(The following statement was released by the rating agency)
Jan 12 -
-- In our view, Moscow United Electric Grid Co. JSC (MOESK) faces regulatory uncertainties relating to tariffs, and we believe privatization risk is relatively high.
-- However, the company enjoys a dominant position as the operator of Moscow’s major power grid.
-- We are assigning our ‘BB-’ long-term corporate credit rating and ‘ruAA-’ Russia national scale rating to MOESK.
-- The stable outlook reflects our view that MOESK’s key credit metrics and liquidity will likely remain commensurate with the ratings over the next 12 months.
Standard & Poor’s Ratings Services said today it assigned its ‘BB-’ long-term corporate credit rating and ‘ruAA-’ Russia national scale rating to Russian electricity transmission grid operator Moscow United Electric Grid Co. JSC (MOESK). The outlook is stable.
The ratings reflect our view that MOESK faces regulatory uncertainties related to the further development of the electricity distribution tariff regime. MOESK’s aging operating assets and grid-development plans combine to create an ambitious medium-term investment program, in our opinion. Furthermore, MOESK has a concentrated customer base and its losses are higher than the industry average, owing to large transit volumes through the area. It also has a significant portion of residential consumers in the customer structure, and cash flows and earnings from the connection of new customers to the grids are volatile. These earnings contributed about 11% of the company’s revenues in the first six months of 2011 (18% for full-year 2010).
However, MOESK enjoys a dominant position as the major distribution grid operator in the City of Moscow (BBB/Stable/--), with an 80% market share. It also has a leading 65% market share in Moscow Oblast (not rated). Cash flows from regulated power distribution are relatively stable and the company’s long-term debt maturity profile is favorable, in our view.
We assess the company’s stand-alone credit profile at ‘b+', based on our assessments of its business risk profile as “fair” and its financial risk profile as “aggressive”.
The Russian government has a controlling state in MOESK through its 53.7% stake in IDGC Holding, which controls 50.9% of MOESK’s share capital. We therefore consider MOESK to be a government-related entity (GRE). According to our GRE criteria, the ratings on MOESK incorporate our view of a “moderate” likelihood of timely and sufficient extraordinary state support in the event of financial stress. This is based on our view of MOESK‘s:
-- “Important” role for the Russian government as a provider of essential infrastructure services in its areas of operation; and
-- “Limited” link to the Russian government, given its indirect majority ownership of the company and the existence of a number of minority shareholders, which increases uncertainty about the timeliness and mechanism of any extraordinary support.
We see privatization risk as relatively high, given that IDGC Holding has already started to transfer its stake in MOESK to Gazprombank (BB+/Stable/B; Russia national scale ‘ruAA+'). We understand Gazprombank is to manage the stake for 3.5 years, but the deal has so far been blocked by the antimonopoly regulatory body.
We will monitor how this transaction proceeds. If we see signs that the company’s role for the government is weakening, we might revise our assessment of MOESK’s importance as a GRE, which could lead to the lowering of our ratings on MOESK.
The stable outlook reflects our view that MOESK’s currently moderate debt leverage, adequate liquidity management, and sufficient margins will mitigate the risks related to negative FOCF generation, MOESK’s sizable investment program, collection of receivables, and cost overruns. We view a debt-to-EBITDA ratio of less than 2.5x as commensurate with the rating.
Ratings upside could result from improvements in profitability and cash flow generation, positive regulatory actions, and successful cost controls. This is if, at the same time, MOESK displays a moderate financial policy, with debt to EBITDA at consistently less than 2.0x.
We might lower the ratings if the company’s liquidity and maturity profile deteriorated or if cash flow protection weakened, due to a substantial increase in debt to finance larger-than-expected investments. Moreover, large debt-financed acquisitions to consolidate distribution assets in the service regions could lead to negative rating actions.
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008