Moody’s issued the following statement:
"Prague, September 04, 2009 -- Moody's Investors Service has today changed the outlook on Transelectrica's Baa3 long-term issuer rating to negative from stable. This action reflects Transelectrica's recent adverse financial performance resulting from a significant decrease in electricity consumption in Romania, Transelectrica's relatively rigid cost structure and the company's sizeable capital investment programme that exceeds its own cash flow sources.
The change in outlook reflects Moody's assessment of increased risk that the severe economic recession experienced in Romania, which resulted in an unprecedented decrease in the country's electricity consumption, may have a long-term impact on Transelectrica's financial profile, which has historically been relatively unleveraged, although with currency and liquidity exposures. Based on the company's unconsolidated financial statements for H1 2009, which Moody's believes provide a good indication of its final consolidated results for this period, Transelectrica's revenues decreased by RON106 million (EUR25 million) or 8% in H1 2009 compared to the same period last year. Transelectrica's cost structure, as a high voltage transmission grid operator, is relatively fixed; therefore, the revenue decrease had a direct impact on the company's profitability, decreasing its operating profit by RON112 million (EUR27 million) or 75% in H1 2009. Furthermore, as almost 95% of Transelectrica's debt is foreign currency denominated, the devaluation of the local currency in 2009 almost doubled the company's interest expenses and further burdened bottom line profitability. Transelectrica's cash flow generation deteriorated in line with the decline in profitability and resulted in weakened debt coverage metrics.
Transelectrica's extensive capital investment programme, focused on the modernisation and extension of the existing asset base, will require significant financial resources. As the cash flow generation, impaired by a significant decrease in volumes of transmitted electricity, significantly reduced Transelectrica's ability to cover its extensive capex programme from own-generated sources, a combination of (i) an appropriate increase in transmission tariffs, (ii) a significant reduction of the capex plan and (iii) the successful arrangement of additional external debt would be needed to avoid a significant deterioration of Transelectrica's liquidity and weakening of debt protection metrics, which could create negative pressure on the company's Baseline Credit Assessment (BCA) and rating, respectively. Moody's understands that the regulatory framework should provide Transelectrica with some protection from revenue loss due to falling volumes through increases in tariffs in 2010 and that the company is re-assessing its investment plans. However, the negative outlook reflects a degree of risk, as the measures needed to restore the
company's profitability and financial strength may be unpalatable from a political perspective and may not be sufficient or timely to support the current BCA.
In accordance with Moody's rating methodology for Government Related Issuers ("GRI"), Transelectrica's rating incorporates uplift for potential government support to its standalone credit quality. This is expressed by Moody's as a BCA of 13 (on a scale of 1 to 21, where 1 represents the lowest risk and 13 is equivalent to a Ba3 rating). The uplift to the BCA, currently at three notches, results from the credit quality of its government shareholder and Moody's assessment of high probability of government support in the event of financial distress, as well as high default dependence (i.e. degree of exposure to common drivers of credit quality).
Moody's assessments of government support and the local currency rating of the Romanian government remain unchanged at this stage. The increase of the default dependence from medium to high reflects the growing correlation between economic development in Romania and Transelectrica's performance, as Transelectrica derives virtually all of its revenues from domestic activities and its fully foreign-denominated debt exposes it to fluctuations in the value of domestic currency.
The previous rating action on Transelectrica was implemented on 23 January 2007, when Moody's upgraded Transelectrica's rating to Baa3 from Ba1, reflecting primarily the upgrade of the local currency rating of the Government of Romania to Baa3 from Ba1 the previous October.
The principal methodology used in rating Transelectrica was Moody's Regulated Electric and Gas Networks published in August 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
Transelectrica, headquartered in Bucharest, is a majority state-owned electricity transmission system and market operator in Romania. In 2008, the company's turnover was RON2,988 million (around EUR708 million)."
