Moscow, October 07, 2010 -- Moody's Investors Service has today assigned a B3 corporate family
rating (CFR) and a B3 probability of default rating (PDR) to JSC Far Eastern
Generating Company ("FEGC"), the major power generator
in Russia's Far East. The rating outlook is stable.
At the same time, Moody's Interfax Rating Agency, which
is majority-owned by Moody's, has assigned a Baa3.ru
national scale credit rating (NSR) to FEGC.
According to Moody's and Moody's Interfax, the B3 global
scale rating reflects Moody's expectations with regard to FEGC's
global default and loss, while the Baa3.ru NSR reflects the
standing of the company's credit quality relative to its domestic
The B3/Baa3.ru ratings assigned to FEGC reflect the company's
weak liquidity and evolving financial profile, which are only partially
counterbalanced by its fundamentally sustainable business profile as the
fully regulated major power generator in Russia's Far East and monopoly
heat supplier in key five local markets of the region. The rating
of the company incorporates a one-notch uplift for potential support
from its beneficiary majority owner, the Russian government,
with such support expected to be channelled through the government-controlled
RAO Energy System of East holding company.
FEGC is part of RAO Energy System of East Group. The group essentially
represents Russia's Far East electric utility sector, which,
contrary to other Russian regions, remains fully regulated.
Moody's assesses the business profile of FEGC as fundamentally sustainable
but associated with a higher risk compared with the profiles of regulated
electric utility peers (which commonly have some higher degree of integration)
operating in developed markets. Similar to other rated Russian
companies, the immature domestic business environment also contributes
to the business risk assessment of FEGC.
Moody's assessment of FEGC's business risk profile positively
reflects: (i) the company's strong position as the major power
generator in Russia's Far Eastern market and its monopoly business
as the heat generator and supplier in the region; (ii) the sustainable
power and heat demand in Russia's Far East and revenue growth opportunities,
additionally supported by the federal government's special programme
as well as projects aimed at the economic and social development of the
region as part of Russia's steps to strengthen its geo-politic
position and economic co-operation with countries from the Asia-Pacific
region; (iii) the regulated nature of the company's business,
which should provide some predictability of revenues, and increased
recognition by the government of FEGC's development needs,
reflected in a more friendly tariff regulation and adjusted investment
burden in 2009; (iv) some level of potential support, which
is likely to be available for FEGC from the federal government in case
of financial distress, given the government-adopted regulated
model for the Far Eastern electric utility sector and the government being
the major beneficiary shareholder of the sector, including FEGC,
through RAO Energy System of East holding company.
FEGC's credit quality is mainly constrained by: (i) the company's
very weak liquidity position, driven by its predominantly short-term
debt maturity profile, pressured covenants and lack of committed
credit facilities; (ii) exposure to the evolving regulatory environment
for the domestic electric utility sector in Russia's Far East,
with no track record of consistent and timely cost recovery for FEGC's
business; (iii) FEGC's evolving financial profile, which
has been volatile. Although it materially improved in 2009,
it remains pressured by FEGC's significant investment needs and
the politically biased tariff regulation; (iv) the complex state
ownership and control of the domestic Far Eastern electric utility sector
through the state-controlled RAO Energy System of East holding
company and uncertainty about its future development, which may
challenge FEGC's timely access to the federal government's
support; and (v) FEGC's limited track record of operations
in the current sector configuration and continuous corporate changes at
the company, including the recently changed management team.
FEGC's ratings also incorporate the high geographical concentration
of its assets and customer base, its fuel mix concentration on coal
and exposure to foreign currency risk. The company's sizable
gas purchase contract is denominated in US dollars, while its revenue
is generated in roubles. Moody's considers that these additional
business risks are only partially absorbed under the current regulations.
FEGC's B3/Baa3.ru ratings are thus largely driven by its
uncovered liquidity position and the risk of further volatility of its
financial profile in the context of the evolving regulation and the company's
large investment needs.
The company has a short-term debt maturity profile, which
is associated with high refinancing risk. As of the beginning of
Q2 2010, short-term debt obligations accounted for about
60% of the company's total debt of RUB24.3 billion.
Net of the debt due to its state-related shareholder and the state
itself, these short-term obligations were still well above
the company's cash reserves of around RUB840 million. The
gap is supposed to be covered largely from refinancing bank facilities.
However, under the liquidity management policy, which relies
on its monopoly and market dominance status, connections with the
state and uncommitted bank funding limits, FEGC lacks committed
facilities to address its funding needs reasonably in advance.
Moody's regards this practice as particularly risky for FEGC,
whose financial profile has been volatile and whose access to the state
support may not be quick due to the complicated ownership structure in
the Far Eastern power sector and the limited cash reserve and funding
facilities readily available at the level of RAO Energy System of East
holding company. The rating agency understands that the company
plans to extend its debt maturity profile but has yet to demonstrate its
commitment and ability to do so.
The company's financial profile is still evolving, in Moody's
view, though the rating agency positively notes its material improvement
in 2009, with EBITA margin reaching 13.0%, debt/EBITDA
decreasing to below 4x and FFO interest and debt coverage improving to
1.9x and 12.9%, respectively. However,
Moody's is concerned that the improvement may not be sustainable
and is the result of a one-time recognition by the regulator of
insufficient cost coverage in past years. The regulation is developing,
it lacks consistency and may have various adjustments. It also
remains subject to political interference and, historically,
has contributed to the significant weakening of FEGC's financial
profile. In 2008, given that fuel costs were inadequately
covered by the regulated tariffs, the company's margins decreased
by two times, its debt burden jumped to 11.7x Debt/EBITDA,
and debt coverage was down to 3.4% FFO/Debt (all ratios
incorporate Moody's standard adjustments). Given the developing
regulation and FEGC's large investment needs, Moody's
expects the company to be essentially FCF negative and to increase its
leverage. However, if FEGC failed to materially improve its
liquidity profile, Moody's would see the company's flexibility
to increase leverage under the B3/Baa3.ru CFR as very limited.
Despite the uncovered liquidity and evolving financial profile,
Moody's considers that the company's credit quality is commensurate
with B3/Baa3.ru ratings due to some level of the government's
support incorporated into the rating. In Moody's view,
such support could be available for the company through RAO Energy System
of East in case of financial distress. The government supports
the company in various forms, including subsidies, although
they are limited and not necessarily channelled in a timely manner.
The government has also taken over investment projects from the company
to mitigate the burden on its financial profile and indirectly facilitates
the company's access to state-owned banks. However,
Moody's notes that the timeliness of the support may be challenged
within the sector's complex framework and that the support may be
selective and limited in some cases. As a result, the recognition
of the support in the rating was limited to one notch.
Assuming currently no major negative developments in Russia's economy
in the medium term, although volatilities and/or delays in a sizable
sustainable recovery could not be excluded, Moody's expects
FEGC to be able to improve its liquidity and avoid significant deterioration
of its financial profile in the next 12-18 months. This
expectation is reflected in the stable outlook on the company's
If the company's liquidity position materially improved and its
revised liquidity management policy became more consistent with a B category,
with refinancing issues addressed reasonably in advance, there could
be upward pressure on the rating.
Negative pressure on the company's ratings could result from (i) the economic
environment in Russia and/or the company's focus region deteriorating;
(ii) growing liquidity pressures, with a higher refinancing risk
and challenged covenants, (ii) weakening support from the government,
(iii) a negative development in the regulatory regime leading to lower
margins; (iv) failure to adjust investment plans in line with the
market needs and hence to limit a deterioration of the financial profile,
with FFO interest coverage falling below 1.5x, FFO/Debt decreasing
sustainably below 8%, Debt/Capital exceeding 70%.
This is the first time that Moody's has assigned ratings to FEGC.
The principal methodology used in rating JSC Far Eastern Generating Company
("FEGC")was Regulated Electric and Gas Utilities rating methodology
published in August 2009. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
FEGC is the largest power and monopoly heat generator servicing the Russian
Far East market which remains fully regulated. In 2009, the
FEGC's revenue amounted to RUB41.7 billion (USD1.3
billion). FEGC is indirectly controlled by the Russian government
represented by Russia's Federal Property Agency. The latter
owns a 52.68% stake in RAO Energy System of East Holding,
which in its turn has a controlling stake (51.03%) in Far
Eastern Energy Company, the sole shareholder of FEGC.
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.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
MD - Infrastructure Finance
Moody's Investors Service Ltd.
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Moody's assigns B3 rating to FEGC; outlook stable
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