Russian Refined Oil Pipeline Operator Transnefteproduct Upgraded To 'BBB-' On Integration With Parent; Outlook Stable
July 11, 2011 Standard & Poor's
MOSCOW (Standard & Poor's) July 11, 2011--Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on Russian refined oil product pipeline operator OJSC AK Transnefteproduct to 'BBB-' from 'BB+'. The outlook is stable. At the same time, we raised the Russia national scale rating to 'ruAAA' from 'ruAA+'.
Transnefteproduct is responsible for the transportation of about 17% of Russia's oil production to domestic and export destinations.
The upgrade reflects our understanding that Transnefteproduct is now fully integrated into its 100% parent OAO AK Transneft (BBB/Stable/--). Transnefteproduct's finances are effectively managed by the parent. All of Transnefteproduct's debt (Russian ruble [RUB] 9.6 billion [$340 million] as reported on Dec. 31, 2010) is owed to the parent only.
We understand that Transnefteproduct's large "North" pipeline project has begun working, and the "South" project has been delayed, so that any significant capital expenditures for the "South" project will not start before 2014. We therefore expect Transnefteproduct's free operating cash flow (FOCF) to stay positive and credit metrics to remain robust.
We also believe that Transneft's management does not plan to raise any further debt at the level of Transnefteproduct, so that any borrowing needs to finance the "South" project will be met by loans taken out by the parent. We view Transneft's capacity to provide financing to Transnefteproduct as significant because of Transneft's relatively robust rating and because Transnefteproduct's debt and capital-expenditure needs are low compared with Transneft's cash flow and cash reserves.
The long-term rating on Transnefteproduct is one notch below the long-term rating on Transneft and in line with Transneft's stand-alone credit profile (SACP), which we assess at 'bbb-'. The one-notch difference between the long-term ratings on Transneft and Transnefteproduct reflects Transnefteproduct's position as a relatively small (relative to its parent) commercial operator competing with other transportation providers, especially Russian Railways (JSC) (BBB/Stable/--; Russia national scale 'ruAAA').
We view Transnefteproduct's importance for the government to be considerably lower than Transneft's, and its links to the government to be only indirect. Therefore timely and sufficient extraordinary government support, which we think Transneft is extremely likely to enjoy, may not fully filter through to Transnefteproduct.
Our current assessment of Transnefteproduct's SACP is 'b+'. We see the key risks to the SACP to be competition with alternative transportation routes, high and growing maintenance capital expenditures, and potential swings in capacity utilization. The Russian tax regime currently creates an artificial tax incentive to export refined products rather than crude oil, which benefits Transnefteproduct's revenues. In the future, however, we understand that this tax regime is set to change, which may result in lower transportation volumes for Transnefteproduct. In addition, if and when the large "South" project starts, it will pressure the company's FOCF because the project is very large compared with Transnefteproduct's size.
We see the supports for the SACP to be Transnefteproduct's currently robust profitability and credit metrics, with the ratio of adjusted debt to EBITDA of only 0.6x in 2010. The company is set to generate positive FOCF before investments in the "South" project start.
The stable outlook on Transnefteproduct mirrors that on its 100% owner Transneft. Given our top-down rating approach, the rating on Transnefteproduct is likely to follow the rating on Transneft.
The differential between the long-term ratings on Transnefteproduct and its parent could increase if Transnefteproduct relies only on external debt not guaranteed by Transneft to finance investment projects--although we currently consider this scenario unlikely--or if its SACP deteriorated significantly.
Company — Transnefteproduct
Full nameopen joint stock company Transnefteproduct