December 7, 2012 / 9:47 AM / 5 years ago

OFFICIAL-TEXT-S&P puts Moscow Integrated Power rtg on watch neg

(Agency corrects the version published earlier today, where the City of Moscow’s stake was incorrectly stated. In addition, it was incorrectly stated that Moscow Heating Grid Co. is still a subsidiary of MIPC. A corrected version follows.) (The following statement was released by the rating agency)

Dec 07 -

Overview

-- We understand that Russian electricity and heat generator Mosenergo (AO), and its ultimate parent OAO Gazprom, entered into negotiations with the City of Moscow to acquire a stake in Moscow Integrated Power Co. JSC (MIPC).

-- Depending on the size of the acquired stake, the transaction may lead us to revise our view of the likelihoood that Moscow would lend extraordinary financial support to MIPC.

-- We are placing our ‘BB’ long-term and our ‘ruAA’ Russia national scale ratings on MIPC on CreditWatch negative, and affirming the ‘B’ short-term rating.

-- The CreditWatch placement reflects the possibility that we could downgrade MIPC by up to three notches if we believed Moscow’s financial support were likely to weaken following the transaction.

Rating Action

On Dec. 7, 2012, Standard & Poor’s Ratings Services placed its ‘BB’ long-term corporate credit rating and ‘ruAA’ Russia national scale rating on Russian heating utility Moscow Integrated Power Co. JSC (MIPC) on CreditWatch with negative implications. At the same time, we affirmed our ‘B’ short-term corporate credit rating on the company.

Rationale

The Credit Watch placement follows reports that Russian electricity and heat generator Mosenergo (AO), and its ultimate parent OAO Gazprom (BBB-/Stable/A-2), are in negotiations with the City of Moscow (BBB/Stable/--), the 89.98% owner of MIPC, to acquire a stake in MIPC. In our view, the transaction could weaken the likelihood that Moscow would lend financial support to MIPC if needed.

Under our criteria, we consider MIPC to be a government-related entity (GRE). We currently believe there is a “high” likelihood Moscow would provide timely and sufficient extraordinary financial support to MIPC, based on the company’s “important” role for and “very strong” link to the city’s government, which results in a three-notch uplift from the company’s SACP.

We understand that it’s unclear at this stage whether the transaction will go through, owing to uncertainties regarding its timing, price, sources of funding, and the offered stake in MIPC. Still, the transaction could signal MIPC’s weakening role for or link to Moscow. If the full or partial disposal of the stake in MIPC goes through, we would likely reduce or remove the uplift we currently incorporate into the rating on MIPC for extraordinary government support, which could lead us to downgrade MIPC potentially by one to three notches. This would, however, also depend on our view of Mosenergo’s credit quality and willingness to support MIPC.

MIPC is the dominant player in the local heating market; it controls almost all of Moscow’s district heating grids and its own generation assets provide around 34% of its heat sales, with the remainder purchased from Mosenergo. MIPC benefits from a wide range of ongoing government support, including annual subsidies (budgeted at Russian ruble {RUB} 15.2 billion for 2012), a benign no-dividend policy, and generally supportive tariffs. We note that Moscow could stop supporting MIPC if the transaction goes through, which would weigh on the company’s business risk and financial risk profiles. At the same time, the company’s relatively low leverage--with a debt-to-EBITDA ratio of 1.3x in 2011 and our forecast that it will remain below 1.5x in 2012--and stable cash flows from regulated operations might help to absorb the impact of the transaction.

We currently assess MIPC’s SACP at ‘b’, based on the company’s “fair” business risk profile and “highly leveraged” financial risk profile. Our assessment reflects MIPC’s less-than-adequate liquidity arrangements, aggressive liquidity management, weak corporate governance, lack of transparency, and uncertain financial policies. In addition, demand in the heating sector is weather-dependent and volatile. Other rating constraints include a politicized--and therefore somewhat unpredictable--tariff regime, and the transitional nature of the Russian economy.

These weaknesses are mitigated by existing strong ongoing support from the city’s government (including annual subsidies), MIPC’s dominant position as the city’s leading district heating utility, its diverse customer base, high wealth and economic diversity in its service area, a fairly modern asset base, and moderate debt leverage.

Liquidity

The short-term rating is ‘B’. We consider MIPC’s liquidity to be “less-than-adequate” under our criteria on the basis that we expect a ratio of liquidity sources to uses of about 1.0x on Sept. 30, 2012.

As of that date, the main sources of liquidity included:

-- RUB1.2 billion ($38 million) in cash reserves, though we understand some of this is tied to operations;

-- RUB0.5 billion available under existing long-term committed credit lines; and

-- Operating cash inflows of about RUB19 billion.

Key potential uses of liquidity within 12 months of the same date included:

-- Debt repayments of around RUB3.9 billion; and

-- Capital expenditures, which we estimate at RUB18 billion.

We note that the company will also have to repay RUB4.5 billion of debt in the fourth quarter of 2013, which in our view increases its liquidity risk.

CreditWatch

We intend to resolve the CreditWatch placement once there is more clarity on whether the transaction will proceed, and if it does, its timing, financing structure, price, and the size of the offered stake in MIPC.

We could downgrade MIPC if we believe Moscow would dispose of a partial or full stake in MIPC. Depending on the size of the privatized stake and whether the city would continue providing financial support to MIPC, we might revise our assessment of the likelihood of extraordinary government support. This could lead us to reduce or remove the notches of uplift we currently incorporate into the ratings on MIPC for government support. In turn, this could result in a downgrade of MIPC by one, two, or a maximum of three notches. However, this would also depend on our view of Mosenergo’s credit quality and willingness to support MIPC.

Should the transaction go through, we will also assess its impact on MIPC’s market position, profitability, strategies, and funding. This could lead us to revise our assessment of the company’s SACP.

We will review our assessment of extraordinary support regardless of whether the transaction takes place.

We could affirm the rating if the transaction doesn’t go through, and if the city demonstrates its willingness to maintain its control over and provide financial support to MIPC.

Related Criteria And Research

-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For Corporate And Sovereign Issuers, May 15, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action

To

From

Moscow Integrated Power Co. JSC

Corporate Credit Rating BB/Watch Neg/B BB/Stable/B

Russia National Scale ruAA/Watch Neg/-- ruAA/--/--

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