NOTE: On February 3, 2020, the press release was corrected as follows: The first sentence of the second paragraph in the LIQUIDITY section was changed to “More than 80% of ENA's debt is provided by international financing organisations and banks including the Asian Development Bank and the European Bank for Reconstruction and Development.” Revised release follows.
London, 30 January 2020 -- Moody's Investors Service, ("Moody's") has
today assigned a Ba2 corporate family rating (CFR) and a Ba2-PD
probability of default rating to the Electric Networks of Armenia (ENA),
the national electricity distribution grid of the government of Armenia
(Ba3 stable). The outlook on the ratings is stable.
RATINGS RATIONALE
ENA's Ba2 CFR is supported by the company's (1) monopolistic position
in the electricity distribution in Armenia; (2) transparent,
albeit relatively new, system of tariff regulation and clear-cut
long-term arrangements for recovery of costs and pre-agreed
investments, as well as the regulator's structural independence
from the government; (3) good visibility of profitability and cash
flow generation until 2027, owing to the signed 2016-2027
agreement between the company and the regulator; and (4) its strong
financial profile.
The rating is constrained by: (1) ENA's modest scale of operations,
naturally constrained by the size of Armenian economy and population;
(2) foreign exchange risk arising from the mismatch between the revenue
currency -- Armenian dram (AMD) - and the currencies of the
majority of ENA's loans -- mainly euros and US dollars;
(3) a meaningful investment programme of $726 million to be completed
by 2027; and (4) a relatively short track record of the company operating
under the new regulatory regime.
RATING CONSIDERATIONS
The company emerged in its present state following a restructuring and
a change of ownership in 2015-16, when in the wake of social
unrest triggered by electricity tariff rises Russia's state-controlled
Inter RAO, PJSC (Baa3 stable) ceased to be the owner of ENA,
with Tashir group, a conglomerate owned by the Karapetyan family
of Armenian origin, taking over control and ownership of the company.
In 2016, ENA concluded an agreement with the regulator, the
Public Services Regulatory Commission of the Republic of Armenia (PSRC),
that envisages a tariff formula for 2016-27 which allows ENA to
recover all incurred operating costs, including cost of purchased
electricity and depreciation, and investments within a certain limit,
in accordance with the pre-agreed investment plan. Actual
cost of electricity which ENA directly purchases from generating companies
for its customers, and actual investments made during the year are
reconciled with the estimates used for the ex-ante tariffs annually,
and adjustments are made to the tariff from 1 February of the following
year. The agreement envisages a gradual reduction in the operating
expenses, as well as improvements in the network efficiency.
Investment costs are included in the tariff with a 12%-14%
rate of return depending on the currency of investments. Revenue
is based on actual transmitted volumes only, since there are no
capacity payments, but absence of competition limits revenue risk.
Moody's expects ENA's gross Moody's-adjusted debt/
EBITDA to increase to 3.3x-3.4x from 3.2x
as of the end of 2018 over a period of 2020-23 as it makes progress
on its investment programme. We expect the company to maintain
other metrics in the A-Baa range, supported by a guaranteed
operating margin.
LIQUIDITY
ENA has an adequate liquidity profile. Cash from operations of
around AMD35.0 billion over the next 12 months and cash and cash
equivalents of around AMD3.8 billion as of 30 June 2019 will be
sufficient to cover maintenance costs, mandatory debt repayments
and some planned investment outflows; however, new debt will
be required to finance the second stage of the company's investment
plan starting 2021. Moody's understands, that necessary
funding will be procured from an international bank syndicate in 2020.
ENA has a degree of flexibility with regard to the implementation of its
investment programme, which is subject to the availability of funding.
More than 80% of ENA's debt is provided by international financing organisations and banks including the Asian Development Bank and the European Bank for Reconstruction and Development. The company's
existing credit agreements embed several financial covenants, including
financial debt/EBITDA at or below 3.5x and debt service coverage
ratio at or above 1.2x. Incompliance with the covenants,
which are tested at the end of a calendar year, would trigger a
default or a cross default under these agreements. Moody's
notes, that during the highest investment phase the covenants headroom
may significantly erode and will require close monitoring.
FINANCIAL POLICY
Single-owner shareholding structure poses certain risks to the
company's corporate governance profile, which are mitigated
by ENA's strategy of improving its corporate governance practices
and achieving compliance with the UK Corporate Governance code as it prepares
for an initial public offering to be held over the next 3-5 years.
The company plans to implement a dividend policy whereby 50% of
net profit will be remitted to the shareholders.
A healthy balance of the shareholder and creditors' interests will
be supported by a set of financial covenants embedded in ENA's creditor
agreements, and performance quality requirements set out and tested
by the regulator at specified intervals.
Moody's does not expect ENA to conduct any meaningful M&A activity
in the foreseeable future.
SHAREHOLDER SUPPORT
Tashir group, which is ENA's sole shareholder via CJSC Tashir
Capital (70%) and Liormand Holdings Limited (30%),
is one of Russia's largest conglomerates engaged in, primarily,
development and construction, as well as manufacturing and other
businesses, on the territory of Russia and the neighbouring states.
The group owns two electricity generating plants in Armenia. Beneficiary
of Tashir Mr. Karapetyan confirmed to the agency that Tashir considers
ENA a strategic asset, which is important to the group for both
business and reputational reasons, and that the group would provide
implicit and explicit support to the company at a time of financial difficulty.
CONSIDERATIONS FOR RATING THE COMPANY ONE NOTCH ABOVE SOVEREIGN RATING
Moody's believes that (1) the strength of ENA's financial
profile, (2) predictability of its cash flow generation and transparency
of its regulatory environment, (3) relative resilience to economic
cycles due to its infrastructure business profile, and (4) low reliance
on domestic capital markets to a degree insulates the company's
financial profile from that of Armenia and justifies one-notch
differential between the company's rating and the sovereign rating
of its domicile country.
OUTLOOK
The stable outlook reflects Moody's expectation that ENA's tariff
arrangements will support sustained operating and financial performance
and liquidity in the next 12-18 months, and that the regulation
of the industry will continue to be applied in a transparent and predictable
manner.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the company's size, its large investment programme,
and its current rating positioning, the upgrade potential is currently
low. The rating could be considered for an upgrade if the sovereign
rating of Armenia were upgraded, provided that ENA demonstrated
strong financial and liquidity profile in a supportive regulatory environment.
Conversely, the rating could be downgraded if Armenia's sovereign
rating were downgraded, or the company's financial metrics
weakened so that its Funds from operations (FFO)/interest fell below 3.0x,
and FFO/net debt to below 18%. A weakening in liquidity,
and threat of covenants breach will put negative pressure on the rating.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in March 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
COMPANY PROFILE
Electric Networks of Armenia emerged in 2002 as a result of a merger and
privatisation of four state regional electricity distribution and sales
networks and is now the sole owner and operator of the electricity distribution
grid of the Republic of Armenia (Ba3 stable). The grid covers a
territory of 36 thousand kilometres, services more than 1.0
million households and employs almost 8.0 thousand people.
The company is fully owned by Tashir group, that is domiciled and
conducts most of its operations in Russia (Baa3 stable) and the neighbouring
states. In 2018, ENA generated AMD189.0 billion (approximately
$397 million) in revenue and AMD28.0 billion (approximately
$59.0 billion) in Moody's -adjusted EBITDA.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Julia Pribytkova
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
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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