LONDON & MOSCOW--(BUSINESS WIRE)--Fitch Ratings has affirmed JSC Atomic Energy Power Corporation's (Atomenergoprom) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Negative. A full list of rating actions is available at the end of this commentary.
The ratings benefit from a single-notch uplift, reflecting state support and alignment with those of the Russian Federation (BBB-/Negative), the ultimate shareholder of Atomenergoprom. The Negative Outlook mirrors that of the sovereign.
Atomenergoprom's 'BB+' standalone profile benefits from a sound financial profile, the company's full vertical integration, large order book, operations under long-term contracts, globally strong market positions, limited volume risk in electricity sales and nuclear generation capacity expansion under capacity supply agreements (CSAs) that envision long-term guaranteed payments. These are all characteristics of a solid investment-grade company, but the unpredictable Russian regulatory regime in the power markets constrains Atomenergoprom's standalone profile to speculative-grade. We expect the electricity generation segment to continue to dominate the company's EBITDA at least over the medium term.
KEY RATING DRIVERS
Ratings Aligned with Sovereign's
Atomenergoprom's ratings incorporate state support and are aligned with those of its ultimate shareholder - the Russian Federation through State Atomic Energy Corporation Rosatom (Rosatom) which owns 94.349% of shares of all categories (ordinary and preferred) and the Ministry of Finance which owns 5.651% - as we consider the ties between the company and state as strong.
The strength of the ties is supported by Atomenergoprom's strategic importance to the implementation of the state's programme for civil nuclear development, a track record of tangible financial support from the state (RUB369bn over 2010-2014 and another RUB341bn is expected over 2015-2019, including funding for the construction of Hanhikivi nuclear power plant (NPP) in Finland), a centralised treasury at Rosatom level and by full representation of Rosatom's management on Atomenergoprom's Board of Directors.
Generation Dominates EBITDA
Fitch expects nuclear power generation to continue to dominate Atomenergoprom's revenue (56% in 2014) and cash flow generation at least over the medium term, following planned nuclear capacity expansion in Russia, although commissioning of some of the nuclear power units has been postponed by one to two years. The newly built nuclear power units are expected to be operated under CSAs with favourable economics as opposed to capacity sales on the competitive capacity market.
Strong Financial Profile
Atomenergoprom's credit metrics remain strong despite sizeable capex. At end-2014 the company reported funds from operations (FFO) adjusted gross leverage of 1.7x, down from 1.9x in 2013 and a FFO fixed charge coverage of 8.5x, up from 7.1x.
Fitch expects Atomenergoprom's large RUB1.5trn capex programme over 2015-2019 (including the Hanhikivi NPP construction project) to be partially debt-funded. Therefore, we forecast Atomenergoprom's FFO adjusted gross leverage to remain 2.1x on average over 2015-2019 and FFO fixed charge cover to deteriorate to 4x as a result of elevated interest rates for new debt.
Although the group had sizeable nuclear liabilities of RUB57bn at end-2014, we calculate that their impact on leverage metrics is immaterial at less than 0.1x. Atomenergoprom's credit metrics compare well with those of other Russian utilities, international nuclear power-generating utilities and peers involved in various stages of the nuclear fuel cycle.
Capex to Drive Negative FCF
Atomenergoprom forecasts it will invest around RUB233m in 2015 and another RUB1.3trn over 2016-2019, including the Hanhikivi NPP construction project. Fitch expects Atomenergoprom to continue generating solid cash flow from operations of RUB160bn on average over 2015-2019; however, a continued extensive capex programme is expected to result in sizable negative free cash flow (FCF) of RUB155bn on average over the same period. Part of the planned investment programme is expected to be funded by direct equity injections or asset contributions from the state while Atomenergoprom will also rely on external debt to fund the rest of its investment projects.
Global Scale and Operational Diversification
Atomenergoprom's business profile is supported by full vertical integration across all stages of the nuclear fuel cycle, ranging from uranium mining, conversion and enrichment to nuclear energy generation, compared with international peers who are only engaged in certain stages of the nuclear cycle.
The group is also one of the leading global players with proven technologies and strong market positions in all stages of the nuclear fuel cycle, which are represented by oligopolistic markets with high barriers to entry. This provides a solid platform for sustainable growth.
Large Order Book
A large international order book and long-term contracts under which Atomenergoprom operates at the front end of the nuclear fuel cycle, as well as low volume risk for electricity sales support cash flow visibility. These factors significantly minimise volume risk and contribute to highly predictable EBITDA and cash flow, which Fitch assesses in conjunction with the price risk exposure and regulatory framework for electricity generation.
In 2014 Atomenergoprom increased its international backlog over 10 years by 40% yoy to USD101.4bn. The company estimates it to increase further to USD108.2bn by end-2015. The rise in the backlog of international NPP construction was the main contributor of 2014 international order-book growth. At present NPP construction projects account for over half of the total backlog, while fuel sales and sales of uranium products represent the remainder.
Unpredictable Russian Regulatory Regime
Similar to other rated Russian utilities, Atomenergoprom is exposed to high regulatory risk, reflected in frequent modifications of regulations and political intervention. This undermines the predictability of the regulatory regime, which we consider essential to long-term investment decision-making by utilities. This in turn weighs on cash flow generation, increasing business and financial risks. Such uncertainties surrounding the regulatory regime are the key factor constraining Russian utilities' standalone ratings to speculative grade. While Atomenergoprom's business profile benefits from operational diversification, it is not sufficient to fully mitigate regulatory risk.
Fitch's key assumptions within our rating case for the issuer include:
- Domestic GDP decline of 4% and inflation of 15.5% in 2015 and GDP growth of 0.5%-1.5% and inflation of 5.5%-9% over 2016-2017
- Electricity consumption to grow slightly above GDP growth in 2016-17
- Average USD/RUB exchange rate of 60.8 in 2015 and 68-71 over 2016-2019
- Capex of RUB1.5trn over 2015-2019, including the Hanhikivi NPP construction project
- Equity injections in line with the company's expectations
Negative: Future developments that could lead to negative rating action include:
- A negative rating action on the sovereign, which would result in a corresponding action on Atomenergoprom
- Deterioration of the financial profile (e.g. FFO gross adjusted leverage above 3x and FFO fixed charge coverage below 4x) on a sustained basis, which may be negative for the standalone profile, but ratings may continue to be supported by the parent and, ultimately, by the state. However, the company's ratings may be adversely affected if credit metrics deterioration is perceived as a sign of diminishing state support.
Positive: Future developments that could lead to positive rating actions include:
- A revision of the Outlook on the sovereign to Stable or a positive change in Russia's rating (up to BBB level), which would be reflected correspondingly in Atomenergoprom.
- Enhancement of the business profile through geographic diversification and/or operational diversification, reducing the contribution of Russian power generation to EBITDA. This would be positive for the group's standalone profile but is unlikely to change the rating while Atomenergoprom remains state-supported.
- FFO adjusted gross leverage below 2x and FFO fixed charge cover above 6x on a sustained basis, which would improve Atomenergoprom's standalone creditworthiness, but not necessarily its ratings.
For the sovereign rating of Russian Federation, Atomenergoprom's ultimate parent, Fitch outlined the following sensitivities in its rating action commentary of 16 October 2015:
Future developments that could individually, or collectively, result in the Outlook being revised to Stable include:
-An easing of macroeconomic and financial sector stress and progress in reducing inflation
-Avoiding further significant depletion in international reserves
-Progress in consolidating the budget
-Further evidence that economic growth prospects and external finances are resilient to long-lasting constraints on access to foreign financing, or the unwinding of sanctions
Future developments that could individually, or collectively, result in a downgrade include:
-Weakening in the sovereign balance sheet
-Failure to recover from recession, coupled with significant deviation from stated macroeconomic and fiscal policy aims
-Rise in geopolitical tensions and/or sanctions risks
Atomenergoprom's cash position stood at RUB324bn at end-3Q15 was sufficient to cover short-term maturities of RUB100bn. Additionally Atomenergoprom also had access to undrawn credit facilities of RUB560bn at end-3Q15 from major Russian banks. Forecast negative FCF will add to funding requirements.
Manageable FX Risk
We assess the group's FX risk as manageable due to natural hedge. Forty per cent of the group's 9M15 revenue was denominated in foreign currencies versus 42% of its debt in foreign currencies, mainly US dollars.
FULL LIST OF RATING ACTIONS
Long-term foreign and local currency IDRs: affirmed at 'BBB-'; Outlook Negative
Short-term foreign and local currency IDRs: affirmed at 'F3'
National Long-term Rating: affirmed at 'AAA(rus)'; Outlook Stable
Local currency senior unsecured rating: assigned to Atomenergoprom's RUB15bn local bonds at 'BBB-'
Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form