Bulgarian Energy Holding (BEH)'s Ba1 corporate family ...( OF-erCP/W )C / tbeD 21.6% 28.8% 6.3% 19.2% 22.7% FC/R tbeD 21.1% 28.8% 5.6% 12.3% 17.2% tb/eD tknoiooablitizpaac 27.0% 20.6%

INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION24 August 2017

Update

RATINGS

Bulgarian Energy Holding EADDomicile Bulgaria

Long Term Rating Ba1

Type LT Corporate FamilyRatings

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Velina Karadzhova [email protected]

Andrew Blease 44-20-7772-5541Associate [email protected]

Bulgarian Energy Holding EADCredit Opinion Update

SummaryBulgarian Energy Holding (BEH)'s Ba1 corporate family rating (CFR) reflects (1) the group'sdominant position within the electricity generation industry in Bulgaria; (2) its improvingfinancial profile as a result of deficit reduction measures put in place throughout 2015; and(3) its ownership of Bulgaria’s main gas transit and transmission and electricity transmissionassets.

However, the rating is constrained by (1) the relatively unsettled regulatory regime whichdoesn't support cash flow stability and predictability; (2) the risks and uncertainties withrespect to full liberalisation of the wholesale power market in Bulgaria and its impact on BEH;(3) the volatile earnings profile of the group which limits cash flow visibility; and (4) weakliquidity management.

Exhibit 1

Deficit reduction measures support improvement in Natsionalna Elektricheska Kompania's(NEK) financial profile

- - -

392 352

689 697

- - -

-183

300 339

172

(34) (46)

(503)

(17)

135

313

(600)

(400)

(200)

-

200

400

600

800

1,000

1,200

2011 2012 2013 2014 2015 2016 2017E

BG

N m

ln

OBS fee SESF fund EBITDA

Note: (1) OBS fee excludes amounts collected through the regulated tariffs and (2) 2016 NEK EBITDA is adjusted for BGN156million one-off costs in relation to the Belene arbitration court caseSource: NEK and BEH Annual Reports

The Ba1 rating incorporates three notches of uplift to BEH’s standalone credit quality,expressed as a baseline credit assessment (BCA) of b1, to reflect the high likelihood that theGovernment of Bulgaria, BEH’s 100% owner, would step in with timely support to avoid apayment default of BEH if this became necessary.

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MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

Credit Strengths

» Competitive generation base in export driven market should support generation earnings over the medium term

» Improving financial profile supported by deficit reduction measures introduced in 2015

» 100% government ownership and ownership of strategic energy infrastructure provide three notches of rating uplift

Credit Challenges

» Unsettled regulatory environment with some political intervention cause earnings volatility

» Full electricity market liberalisation presents opportunities, but also risks

» Liquidity management practices are credit negative given the volatile earnings profile

Rating OutlookThe stable outlook reflects the fact that, while BEH’s standalone credit profile could come under pressure, the strategic role of thecompany in the Bulgarian energy sector and the oversight and support given by the Government would be supportive of BEH’s overallfinancial status. Moody’s notes the letter of support that the Bulgarian Government has provided to the holders of the Bonds asoutlined in the Bond prospectus.

The stable outlook reflects Moody’s view that a one notch downgrade of the BCA may not result in a downgrade of the final rating.

Factors that Could Lead to an UpgradeCurrently, there is limited upward rating potential in light of the uncertainties with respect to full liberalisation of the wholesaleelectricity market and its impact on BEH.

Factors that Could Lead to a DowngradeDownward rating pressure may develop if (1) we were to reassess the estimate of high support from the Government of Bulgaria; or (2)the Government's rating were to be lowered.

We would expect BEH to maintain FFO/debt of at least in the high teens in percentage terms to maintain the existing b1 BCA.Downward pressure could be exerted on the BCA if (1) the positive regulatory changes implemented in 2015 were to be reversed asa result of market liberalisation or other reasons, and this were to cause further deficits incurred by BEH; and (2) changes in BEH'soperating environment, including due to market liberalisation, led to a significant deterioration in its financial profile.

Key indicators

Exhibit 2

Deficit reduction measures are successful in supporting BEH's financial profileFY2016 cash flows are adjusted for one off impacts of BGN156 million legal costs for Belene and BGN104 million write off of deposits with a bank inliquidation (KTB)

12/31/2016 12/31/2015 12/31/2014 12/31/2013 12/31/2012

(CFO Pre-W/C + Interest) / Interest 5.5x 6.8x 2.8x 7.8x 7.4x

(CFO Pre-W/C) / Net Debt 29.9% 41.0% 7.3% 23.3% 30.1%

RCF / Net Debt 29.3% 41.0% 6.5% 15.0% 22.7%

(CFO Pre-W/C) / Debt 21.6% 28.8% 6.3% 19.2% 22.7%

RCF / Debt 21.1% 28.8% 5.6% 12.3% 17.2%

Debt/book capitalization 27.0% 20.6% 23.7% 24.2% 20.8%

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.Source: Moody's Financial Metrics™

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 24 August 2017 Bulgarian Energy Holding EAD: Credit Opinion Update


ProfileBulgarian Energy Holding EAD is the incumbent 100% state owned electricity and gas utility in Bulgaria. It owns around 50% of theelectricity generation facilities in the country, including the 2,000MW nuclear power plant, 2,713 MW of hydro plants, as well as a1,620MW lignite plant, the input fuel for which is sourced at BEH-owned mining facilities Through its subsidiary NEK, it is the singletrader on the regulated wholesale power market. It also owns and operates the high voltage electricity transmission grid (15,130 km)and the gas transmission and transit networks in Bulgaria (1,700km and 945km respectively), and is also the main regulated wholesalegas supplier. In 2016, BEH group generated BGN608 million of EBITDA.

Detailed credit considerationsCompetitive generation base in export driven market should support generation earnings over the medium termBEH owns c. 6,300 megawatts (MW) of power generation assets representing 51% of the installed capacity in Bulgaria and in 2016generated a net 25.2 terawatt hours (TWh) of electricity (around 60% of the total generation in Bulgaria).

Bulgaria is a net electricity exporter with net exports in the range of 6-10 TWh per year (lower than average in 2016 at around 6TWh) depending on demand and hydrological conditions. Interconnector capacity with main export destinations (Greece, Turkey andMacedonia) is 1,530 MW and is usually fully utilised. Demand from export markets is expected to remain high in the near term, asGreece and Turkey have a large proportion of gas-fired generation which has been less competitive in the last few years. As a result ofhigher gas prices and lower CO2 costs, the Bulgarian generation mix is expected to remain competitively priced.

Exhibit 3

Wholesale power prices in export markets remain higher than those in BulgariaAll prices in EUR/MWh

0

10

20

30

40

50

60

70

80

2011 2012 2013 2014 2015 2016

NPP free market TPP free market Greece Turkey

Source: BEH Annual Reports, EWRC Regulatory Decisions, LAGIE, EPIAS

BEH's generation mix is well positioned to benefit from those regional disparities, as around 70% of its generation is low cost nuclearand hydro generation.

Improving financial profile supported by deficit reduction measures introduced in 2015The wholesale electricity market in Bulgaria currently operates under a dual system (regulated and competitive segments). NEK (awholly owned subsidiary of BEH) has a public mandate to act as a single buyer and seller for all regulated transactions on the market.Electricity outside the regulated quotas trades at bilaterally negotiated prices in an open market or on the Bulgarian power exchange(IBEX) since the beginning of 2016.

Under this single buyer model, NEK purchases electricity from producers with regulated generation quotas at regulated prices.Quota producers include some conventional generators, renewables, and highly efficient co-generation plants. NEK also holdsobligations to purchase power under two power purchase agreements (PPA) with privately owned thermal plants (owned by AES-3Cand ContourGlobal). NEK’s regulated sales are to end suppliers for their consumers on regulated supply tariffs (mainly low voltageconsumers, e.g. households and small businesses) and volumes to cover transmission and distribution technological losses.



In the period 2011-2014, NEK’s regulated sales prices did not reflect the full costs of its regulated purchases and its financial profiledeteriorated as in effect it absorbed the energy system deficit (estimated by BEH at BGN1.6 billion as of Dec'15).

In 2015, the government implemented a series of measures to address future deficit occurrence and the early results of those havehad a positive impact on BEH’s financial performance (see exhibit 1). The key measures include 1) a limitation on the renewables andco-generation output eligible for feed-in-tariff subsidies; 2) an increase in the scope and amount of the charge levied on consumerbills to cover system costs such as renewables generation support (the “obligation to society fee”); and 3) the establishment of a fund(the Security of the Electricity System Fund) which is funded by a five percent tax on generation and electricity and gas transmissionrevenues and proceeds from auctioning of the CO2 allowances allocated to Bulgaria. A 14%-15% reduction in the fixed availability feefor the PPAs, effective from April 2016, was also negotiated, however the saving is passed onto final consumers through the tariffs andhas no financial benefit for BEH.

BEH’s consolidated FFO/net debt recovered to above 20% in both 2015 and 2016 from previously low levels of 7.3% in 2014. NEKreturned to positive operating results at EBITDA level in 2016 with EBITDA adjusted for one-offs of BGN156 million.

The above mechanism will remain in place for the new regulatory period which started on 1 July 2017 and we expect that future tariffdeficits would be very limited, if any occur at all.

We note that the market liberalisation process may lead to structural changes in this mechanism or NEK’s role within the sector as awhole (see below), however, we expect that BEH would continue to benefit from those proceeds in the near-term.

Full market liberalisation presents opportunities, but risks and uncertainties remainFull market liberalisation within the electricity sector (apart from network assets) is a strategic objective for the government in orderto achieve full compliance with the 3rd energy package of EU Directives. It is intended that the current single buyer model underregulated prices and generation quotas will be replaced with a fully competitive wholesale market.

The World Bank presented its suggested approach in January 2017. The model proposed by the World Bank largely follows the actionstaken in Spain with a transfer of the system deficit to a special purpose Government-owned and guaranteed fund. The Bulgariangovernment is yet to announce their proposed course of action. The proposals will then be open to public discussion and legislativechanges will be also required.

The removal of mandatory purchase obligations for NEK will be a significant benefit for the group, as it will eliminate the risk of itincurring the system deficits in the future. We note that affordability remains a concern in Bulgaria and hence there is still socialpressure to maintain low electricity bills. On the contrary, BEH or some of its subsidiaries could remain involved in the new marketmodel as a payment administrator which may in effect retain their exposure to working capital needs or even future tariff deficits.

Benefits for the regulated generation within BEH are limited, as BEH’s regulated quota has decreased significantly and regulatedgeneration prices are now closer to those seen in the open market.



Exhibit 4

BEH's regulated generation quota has more than halved since2013…..

Exhibit 5

…….and the associated regulated prices are now closer to the openmarket wholesale price

9,5637,241 6,178 5,003 3,986

14,073 19,072 21,20020,278

20,908

0

5,000

10,000

15,000

20,000

25,000

30,000

2013 2014 2015 2016 2017E

GW

h

regulated generation unregulated generation

Note: hydro generation is assumed to all be sold at freely negotiated pricesSource: BEH Annual Reports

0

5

10

15

20

25

30

35

40

2011 2012 2013 2014 2015 2016 2017E

NPP regulated NPP free market

TPP regulated TPP free market

Source: BEH Annual Reports

BEH is however exposed to a number of risks and uncertainties as a result of the liberalization process.

Open market transactions are at the moment negotiated bilaterally and thus are somewhat shielded from the price volatility thatliberalisation with trading of all generation volumes on an exchange could bring. BEH's generation assets are largely fixed cost and anyprice volatility will directly impact BEH's results if not hedged. As an example, a 10BGN/MWh reduction in the wholesale power pricewould result in c. BGN140 million reduction in EBITDA for the nuclear generation.

Also, BEH can currently charge a price premium for ancillary services such as limited balancing exposure of the buyers or varyingconsumption profiles. The ability to offer those services through the power exchange may be more limited and BEH could therefore seea reduction in its realised prices.

Further, it is yet unclear how and over what time horizon BEH would be able to recover the accumulated tariff deficit. At present, thedeficit amount is also not confirmed by the regulator.

Unsettled regulatory environment with some political intervention cause earnings volatilityElectricity and gas regulation in Bulgaria is undertaken by the Energy and Water Regulatory Commission (EWRC). Since 2015, EWRCmembers are appointed by the Parliament rather than the Council of Ministers and this in our view should increase its independence.However, a track record of independent decision-making is still to be established.

Regulation is largely based on known principles such as rate of return on a regulated asset base for electricity and gas transmission and“cost plus” for the gas supply business. However, application of these principles still lacks the level of transparency seen in the moreestablished regulatory regimes elsewhere in Europe.

As a result of social and political pressures, there have been past instances when tariffs did not fully reflect incurred costs (such as gassupply until 2013 and NEK’s regulated sales prices). Regulated prices for BEH's quota generation are below open market levels and thislimits generation earnings, even though prices still reflect generation costs. The allowed returns for electricity transmissions are thelowest seen in Europe and below the historical cost of debt for the country, although we note that the earnings are supplemented bynet revenues from balancing activities.



Exhibit 6

Allowed returns for electricity transmission do not cover even costof debt…..

Exhibit 7

…..and are the lowest seen in Central and eastern Europe

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2012 2013 2014 2015 2016

BEH elec transmission Bulgarian 10y annual average yields

Source: BEH, Factset

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2012 2013 2014 2015 2016

BEH elec transmission Transelectrica Elering Latvenergo DSO PGE DSO SPP-Distribucia DSO

Source: BEH, Regulatory determinations

Further, the regulatory regime does not provide stability and predictability of cash flows as is typical for a regulated business.Regulatory periods are of one year and although this allows for quick interventions and updates of regulatory inputs, it limits themedium-term stability of cash flows. Some regulatory decisions in the past have either been inconsistent or quickly abolished (such asthe introduction of the obligation to society fee on exports or transmission charges on renewable power plants) and have resulted inadditional cash flow volatility.

Exhibit 8

Significant EBITDA volatility driven by unsettled regulatory environment limits cash flow visibilityEBITDA as reported, excluding adjustments for one-off or unusual items

166 160 159 141 162.4 154.8

172

(34) (46)

(503)

(17.5) (20.8)

127

(29)

5 123

179.8 190.4

(58)

(103)

52

(0)

33.3 46.9

(600)

(400)

(200)

0

200

400

600

2011 2012 2013 2014 2015 2016

BTGAZ NEK ESO BGAZ


As a positive, we take into account the stable contracted contribution from the gas transit business, where tariffs are largely linked toinflation. However, this is a bilateral arrangement with limited information on the terms and conditions, and hence on the risks andrewards embedded within the contract.

100% government ownership and ownership of strategic energy infrastructure provides three notches of rating upliftBEH’s Ba1 CFR benefits from three notches of rating uplift for extraordinary support from its 100% shareholder, the Governmentof Bulgaria (Baa2, stable). This is driven by our high support assessment and expectation that BEH’s shareholder would provide thecompany with timely financial support if such were needed in order to avoid a default.

Our assessment incorporates past instances of support provided by the Government in the form of 1) government debt guarantees;2) an equity injection in 2009 and 3) most recently providing an interest-free loan to NEK in order to settle the arbitration award



of EUR550 million plus accrued interest to Atomstroyexport. We also note the letter of support that the Bulgarian Government hasprovided to the holders of the Bonds as outlined in the Bond prospectus.

We further note that BEH owns a substantial part of the strategic energy infrastructure of the country, including gas and electricitytransmission and the nuclear power plant. It is therefore strategically important from an economic and national security perspective.

Other considerationsIn addition to the factors discussed above, the rating assessment also factors in the residual issues of (1) interpretation of financialstatements given that there are a number of re-occurring audit qualifications and (2) the lack of approved financial targets and financialpolicies.

Our adjusted financial metrics include, among other adjustments, an allowance of approx. BGN1 billion for potential nucleardecommissioning liabilities of the group with respect to the Kozloduy power plant which is included in our adjusted debt calculation.The allowance is based on our estimates broadly taking into account 1) BEH's installed capacity; 2) the range of nuclear liabilitiesreported by peer nuclear plant operators in Europe; and 3) access to state funds dedicated to nuclear decommissioning works.

Limited financial exposure to de-carbonisation risks due to clean generation mixThe EU has committed to reduce greenhouse gas emissions by 40% from 1990 levels and to increase the contribution of renewablesto energy demand to 27% by 2030. These targets, agreed in 2014, formed the basis of the EU's Nationally Determined Contributionsincorporated into the Paris Agreement, and are designed to significantly decarbonise the region's economies. We believe thatunregulated utilities, which account for 40% of EU carbon emissions, will need to deliver a significant share of the reductions, and thatthis will create a variety of risks and opportunities for individual companies.

BEH's generation mix is dominated by clean technologies with around 70% generated by nuclear and hydro. As a result, any increase incosts for the thermal generation due to increase in CO2 emissions prices will be likely offset by gains from the higher wholesale pricesrealised by the nuclear and hydro plants.

Increased costs for lignite generation due to higher CO2 prices will be offset by gains from higher wholesale power prices by the nuclear andhydro plants

16,314 15,78513,316

14,978 14,528 14,936

10,9749,270

6,722

7,777 8,320 7,282

2,811

2,999

3,598

3,558 4,530 3,063

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2011 2012 2013 2014 2015 2016

GW

h

nuclear thermal hydro


However, BEH's thermal power plant in the Maritza basin is currently non-compliant with the new large combustion plant limits. IfBulgaria obtains derogation approval, the plant could remain in operation post 2021, otherwise it will have to close or incur additionalinvestments in order to meet the new limits. The cash flow impact of potential closure will not be material for BEH on it's own asearnings contributions from the plant are already small (EBITDA of BGN13.7 million in 2016). However, a closure of a substantial partof the thermal capacity in Bulgaria will have wider sector implications, including for BEH.

More generally, BEH has no experience with newer renewables technologies and this could impact its competitiveness over the longerterm.



Liquidity AnalysisAt the end of December 2016 BEH's liquidity is mainly supported by (1) just over BGN1 billion in cash and equivalents; and (2) theoperational cash inflows. Therefore, BEH’s liquidity is fully reliant on internal cash flow generation, as the group has no committedshort term liquidity facilities in place.

The available liquidity is sufficient to cover BEH’s operational and investment needs over the next 12 to 15 months, however BEH willneed to access the capital markets for refinancing of its EUR500 million Eurobond due in November 2018. We expect the company toaddress the refinancing well ahead of the maturity date in order to avoid liquidity pressures.

Structural ConsiderationsA corporate family rating is an opinion of the BEH group's ability to honour its financial obligations and is assigned to BEH as if it had asingle class of debt and a single consolidated legal structure.

BEH’s strategy is to consolidate debt at the holding company level and with the issuance of the EUR550 million bonds in August 2016this accounted for 85% of group debt as of December 2016. Holding company debt service is predominantly reliant on dividends beingupstreamed, ensured through BEH’s operating subsidiaries being required to distribute half of their net profits after certain allocationsto retained earnings and reserves. Nevertheless, unsecured holding company creditors would be subordinated to claims of existingsenior secured lenders (BGN96.7 million as of December 2016), as well as structurally subordinated to unsecured lenders and tradecreditors of the subsidiaries.

Rating Methodology and Scorecard FactorsThe principal methodologies used in rating BEH are Moody's ''Regulated Electric and Gas Utilities'', published in June 2017 and''Government Related Issuers'', published in August 2017. Please see the Credit Policy page on www.moodys.com for a copy of thesemethodologies. BEH’s assigned BCA is currently b1, three notches lower than the Ba1 grid-indicated outcome. The difference is dueto (1) risks and uncertainties with respect to the full liberalization of the wholesale electricity market in Bulgaria; (2) Governmentinvolvement in BEH's strategic direction which on occasions follows the wider political agenda rather than BEH's corporate interests;and (3) wider governance issues, such as lack of approved financial policies and re-ocurring audit qualifications.



Exhibit 10

Rating FactorsBulgarian Energy Holding EAD

Regulated Electric and Gas Utilities Industry Grid [1][2]

Factor 1 : Regulatory Framework (25%) Measure Score Measure Score

a) Legislative and Judicial Underpinnings of the Regulatory Framework B B B B

b) Consistency and Predictability of Regulation B B B B

Factor 2 : Ability to Recover Costs and Earn Returns (25%)

a) Timeliness of Recovery of Operating and Capital Costs B B B B

b) Sufficiency of Rates and Returns B B B B

Factor 3 : Diversification (10%)

a) Market Position B B B B

b) Generation and Fuel Diversity Baa Baa Baa Baa

Factor 4 : Financial Strength (40%)

a) CFO pre-WC + Interest / Interest (3 Year Avg) 5.3x A 5x - 6x A

b) CFO pre-WC / Debt (3 Year Avg) 19.0% Baa 18% - 23% Baa

c) CFO pre-WC – Dividends / Debt (3 Year Avg) 18.7% A 18% - 23% A

d) Debt / Capitalization (3 Year Avg) 23.8% Aaa 26% - 28% Aa

Rating:

Grid-Indicated Rating Before Notching Adjustment Ba1 Ba1

HoldCo Structural Subordination Notching 0 0 0 0

a) Indicated Rating from Grid Ba1 Ba1

b) Actual BCA Assigned b1

Government-Related Issuer Factor

a) Baseline Credit Assessment b1

b) Government Local Currency Rating Baa2, Stable

c) Default Dependence High

d) Support High

e) Final Rating Outcome Ba1

Current

FY 12/31/2016

Moody's 12-18 Month Forward

View

As of August 2017 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 12/31/2016.[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody's Financial Metrics™

Ratings

Exhibit 11Category Moody's RatingBULGARIAN ENERGY HOLDING EAD

Outlook StableCorporate Family Rating Ba1Senior Unsecured Ba2/LGD5

Source: Moody's Investors Service



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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it feesranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1082483


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