Fitch affirms RusHydro at 'BB+'; Stable Outlook
MOSCOW. Sept 10 (Interfax) -Fitch Ratings has affirmed JSC RusHydro's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+', the agncy said in a press release.
The Outlook on the ratings is Stable.
"RusHydro's ratings benefit from state support and are notched down two notches from the ratings of the Russian Federation (BBB/Stable), its majority shareholder. The company's standalone creditworthiness reflects its solid market position in Russia as a leading, low-cost electricity producer. It also incorporates RusHydro's rising debt and financial leverage mainly due to extensive capex and the company's exposure to regulated, but insufficient 'cost plus' tariffs," Fitch said.
"RusHydro's ratings continue to be driven by support from its parent, the Russian Federation, in accordance with Fitch's Parent and Subsidiary Rating Linkage methodology. Fitch assesses RusHydro's credit strength as two notches below the sovereign's, due to the company's strategic importance, state ownership, and the direct equity injections and significant investment projects supported by the state. Between January 2012 and June 2013, RusHydro group received tangible state support of RUB68.8bn, including a RUB50bn equity injection for the construction of four thermal power plants in the Far East and direct subsidies of RUB15.2bn as a compensation for low tariffs in the Far East region.
In May 2012, the Russian president delayed the earlier announced partial privatisation of RusHydro in 2012 by including the company in the list of strategic enterprises. The ratings factor in Fitch's assumption that the state will maintain a majority stake in RusHydro in the medium term.
Fitch views the 2011 consolidation from the state of a 69% stake in OJSC RAO Energy System of the East (RAO UES East), which is financially much weaker, as an example of state involvement that has negative implications for RusHydro's creditworthiness. Following consolidation, RusHydro's operating and financial profile worsened due to RAO UES East's poor asset quality, fully regulated, but insufficient "cost plus" tariffs, weak operating cash flows, high leverage and short-term debt maturities.
Fitch views RusHydro's standalone credit profile as commensurate with the mid 'BB' rating category reflecting its solid market position as a leading, low-cost electricity producer in Russia on the back of its large portfolio of hydro power plants. The standalone profile also reflects the company's exposure to regulated, but insufficient 'cost plus' tariffs (in particular in case of RAO UES East), as well as uncertainty of the regulatory framework in the medium-term and corporate governance limitations pertaining to the operating environment in Russia.
As the regulatory framework for the Russian utilities sector is at the development stage with a limited track record of its consistent implementation, it is less transparent and more unpredictable than the regulatory regimes of the Western European utility companies. Fitch views the lower transparency and supportiveness of the Russian regulatory regime as a constraining factor in its assessment of RusHydro's business profile.
RusHydro's funds flow from operations (FFO) adjusted net leverage increased to 2.4x in 2012 from 1.6x in 2011 and 1x in 2010 mainly due to higher net debt driven by negative free cash flow. We expect FFO adjusted net leverage to deteriorate to about 3x by 2014 owing to its extensive capex programme, but note that RusHydro has some capex flexibility and may cancel or defer some projects if there is a risk of a substantial deterioration in net leverage, for instance when FFO is weaker than expected.
Future developments that could lead to positive rating action include:
- Positive rating action on the Russian Federation's ratings could be replicated on RusHydro's ratings, unless Fitch deems RusHydro's links with the state to have weakened at the same time.
- Significantly lower leverage (compared with Fitch's expectations), and an improvement of operational performance (including in tariff policy) on a sustained basis would be positive for the company's standalone credit profile and possibly the ratings.
Future developments that could lead to negative rating action include:
- Negative rating action on the Russian Federation's ratings could affect RusHydro's ratings, unless Fitch deems RusHydro's links with the state to have strengthened at the same time.
- A weakening relationship between RusHydro and the Russian Federation, i.e., significant reduction of the state's share and/or lack of tangible support that may contribute to RusHydro's FFO adjusted net leverage exceeding 3.5x on a sustained basis would be negative for the rating.
At end-June 2013, RusHydro had short-term debt of RUB75bn against cash and short-term deposits of RUB73bn (excluding cash injection of RUB50bn received from the state in December 2012 for financing the Far East projects). Fitch believes that RusHydro's short-term debt bias (44% of total debt was due within 12 months as of end-June 2013) is mitigated by access to funding from the state-owned banks (around 50% of total debt). Fitch expects that RusHydro will generate negative free cash flow in 2013-2015 due to the large capex, and consequently it will need new external funding," Fitch said.
FULL LIST OF RATING ACTIONS
JSC RusHydro
Long-term foreign currency IDR affirmed at 'BB+', Outlook Stable
Long-term local currency IDR affirmed at 'BB+', Outlook Stable
Long-term National Rating affirmed at 'AA(rus)', Outlook Stable
Local currency senior unsecured rating affirmed at 'BB+'
RusHydro Finance Limited
Local currency senior unsecured rating affirmed at 'BB+'
