S&P: Russian Oil Product Pipeline Company Transnefteproduct Upgraded To 'BB-/ruAA'; Outlook Positive
May 4, 2008
MOSCOW (Standard & Poor's) April 30, 2008--Standard & Poor's Ratings Services said today that it raised its long-term corporate credit rating on Russian oil product pipeline company OJSC AK Transnefteproduct to 'BB-' from 'B+'. At the same time, we raised the Russia national scale rating to 'ruAA' from 'ruAA-'. At the same time, the global scale ratings were removed from CreditWatch, where they had been placed on April 17, 2007, following the announcement of the merger with state-owned Russian oil pipeline monopoly OAO AK Transneft (BBB+/Stable/--). The outlook is positive.
"We upgraded Transnefteproduct following our analysis of the impact of the shareholding change on the company's financial and business risk," said Standard & Poor's credit analyst Andrey Nikolaev.
The ratings are based on the company's stand-alone credit quality, which we continue to assess at 'B+', plus a one-notch uplift for extraordinary support from its 100% shareholder, Transneft, reflecting the credit enhancement of being owned by a larger and stronger parent.
The stand-alone rating on Transnefteproduct continues to reflect the company's position as a relatively small and mainly commercial operator competing with other transportation providers (notably rail). It also reflects the risks associated with the company's large, new pipeline project, North.
Due to negative free cash flow during construction in 2005-2007, TNP's debt increased to Russian ruble (RUR) 20.1 billion ($855 million) at the end of 2007 from almost zero in 2005.
"We expect that Transnefteproduct could be upgraded in the next 12 months or so if the company becomes free operating cash flow positive--thanks to cash flows generated by the new North project, as well as by its traditional routes and lower capital expenditures--or if Transnefteproduct integrates more closely within Transneft," said Mr. Nikolaev.
We will monitor the role of Transnefteproduct in the Transneft group, as well as Transneft's strategy toward its subsidiary, including its level of operational and financial autonomy; whether the new debt will be issued at Transneft or the Transnefteproduct level; and whether existing debt will be refinanced.
Should the capacity utilization level or profitability of the new route turn out to be substantially lower than that of existing operations, or if the company embarks on a new major debt-financed investment project prior to restoring its financial flexibility, the outlook could come be negatively affected.
Company — Transnefteproduct
Full nameopen joint stock company Transnefteproduct