London, 18 November 2009 -- Moody's Investors Service has today assigned a Ba2 corporate family rating
(CFR) to JSC Lenenergo ("Lenenergo"), the Russian electricity distribution
grid business focusing on the St. Petersburg region. The
rating outlook is stable. At the same time, Moody's Interfax
Rating Agency, which is majority owned by Moody's, assigned
a Aa2.ru national scale credit 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.
Moody's notes that Lenenergo's Ba2/Aa2.ru ratings incorporate:
(i) the higher risk of the company's regulated grid monopoly business
in Russia compared to the generally low business risk profiles of its
peers in developed markets; (ii) the company's financial profile
and liquidity, which are challenged by its large investment programme;
and (iii) some degree of shareholder/state support available to the company
given its advantageous shareholder structure and its strategic role in
the economy of the St. Petersburg region, one of the wealthiest
regions in Russia. The company's higher business risk is
attributed to the developing regulation and framework of the Russian power
sector and, more broadly, to the country's immature
Lenenergo's ratings positively reflect its position as the monopoly
distribution grid business in the St. Petersburg region,
which is highly populated, strategically important and demonstrates
a lower-than-average reduction in electricity demand in
the 2009 crisis environment, whilst remaining one of the regions
that will be the first to benefit from a future economic recovery.
The ratings also take into account some level of support from MRSK-Holding,
the state-related controlling shareholder of Lenenergo, and
from the government of the city of St. Petersburg (rated Baa2/stable),
the second-largest shareholder owning a blocking stake.
Also, the rating reflects the relatively supportive tariff regulation,
which recognises the importance of Lenenergo's business for regional
development, with the expected introduction in the short term of
a RAB (Regulatory Asset Base)-based regulation which is expected
to lead to tariff increases in order to support the company's ability
to invest in its asset base. More broadly, the RAB-based
regulation should contribute to the transparency and stability of the
tariff regulation framework. Lastly, the ratings reflect
additional opportunities to support margins and cash flow generation based
on connection charges, until the RAB-based regulation is
However, Moody's notes that Lenenergo's ratings are
constrained by the company's exposure to the developing Russian
distribution grid sub-sector regulation, as well as some
uncertainties surrounding the sub-sector consolidation under the
MRSK-Holding management. The ratings are also constrained
by additional risks from Russia's immature operating environment
and the company's large investment programme to increase capacity
and renovate its significantly outdated assets, which will drive
the company's leverage up and expose it to material execution risks.
Furthermore, another rating constraint is the risk that pressure
on the company's liquidity may increase in the still tight financial
markets due to its limited flexibility in delaying investments and large
external funding needs.
Moody's notes that the new RAB-based regulation has yet to
be fully introduced and that it will take several years before the independence
of the economic regulation from political interference in Russia and its
fairness and predictability can be tested. However, Moody's
has also considered that, due to Lenenergo's strategic importance
to the region, the regulatory authorities are likely to continue
to be responsive to the company's large investment needs,
particularly in the upcoming period of transition towards the new tariff
regulation. Indeed, in 2005, the authorities decided
to introduce connection charges mainly for new and expanding businesses,
which created an additional revenue source that is less politically sensitive
compared to common transmission revenue. Accordingly, despite
uncertainties surrounding the introduction and parameters of the new RAB-based
regulation for the company, Moody's currently does not expect
the upcoming introduction of the regulation to weaken the company's
operating cash flow compared to the current cost-plus-based
regulation. However, the agency remains concerned about whether
the new regulation can reasonably strengthen Lenenergo's cash flow
generation and hence about the company's ability to finance its
investments without raising a substantial amount of debt in the short
to intermediate term. In the current weak economic environment,
a sustainable high level of growth in tariffs may not be implemented,
given the high political sensitivity of such increases.
If fully implemented, Lenenergo's ambitious 2009-2011
investment programme of approximately RUB55 billion will result in the
company becoming increasingly free cash flow negative. Lenenergo
will thus need to achieve sustainable cash flow growth to limit the deterioration
in its financial profile. The company's 2008 interest and
debt coverage metrics were relatively strong, with FFO/Interest
and FFO/Net Debt at 8.0x and 69.3%, respectively,
factoring in sizeable cash inflow from connection charges. Moody's
notes that this inflow from connection charges has been severely affected
in the current economic environment and is expected, in any case,
to decrease gradually going forward following the introduction of the
Moody's has factored into Lenenergo's ratings the expectation
of deterioration in the company's credit metrics compared to the
levels achieved in 2008 due to its investment programme, which could
leave the company with a limited cushion within its rating category.
However, Moody's expects Lenenergo to be able to limit any
deterioration of its financial profile within this rating category,
based on the support from its major shareholders, the state-controlled
MRSK-Holding and the government of St. Petersburg.
Both shareholders are expected to be able to (i) help the company adjust
its investment plans to available funding and reasonably prudent leverage
targets, and (ii) facilitate its access to external funding to retain
an appropriate liquidity profile. Moody's factors a one-notch
uplift into the company's Ba2 rating for the support from its shareholders.
Moody's notes that the company's liquidity is being pressured
by: (i) significant investment needs; (ii) a limited track
record of advance arrangements for committed back-up facilities;
and (iii) potentially challenged financial covenants. Furthermore,
a sizeable portion (40%) of its debt of RUB11 billion, excluding
finance lease obligations, as of the middle of 2009, will
mature over the next 12 months, putting additional pressure on the
company's liquidity position. Being a monopoly business,
Lenenergo is required to attract bank resources under time-consuming
tender procedures, which may additionally limit its financial flexibility
going forward. According to the company's management accounts
as of the middle of 2009, its cash and cash equivalents and shortly
expected advances under the connection agreements covered nearly 60%
of its short-term debt obligations. However, as Lenenergo
is finalising new credit line agreements with Russian state-owned
banks, Moody's believes all its debt obligations over the
next 12 months should be covered by the end of November 2009.
More generally, Moody's notes that the company's liquidity
position will depend on its actual capex over the next 12 months,
as well as its ability to address its refinancing issues reasonably in
advance. In Moody's view, the liquidity pressures are
currently accommodated under the company's rating due to the above-mentioned
support from shareholders.
The rating outlook is stable as Moody's believes that the company
has sound and prudent plans to develop and adjust its business in close
interaction with its shareholders taking into account the availability
of funding, tariff evolution and the wider economic environment.
Moody's expects Lenenergo to manage its financial profile and liquidity
in line with the current rating category based on support from its large
No upward pressure on the ratings is expected in the current developing
and untested regulatory environment in the Russian distribution grid sub-sector.
However, negative pressure on the company's ratings could result
from (i) weakening support from the shareholders, (ii) a negative
shift in the developing regulatory regime and deteriorating margins,
or (iii) failure to adjust investment plans to tariff decisions and hence
limit deterioration of the company's financial profile, with
total FFO interest coverage falling materially and persistently below
3.0x and FFO/Net Debt below mid-teens. Furthermore,
an inability to address refinancing issues and/or challenged covenants
reasonably in advance could negatively impact the ratings.
The principal methodology used in rating Lenenergo was Moody's rating
methodology for Regulated Electric and Gas Networks, published in
August 2009 and available on www.moodys.com in the Rating
Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in the city of St. Petersburg, Lenenergo is
one of Russia's largest regional power distribution grid companies,
focused on the St. Petersburg region. The company services
a territory of 87,400 sq km with a population of 6.2 million
people. Lenenergo is a regulated monopoly, whose electricity
transmission revenues accounted for around 65% of its 2008 total
revenues of RUB17.9 billion. The largest shareholder of
Lenenergo is the state-controlled MRSK-Holding, which
holds 50.31% of the company's voting shares.
A blocking stake of 25.16% in the company is owned by the
government of the city of St. Petersburg.
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 (MIRA) specialises in credit risk analysis
in Russia. MIRA is 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.
Moody's Investors Service Ltd.
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Moody's assigns Ba2 rating to Lenenergo; outlook stable
Vice President - Senior Analyst
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
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