Moody's assigns Ba2 rating to IDGC of Urals, outlook stable
LONDON. Oct 12 (Interfax) - Moody's Investors Service has assigned a
Ba2 corporate family rating (CFR) and probability of default rating (PDR) to OJSC IDGC of Urals with a stable outlook, the ratings agency said in a press release.
This is the first time Moody's has assigned a rating to IDGC of Urals.
"IDGC of Urals's Ba2 CFR mainly reflects (1) its higher business risk compared with the generally low risk of regulated grid peers operating in developed markets; (2) a large investment program that could create pressures on its financial profile and liquidity position; (3) its focus on the industrialized area of the Urals, where electricity consumption shows higher volatility through economic cycles, essentially driven by a few large industrials, resulting in a high degree of IDGC of Urals's customer-base concentration and relatively high exposure to the risk of loss of a few large customers under the so-called last-mile agreements; (4) the company's exposure to volatile low-margin electricity sales business; (5) a degree of uncertainty regarding the future development of IDGC of Urals' business and corporate structure, with the disposal of its sales business subsidiary and the optimization of its stakes in local grids remaining under consideration by its parent company IDGC Holding and governmental bodies," Moody's explained.
"Moody's attributes the company's higher business risk to the evolving regulation of the Russian grid sector and uncertainties surrounding the state strategy for the sector, including privatization plans. The sector's configuration is changing. The state has placed IDGC Holding under the management of OJSC FGC UES (Baa2 stable). A potential merger of IDGC Holding and FGC UES, also controlled by the state, is being discussed," the press release said.
"IDGC of Urals's rating positively factors in (1) its position as the dominant distribution grid business in its highly industrialized service area consisting of Yekaterinburg, Chelyabinsk and Perm regions; (2) a degree of state support available for the company through IDGC Holding, which provides a one-notch uplift to IDGC of Urals's standalone credit quality; (3) the linkage between electricity transmission tariffs and IDGC of Urals's investment program, established following the recent regulatory-asset-base (RAB) tariff revision for two of the company's three regional branches; (4) management's demonstrated commitment to containing an increase in leverage by adjustments to the implementation of investment program proactively discussed with the local governments," it said.
"Moody's notes that, though the company's margins and financial profile deteriorated in H1 2012 following unfavorable tariff decisions of 2011, the profile remains well accommodated under the current rating. Based on management's H1 2012 accounts, the company's FFO interest coverage for H1 2012 on a last-12-months basis is 7.5x and funds from operations (FFO)/net debt is 54.1%, including Moody's standard adjustments," Moody's said.
"Moody's notes that IDGC of Urals generates around 20% of its total revenues from large industrial customers under the last-mile agreements between the company and FGC UES, the Russian transmission grid. The agreements allow distribution grids to charge industrials, which otherwise were just to pay FGC UES's lower tariffs. The agreements were introduced by the government as a temporary instrument to maintain lower tariffs for the population at the expense of industrials. The practice has been disputed in Russian courts and exposed distribution grids, including IDGC of Urals, have lost a few of such customers. Moody's assesses the risk of further similar losses for IDGC of Urals as manageable within the current rating, factoring in a degree of state support. Following the losses of the recent past, the company's current customer base shows more stability in view of the government's plans to cancel last-mile agreements by 2014. Moody's understands that the plans envisage the introduction of a compensatory mechanism for distribution grids. Moody's believes that state support through IDGC Holding can also help mitigate risks associated with the company's exposure to the electricity sales business and its developing business and corporate structure," the press release said.
"The rating positively incorporates IDGC of Urals's long-term debt maturity profile, with short-term debt obligations in the middle of 2012 accounting for just around 5% of its total debt, and access to state-owned banks, which Moody's expects will mitigate investment-driven pressures on the company's liquidity. At the same time, Moody's positively notes management's commitment to maintaining unadjusted debt/EBITDA significantly below 3.0x," it said.
"In Moody's view, the evolving regulation and grid sector's configuration remains the key risk for Russian grid businesses, including IDGC of Urals, and a key component in determining their rating, suppressing differences in their credit profiles. Electricity transmission tariffs remain subject to political considerations within the new RAB regulatory model, which was implemented to improve transparency of tariffs and attract investments to the grid sector. In this environment, the visibility of the long-term evolution of grids' financial profiles remains limited, although this is mitigated by a degree of state support available for the sector and its players," the press release said.
"The stable outlook on IDGC of Urals's rating reflects Moody's view that the company has well-thought plans to develop and adjust its business taking into account tariff evolution, availability of funding and the wider economic environment. The stable outlook is also predicated on Moody's expectation that IDGC of Urals will manage its financial profile in line with the current rating category, with FFO interest coverage and FFO/net debt not weakening below 3.5x and 20%, respectively," it said.
"Moody's does not expect upward pressure on the rating until there is a better visibility with regard to the mid- to long-term evolution of both (1) IDGC of Urals's financial profile in the evolving regulatory environment; and (2) the grid sector's configuration," Moody's reported.
"Negative pressure on the rating could result from (1) Moody's view that access to supportive measures from the state or its agents was no longer available for IDGC of Urals through IDGC Holding; (2) a negative shift in the developing regulatory regime and deteriorating margins; (3) a failure on the part of IDGC of Urals to adjust its investment plans to tariff decisions and thereby limit the deterioration of its financial profile going forward, with total FFO interest coverage falling below 3.5x and FFO/net debt below 20%. Furthermore, if the company were unable to proactively address its liquidity needs and maintain reasonable headroom under the financial covenants of its bank agreements, negative pressure could be exerted on the ratings," it said.
