fitch projects funds from operations (FFO) net adjusted leverage to increase to an average of about 3x in 2015-2017 from a low 1.5x in 2014. This is still below our negative rating guideline for leverage of close to or above 4x.