TEXT-Fitch revises Fortum's outlook to negative; affirms at 'A-'
(The following statement was released by the rating agency)
Jan 15 - Fitch Ratings has revised the Outlook on Fortum Corporation's (Fortum) Long-term Issuer Default Rating (IDR) to Negative from Stable and affirmed the Long-term IDR at 'A-', senior unsecured rating at 'A-' and Short-term IDR at 'F2'.
The rating actions reflect downward pressure on Fortum's ratings from low electricity prices in the Nordic region over the medium term, driven by weak supply and demand dynamics as well as reservoir levels (the latter more a short-term factor), a period of high capital expenditure with corresponding earnings only feeding through with a time lag and high dividend pay-out. At the same time, the group continues to maintain a solid business profile with around 40% of operating EBITDA coming from stable, monopolistic activities (regulated networks and district heating), low carbon generation assets in the Nordic region, substantial new capacity in Russia that is remunerated through a capacity market, geographic diversification and a prudent hedging strategy for electricity sales.
- Financial Ratios Above Guidance:
For FY11 Fitch calculates for the group FFO Adjusted net leverage of 3.6x and FFO fixed charge cover of 7.6x. Hence, leverage was above the ratio guideline of 3.5x for the 'A-' rating level. We expect gearing to increase for FY12 followed by a gradual reduction. Given that FFO Adjusted net leverage is only likely to reduce to 3.5x in the medium term (2014 or beyond), Fitch has revised the Outlook to Negative.
- Risks and Opportunities:
Hydro and nuclear generation assets in the Nordic region have high fixed costs and low variable costs. As a result, electricity prices have a more direct impact on cash flow generation compared with other regions, subject to smoothing effects from hedging. The current environment of low electricity prices is the main reason for forecast credit metrics taking some time to moderate. Any improvement in pricing dynamics, for example through reducing reservoir levels, could create the opportunity for quicker de-leveraging.
Management recently pointed out that there could reasonably be some upside from district heating in the Russian market and efficiency measures in terms of working capital. Fitch has factored into its conservative rating forecasts that efficiency improvements and disposals may take a year longer than guidance. Hence, there are not only risks, but could also be positive news flow regarding Fitch's view of Fortum's creditworthiness.
- Cash Flow Impact From Foreign Exchange:
Fortum has reported in the recent past cash outflows from foreign exchange gains and losses. These mainly relate to forward contracts to hedge SEK loans extended to Swedish subsidiaries and affiliates with the SEK appreciating against the EUR. While Fortum reports these cash outflows within operating cash flow, Fitch considers them financing transactions. Therefore, the negative cash flow impact was removed from FFO, but continues to be reflected in the net debt position.
- Standalone Rating:
No support is factored into Fortum's ratings, even though the Finnish state ('AAA'/Stable/'F1+') holds a controlling stake of 50.8%. Under Fitch's criteria, legal, operational and strategic links with the sovereign would have to stronger (for example though evidence of tangible support) to attribute any uplift to Fortum's ratings.
RATING SENSITIVITY GUIDANCE:
Negative: Future developments that could lead to negative rating actions include:
- Medium-term Nordpool forward prices for baseload reducing further/below current levels of EUR37-EUR38/MWh
- Capital expenditure and acquisitions exceeding management's investment guidance or increase of shareholder pay-out
- Government interventionism such as introduction of nuclear or hydro taxes
Positive: The current Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. Future developments that may nonetheless potentially lead to positive rating action (revision of Outlook) include:
- The hydrological balance in the Nordic region reducing below the long-term average would be expected to give positive pricing signals for Nordpool prices
- Implementing the efficiency programme for 2013-14 and execution of non-core disposals in line or ahead of management schedule could allow for a swifter de-leveraging than forecasted by Fitch
- FFO Adjusted net leverage reducing to below 3.5x on a sustainable basis
LIQUIDITY & DEBT STRUCTURE
As of September 2012 the group had available cash and cash equivalents of EUR1,117m, of which EUR202m was held by OAO Fortum /the Russian part of the business. Additionally, EUR2.5bn of committed and undrawn revolving credit facilities was in place with maturity in July 2016 and EUR0.2bn short-term overdraft facilities. This funding position will provide sufficient liquidity for scheduled debt maturities, operating requirements and dividends until the end of 2014.