London, 16 January 2017 -- Moody's Investors Service, ("Moody's") has
today upgraded to Ba1 from Ba2 the corporate family rating (CFR) of Inter
RAO, PJSC the Russian state controlled major electric utility.
Concurrently, the probability of default rating has been upgraded
to Ba1-PD from Ba2-PD. The outlook on the ratings
is negative. Inter RAO's CFR is now at the same level as
the Russian sovereign rating of Ba1 with a negative outlook.
RATINGS RATIONALE
The rating upgrade to Ba1 reflects the company's track record of
reporting strong credit metrics since the beginning of 2015, and
our expectation that the company's credit profile will continue strengthening
in the next 12-24 months. As of June 30, 2016 the
company's adjusted debt/EBITDA reduced to 1.0x (2015: 1.3x)
and it's adjusted fund flow from operations (FFO)/Debt improved to around
84% (2015: 64%). This is underpinned by ongoing
commissioning of new capacities, built under capacity supply agreements
with the Russian state envisaging a stream of payments over the next 10
years, provided Inter RAO's plants remain available, that
would enable the company to earn a predictable return on its recent investments.
This new capacity will generate additional cash flow and enhance cash
flow stability in future years. The strong metrics are also underpinned
by the recent steps taken to improve operating efficiency, which
included decommissioning of inefficient power generation assets,
sales of stakes of less profitable foreign assets in Armenia and Georgia,
and tight cost control.
The strengthening of Inter RAO's financial metrics in the next 12-18
months will also be underpinned by a reduction in capital expenditure
to maintenance levels following the completion of the investment cycle.
This will reduce the need for new debt which, coupled with recent
debt maturities, will result in a reduction in Inter RAO's
debt/EBITDA below 1.0x. Moody's also expects Inter
RAO to generate positive free cash flow in the next 12-18 months,
its FFO interest coverage ratio to stay above 10x, and its FFO/debt
to stay above 90%.
Nevertheless, Inter RAO's rating remains constrained by the challenging
economic environment in Russia expected in the next 12-18 months,
with anemic growth of gross domestic product expected in this period.
This weak environment will constrain growth in electricity consumption
in the country, which Moody's forecasts at the level of 1%
per annum over the next 18 months. The agency also notes the surplus
capacity in the domestic electricity markets which has a potential to
create downward price pressure.
At the same time, the regulatory framework for the Russian utility
sector is relatively immature with above average risks of political interference.
However, Moody's notes several positive changes in the structure
of the electricity market structure and regulatory framework in the past
12 months, such as the introduction of long-term capacity
auctions which set prices for capacity for 3 years. These prices
are adjusted annually by the consumer price index (CPI)-1%
to protect against inflation.
More positively, Inter RAO's rating continues to reflect the
company's strong position in Russia's power market and diversified business
profile. With 28.2 gigawatts of installed capacity (excluding
foreign assets) as of September 30th 2016, the company is the third
largest power generation company in Russia with around 12% of installed
capacity and domestic electricity output. Inter RAO's retail electricity
sales business is the largest in Russia (with a 15% market share).
Moody's particularly notes Inter RAO's effective monopoly of Russia's
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.
Given its ownership by Russian state-controlled entities,
Inter RAO is a Government Related Issuer. Its CFR reflects a view
of its standalone credit quality, reflected in a baseline credit
assessment of ba1 (upgraded from ba2), and an assumption of "strong"
support being provided by its ultimate owner, the government of
the Russian Federation, should this be required.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on Inter RAO's ratings mirrors the negative outlook
of Russia's sovereign rating and reflects the fact that Moody's
does not currently envision that Inter RAO's rating could be higher
than that of the government.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Positive pressure on Inter RAO's ratings is unlikely at present
given the negative outlook on the sovereign rating of Russia and the company's
exposure to the weak domestic macroeconomic environment.
Moody's could change the outlook on the ratings to stable if Moody's were
to change the outlook on Russia's government bond rating to stable,
provided there was no material deterioration in company-specific
factors, including operating and financial performance, and
liquidity.
Downward rating pressure will emerge if Russia's sovereign rating were
to be downgraded. Downward pressure on Inter RAO's rating could
also develop if the company is not able to strengthen its cash flow generation
as planned and/or the company engages in debt-funded acquisitions
or more ambitious capital expenditure leading to a significantly weaker
financial profile.
The methodologies used in these ratings were Unregulated Utilities and
Unregulated Power Companies published in October 2014, and Government-Related
Issuers published in October 2014 . Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
Inter RAO, PJSC 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 revenue of RUB805.3 billion ($13.1
billion) in 2015. Inter RAO is controlled by the Russian government
through several state-controlled entities who own over 50%
of the company as of 31 October 2016.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 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.
Sergei Grishunin
Asst Vice President - Analyst
Infrastructure 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
SUBSCRIBERS: 44 20 7772 5454
Andrew Blease
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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