First-time rating
London, 29 October 2012 -- Moody's Investors Service has today assigned a Ba1 corporate family
rating (CFR) and probability of default rating (PDR) to JSC INTER RAO
UES (INTER RAO), a Russian major electric utility. The outlook
on the ratings is stable. This is the first time Moody's
has assigned a rating to INTER RAO.
RATINGS RATIONALE
Given the Russian government's control over INTER RAO through both
direct and indirect shareholding, Moody's considers the company
a government related issuer (GRI). In accordance with Moody's
rating methodology for GRIs, INTER RAO's Ba1 CFR incorporates
a two-notch uplift to the company's standalone credit quality
as measured by a baseline credit assessment (BCA) of ba3. The uplift
is driven by the credit quality of the Russian government and Moody's
assessment of strong probability of state support in the event of financial
distress, as well as high default dependence between the company
and government.
The high default dependence reflects a close linkage between the financial
health and stability of the government and that of INTER RAO. Moody's
assessment of a strong probability of support from the government factors
in INTER RAO's strategic importance to the Russian electricity system
and economy, given the company's role of an asset consolidation
center in the domestic electric utility sector and a vehicle for Russia's
presence in the international electricity industry and trading.
The assessment also factors in Moody's expectation that the government's
significant involvement in the company will continue in the medium term.
INTER RAO's ba3 BCA is constrained mainly by (1) its high business
risk of a largely unregulated electric utility business operating in the
evolving Russian electric utility sector; (2) a large investment
programme designed to renovate the company's outdated asset base
and strengthen its presence in the international markets which pressures
its financial profile and liquidity position; (3) the business profile's
rapid transformation of the recent past and the company's ongoing
restructuring, which create significant execution risk over its
strategy and blur the visibility of the medium and long-term evolution
of its financial profile; (4) uncertainties surrounding the government's
vision of the company's target corporate and shareholder structure,
including privatization plans.
As it is common for a largely unregulated electric utility deriving its
revenues from electricity generation, sales and trading, INTER
RAO is exposed to fuel and electricity market volatilities, which
cause cash flow volatility. Furthermore, the risk of cash
flow volatility for the company is heightened by the challenges associated
with the evolving Russian electric utility sector. The challenges
broadly include (1) the evolving regulatory and market framework;
(2) the developing configuration of the sector, with the consolidation
process and redistribution of influence along state-controlled
market players under way; and (3) uncertainties regarding the state's
strategy and involvement in the sector.
INTER RAO's BCA positively factors in (1) INTER RAO's strong
and sustainable market position in Russia supported by a substantial and
geographically diversified asset base, the third largest in the
country by installed capacity (32.5 GW, including 5.5
GW abroad), and its relatively large share (15%) in the domestic
retail market; (2) some level of fuel mix diversification and long-term
framework contracts with the largest gas and coal producers, which
ensure access to fuels at competitive terms and conditions; (3) INTER
RAO's de-facto monopoly in Russia' electricity export
and import operations (although limited by volumes and volatile,
these operations are important both as a natural hedge for INTER RAO's
foreign-currency debt obligations and as an instrument of the state's
energy policy); (4) a relatively high rate of achievable returns
associated with a sizable part of INTER RAO's investment programme
represented by new construction projects under long-term capacity
supply agreements; (5) INTER RAO's involvement in the international
operations and projects, which are seen as strategic by the government
and, as such, are likely to be eligible for the government's
funding; (6) INTER RAO's significant cash reserves accumulated
by the middle of 2012 as a result of its ongoing state-imposed
role of an asset consolidation center in the sector.
Moody's noted a deterioration of INTER RAO's financial profile
in H1 2012 driven by unfavourable changes to the regulatory framework
for retail electricity sales businesses, weak domestic electricity
market pricing and unfavourable conditions on the company's key
export market of the Nord Pool. Moreover, the agency particularly
noted that INTER RAO has recently reduced its 2012 EBITDA target indicated
to the market with reference to the unfavourable regulation of retail
electricity sales. However, the company's financial
profile as of the middle of 2012 remains accommodated under the current
rating, with debt/EBITDA on a last-12-months basis
of 1.8x, FFO interest coverage of 5.7x and retained
cash flow (RCF)/debt of 32.9%, including Moody's
standard adjustments and a non-standard one (the latter envisages
the reclassification of state-owned Vnesheconombank's (VEB)
2010-made equity injection in INTER RAO to INTER RAO's debt
due to VEB's put option in relation to its equity stake which may
be exercised from 18 June 2013 to 18 June 2016) . In Moody's
view, INTER RAO's cash and short-term bank deposits
of around RUB80.4 billion in the middle of 2012, which significantly
exceeded its total reported debt of RUB 47.3 billion, make
the company reasonably flexible in managing its financial profile and
liquidity position within the current rating category in the short term.
Although INTER RAO's unadjusted short-term debt obligations
were rather small (RUB9.3 billion, or around 20% of
total unadjusted debt in the middle of 2012), the company has sizable
liabilities due up to the end of September 2013 under both restructuring-related
transactions and acquisitions of the recent past. In light of INTER
RAO's significant investment programme and negative free cash flow,
Moody's positively noted that the company had around RUB85.7
billion under undrawn credit facilities in the middle of 2012, which
should support its liquidity profile. Moody's expects INTER
RAO's access to state-owned banks to continue to mitigate
investment-driven pressures on the company's liquidity.
In the longer term, Moody's expects INTER RAO to deliver a
better financial performance in line with its strategy, benefiting
from synergies associated with its enlarged and reasonably diversified
utility business and state's support. At the same time,
Moody's positively notes management's commitment to maintaining
unadjusted debt/EBITDA below 3.0x.
The stable outlook on INTER RAO's rating reflects Moody's
view that, based on the state's support, the company
will manage its financial profile in line with the current rating category,
with debt/EBTDA not exceeding 3.0x, FFO interest coverage
and RCF/debt not weakening below 5.0x and 30%, respectively,
including Moody's adjustments.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's does not expect upward pressure on the rating until there
is a better visibility with regard to the mid- to long-term
evolution of both (1) INTER RAO's financial profile; and (2)
the company's asset configuration and shareholder structure.
INTER RAO's rating could be negatively impacted if there were a negative
shift in the evolving regulatory and market framework and the company
failed to limit a deterioration of its financial profile, reflected
in debt/EBITDA above 3.0x, FFO interest coverage below 5.0x
and RCF/debt below 30% on a sustainable basis. The company's
inability to maintain adequate liquidity could also pressure the rating.
Negative pressure on the rating could also result from Moody's assessment
of a material reduction in the probability of state support.
PRINCIPAL METHODOLOGY
The methodologies used in this rating were Unregulated Utilities and Power
Companies published in August 2009, and Government-Related
Issuers: Methodology Update published in July 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of these methodologies.
Headquartered in the city of Moscow, Russia, INTER RAO is
a Russian major electric utility engaged in thermal electricity generation
and retail electricity sales in Russia, cross-border electricity
trading and electric utility operations abroad. INTER RAO generated
RUB536.2 billion (US$18.2 billion) in 2011.
The company is controlled by the Russian government, which directly
and indirectly (through state-controlled entities) owns 59.9%
of the company.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
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Ekaterina Botvinova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
Monica Merli
MD - Infrastructure Finance
Infrastructure Finance
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Moody's assigns Ba1 rating to INTER RAO; stable outlook
