Moody's Assigns Ba2 Rating to MOESK, Positive Outlook
Moscow, October 26, 2007 -- Moody's Investors Service has today assigned a Ba2 corporate family
rating with a positive outlook to OJSC MOESK ("MOESK",
or "the company"), the largest regional electricity
distribution grid company in Russia with a focus on the Moscow region.
At the same time, Moody's Interfax Rating Agency, which
is majority owned by Moody's, assigned a Aa2.ru national
scale rating ("NSR") to the company.
According to Moody's and Moody's Interfax ("Moody's"),
the Ba2 global scale rating reflects the company's global default
and loss expectation, while the Aa2.ru NSR reflects the standing
of the company's credit quality relative to its domestic peers.
MOESK's ratings reflect: (i) the company's position
as the monopoly distribution grid business in the Moscow region that will
be further reinforced in the short-term by MOESK consolidating
the Moscow city distribution grid company (MGESK) as well as the Municipal
power grid company; (ii) MOESK's strategic and social importance
for the highly populated and rapidly growing capital region combined with
the plans for significant upgrade investments into its asset base,
which should ensure some degree of the Moscow city government's
or federal government's support at least for the foreseeable future;
(iii) a supportive tariff regulation that recognizes the importance of
MOESK's business, with the potential medium-term introduction
of a Regulated-Asset-Base ("RAB")-centred
regulation to support the company's ability to invest and fund its
investments into its asset base; (iv) a good cushion in financial
metrics allowing for a meaningful debt increase, providing the company
with some initial flexibility as to the timing and choice of funding sources;
(v) opportunities to substantially increase revenues provided by the fast
growing economy of the Moscow region, with connection charges to
become an important source of revenues and hence an ability to finance
investments independently of the success of the regulatory reforms.
At the same time, MOESK's ratings are constrained i) uncertainties
associated with the restructuring process of the Russian power sector,
while the company's leading role in the consolidation of the distribution
grid business in the Moscow region will also contain some risks until
this consolidation has been successfully executed and implemented;
(ii) MOESK's exposure to a developing regulatory environment in
the sector, with a RAB-based regulatory regime to come into
force and prove itself as clear, transparent and independent;
(iii) a large investment programme that is driven by the company's
outdated and insufficient distribution assets and which may further increase
due to potential increases in costs of new construction and asset renovation
in the Moscow region; while the sheer magnitude of this programme
itself may challenge the company, we also believe that due to the
similar investment plans of many other Russian power utilities MOESK could
face bottlenecks in both skills and resources required to undertake the
investment programme; such a significant investment programme therefore
contains a significant execution risk; (iv) risk of a rapid deterioration
in MOESK's credit metrics as the investment programme is expected
to be largely debt-funded; (v) potential pressure on liquidity,
given the company's limited flexibility in implementing overdue
and necessary investments; (vi) lack of a track record as a standalone
entity following the break-up of Mosenergo in 2005; (vii)
and lastly, the ratings are also constrained by additional risks
related to Russia's general operating environment, from a
political, economic, judicial perspective, as well as
due to the yet developing corporate governance standards.
MOESK has been chosen as the consolidation center of the Moscow region's
distribution grid assets to become one of 11 inter-regional distribution
grid companies (the Far East grid business not counted) as part of the
target configuration of Russia's post-restructuring power
sector. MOESK operates in Russia's most wealthy Moscow region.
Its position as a regulated monopoly in this market that is facing a shortage
of electricity supply allows MOESK to benefit in the long-term
from the initiated additions to the generation and transmission capacities.
In the short- and medium-term MOESK should also benefit
from gradually increasing transmission volumes and grid connection requests.
The consolidation of the region's grid distribution assets under
the helm of the company is at its initial stage, and its largest
shareholders have agreed that the company should start corporate procedures,
in particular increasing its share capital in order to consolidate MGESK,
the Moscow city grid distribution company. After the latter is
consolidated during 2008, MOESK is expected to further consolidate
other distribution grid assets from the Moscow city and Moscow regional
governments. The objective of the consolidation process is to ensure
well managed and reasonably invested electricity distribution grid operations
to support the Russian capital's day-to-day activities,
taking into account lessons learned from the May 2005 blackout in Moscow
which has revealed risks of an outdated and underinvested grid,
both from social and political points of view.
The central scenario is that the company will remain under control of
the state and/or state-controlled entities, with the Moscow
government's stake in the enlarged MOESK to increase during 2008,
while a meaningful shareholding and impact by federal government controlled
entities is expected to remain at least in the medium term. The
state's support at both local and federal levels should at least
partially mitigate risks associated with the company's large investment
programme of Rbl242 billion planned for 2007 to 2010, including
MGESK's programme. With MOESK's strategic importance
recognized, the regulatory authorities both at local and federal
levels are expected to be supportive to the company's investment
needs, in particular in the upcoming period of transition towards
a RAB-based regulation.
The investment programme is the key challenge faced by the company.
Despite a generally supportive regulation, decisions on future tariff
growth will be politically biased. Thus, transmission revenues,
even with increasing revenues from connection charges added, will
be insufficient for the company to finance its investments without raising
external debt. Additionally, MOESK has yet to confirm its
ability to generate sustainable high revenues from recently introduced
regulated connection charges as this is targeted to be an important source
of its cash flow generation capacity.
Given the size and scale of MOESK's investment programme and the
company's limited flexibility in changing the implementation timetable
due to the political significance and the government's close involvement,
MOESK's current cushion in credit metrics is expected to largely
decrease in the upcoming years. MOESK should remain free cash flow
negative in the mid term and could face liquidity issues should it fail
to maintain a debt profile dominated by long-term maturities.
That said, Moody's draws some comfort from the likelihood
of support from the state in different forms, first of all from
the Moscow government.
Moody's notes that the company successfully issued a 5-year
Rbl 6 billion bond in the Russian bond market in 2006. Up to the
end of 2007, MOESK plans to issue a Rbl 10 billion eurobond to refinance
attracted bridge facilities. Under the circumstances, Moody's
points out to the lack of unused committed credit facilities in addition
to a Rbl 1 billion bank facility available until the end of 2007.
However, Moody's understands that the company has good access
to Russian large state-owned banks due to the support from the
Moscow city government and large federal-government controlled
The rating outlook is positive, incorporating the likely strengthening
of the Moscow government's shareholding in MOESK during 2008,
which also increases the likelihood of support.
Successful consolidation of MGESK, coupled with MOESK's operating
performance being strong and in line with projections, as well as
the Moscow city government's stake increasing to 25% could
have a positive impact on the ratings. Better clarity with principals
and timing of potential introduction of a RAB-based regulation,
could have the same impact. The company's ability to increase
operating profit margins and cash flow generation ahead of projections
may also positively influence the rating.
A negative shift in the regulatory regime affecting the company's
credit metrics may negatively affect the rating. A negative pressure
may result from the leverage exceeding the maximum of total debt to EBITDA
ratio of 3x and RCF to total debt coverage falling down below 20-25%.
Headquartered in the city of Moscow, OJSC MOESK is Russia's
largest regional power distribution grid company servicing the Moscow
region and the city of Moscow, with total number of consumers of
circa 1.4 million. MOESK is a regulated monopoly,
whose electricity transmission revenues accounted for about 90%
of its 2006 total revenues of Rbl 25.5 billion. The largest
shareholders of MOESK are RAO UES holding a 50.9% stake
in the company, Gazprom (28.2%) and the Moscow government
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended
as relative measures of creditworthiness among debt issues and issuers
within a country, enabling market participants to better differentiate
relative risks. NSRs in Russia are designated by the ".ru"
suffix. NSRs differ from global scale ratings, as assigned
by Moody's Investors Service, in that they are not globally comparable
to the full universe of Moody's rated entities, but only with other
rated entities within the same country.
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency specialises in credit risk analysis in
Russia and is 51% owned and controlled by Moody's Investors Service,
a leading provider of credit ratings, research and analysis covering
debt instruments and securities in the global capital markets.
Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE:
MCO). Further information is available at www.moodys.com.
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe
Telephone: +7 495 641-1881
Facsimile: +7 495 641-1897