MOSCOW (Standard & Poor's) July 2, 2008--Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on 52.7% Russian government-owned energy utility holding company RAO UES of Russia to 'BBB' from 'BB' and the Russia national scale rating to 'ruAAA' from 'ruAA' following the completion of RAO UES' merger with Russian electricity transmission grid operator Federal Grid Co. of the Unified Energy System (FGC; BBB/Watch Pos/--) on July 1, 2008. The long-term rating remains on CreditWatch, where it was placed with positive implications on Oct. 31, 2007, following shareholder approval for the second stage of RAO UES' restructuring and merger with FGC.
At the same time all ratings on RAO UES were withdrawn, because RAO UES was dissolved after the merger with FGC.
The 'BBB' long-term corporate credit rating on FGC remains on CreditWatch, where it was placed with positive implications on Oct. 31, 2007, after shareholders of FGC's 83.87% (as of May. 15, 2008) parent, RAO UES, approved the second stage of RAO UES' restructuring and merger with FGC.
"The ongoing CreditWatch listing reflects upside potential for the ratings on FGC now that the merger with RAO UES has been completed," said Standard & Poor's credit analyst Eugene Korovin.
Although we expect the credit impact of the merger on FGC's balance sheet to be positive, we have not yet received the full information required to evaluate the implications of the merger.
The rating on FGC reflects its monopoly position as the electricity transmission grid owner and operator in Russia; a supportive, but evolving, tariff regime; ongoing and extraordinary support from the Russian state; and a strong financial profile.
These strengths are counterbalanced by FGC's large medium-term investment program, which relies heavily on external financing; the company's exposure to the Russian economy, which retains some transitional features; and its more aggressive long-term financial policy target.
On July 1, 2008, FGC closed the merger with RAO UES and received--in the form of an equity increase--proceeds from the sale of stakes in thermal generation companies and other assets attributable to the state as a RAO UES shareholder and allocated to FGC by the restructuring plan. FGC also received the remaining unsold minority stakes in thermal generation companies and other assets of RAO UES. This raised the government's stake in the merged company above the legally required minimum of 75% plus one share. FGC has also created a single operating company by merging with 54 companies operating transmission assets of former regional power utilities (AO-energos), most of which were already subsidiaries of FGC. To our knowledge, FGC has not assumed any significant debt liabilities from RAO UES.
On March 31, 2008, FGC had RUR6.0 billion in cash reserves and RUR20.9 billion in financial investments under Russian generally accepted accounting principles, which covered RUR7.7 billion in short-term debt, including RUR7 billion bonds maturing in December 2008.
FGC's 2008 RUR177 billion investment plan substantially exceeds projected operating cash flow and relies heavily on external financing. However, the funds received through the merger should comfortably cover FGC's needs for 2008.
We will resolve the CreditWatch status after we receive the full information required to estimate the impact of the merger on FGC's financial profile in the next several weeks.
"If FGC ends up with a financial profile stronger than presently assumed, the rating could be raised further," said Mr. Korovin.