(The following statement was released by the rating agency)
July 16 -
Summary analysis -- Vodokanal St. Petersburg ---------------------- 16-Jul-2012
CREDIT RATING: BB+/Stable/B Country: Russia
Primary SIC: Water Supply
Credit Rating History:
Local currency Foreign currency
06-Mar-2012 BB+/B BB+/B
30-Jun-2009 BB+/B-1 BB+/B-1
13-Mar-2008 BBB-/A-3 BBB-/A-3
Rating Rating Date
EUR17.5 mil adj rate EIB bank ln due 03/26/2024 BB+ 30-Jun-2009
EUR25 mil adj rate NIB bank ln due 03/26/2024 BB+ 30-Jun-2009
EUR17.5 mil adj rate EBRD bank ln due
03/26/2024 BB+ 30-Jun-2009
The ratings on Russian regional water utility Vodokanal St. Petersburg (VKSPB) reflect Standard & Poor’s Ratings Services’ opinion that there is a “very high” likelihood that the company’s 100% owner, the City of St. Petersburg (BBB/Stable/--), would provide timely and sufficient extraordinary support to VKSPB in the event of financial distress. We assess VKSPB’s stand-alone credit profile at ‘b+'.
In accordance with our criteria for rating government-related entities, our current view of a “very high” likelihood of extraordinary government support is based on our assessment of VKSPB‘s:
-- “Very important” role, given its strategic importance to the city as the sole provider of essential infrastructure services; and
-- “Very strong” link with the city government, given St. Petersburg’s 100% ownership of VKSPB, our expectation that the company will not be privatized in the medium term, the city’s commitment to finance a portion of VKSPB’s capital-expenditure program, and the risk to the city government’s reputation if VKSPB were to default.
The company’s stand-alone credit profile reflects its monopoly position in its franchise area, diverse customer base, stable cash flows derived primarily from regulated activities, and a so far favorable, albeit opaque and short-term, tariff regulation regime.
These strengths are mitigated by VKSPB’s aging operating assets and resulting heavy medium-term investment needs, significant operating risk stemming from deteriorating water quality, tightening quality standards, and “less-than-adequate” liquidity on a stand-alone basis.
S&P base-case operating scenario
Our base-case scenario envisages modest 2.5% growth of 2012 revenues from 2011, on the back of an average 4% tariff rise in two phases: 6% from July 1, 2012, and 4% from Oct. 1. We also anticipate a decrease in volumes of services the company supplies. We believe that mounting operating expenses will outpace revenues, putting pressure on the company’s profitability. By our estimates, the EBITDA margin might fall to about 45% in 2012, which we still consider adequate in the industry context.
The company has not yet produced its annual financial statements, based on International Financial Reporting Standards (IFRS), for 2011. We expect that a 17.9% tariff increase since Jan. 1, 2011, should have boosted the company’s revenues and EBITDA generation last year. We note that the company’s results for 2013 will largely depend on the regulator’s tariff decisions, which are uncertain at this stage.
S&P base-case cash flow and capital-structure scenario
We expect the company’s leverage to remain lower than 2.0x in the medium term, despite its planned, sizable capital expenditures. We note that the city finances a significant portion of VKSPB’s capital spending (about 30% in 2011), which substantiates our view of the company’s close links with and importance to the city. Our base-case scenario incorporates ongoing government support in the future, although a change in the mix of funding sources comprising own funds, borrowings, and the city budget might cause leverage to rise.
We estimate the company’s reported debt-to-EBITDA ratio as of Dec. 31, 2011, at about 1.3x and assume that, on the back of lower capital expenditure and increased cash flow generation, positive free operating cash flow might have reached $180 million in 2011. The company’s exposure to annual tariff revisions and the politicized regulatory regime limit the visibility and predictability of its financial performance, in our view.
The short-term rating is ‘B’. We currently view VKSPB’s liquidity as “less-than-adequate” as defined in our criteria. The constraints include our assessment of a historical lack of prudent financial management, previous covenant breaches, and aggressive liquidity management.
We estimate the ratio of VKSPB’s potential liquidity sources to uses of liquidity at about 1.4x from January to December 2012, which we expect to decline to 1.1x in 2013.
As of Jan. 1, 2012, the main sources of VKSPB’s liquidity included:
-- Balance-sheet cash of about Russian ruble (RUB) 2.6 billion (about $86 million), although we believe part of this is tied to the operations;
-- Funds from operations, which we estimate at about $280 million a year;
-- Availability of EUR65 million ($90.4 million) under long-term, committed, project-specific lines; and
-- Availability of RUB4.0 billion ($133 million) under a non-project-specific committed line expiring in December 2013.
Key potential uses of liquidity as of the same date included:
-- Short-term debt of about $181 million; and
-- Capital expenditures of about $245 million (excluding the portion financed from the city’s budget).
Under existing loan agreements, VKSPB is subject to several financial covenants. We estimate that the company will have adequate headroom under the existing covenants in 2012.
The stable outlook reflects our view that VKSPB will continue to benefit from a “very high” likelihood of extraordinary support from St. Petersburg.
We could take negative rating actions if we saw signs that the city’s support for VKSPB were weakening, for example, if we took the view that the city’s willingness or ability to provide tangible financial support had decreased, or if privatization plans were to emerge, indicating that VKSPB’s importance to the city had reduced. A one-notch deterioration in the company’s SACP would not automatically cause a downgrade, provided that we continued to see a high likelihood of support for VKSPB from St. Petersburg.
We could take positive rating actions if we took positive rating actions on St. Petersburg or if we saw a more predictable and long-term tariff regime, moderate financial policies, adequate liquidity management, and greater transparency. If we were to revise our assessment of VKSPB’s SACP upward by one notch, this would result in a one-notch upgrade, provided that the company’s role for and link to the city remained the same.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor’s Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008