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Moody's Assigns Ba3 Rating to OGK-1, Stable Outlook

September 11, 2007 | Cbonds

Moscow, September 10, 2007 -- Moody's Investors Service has today assigned a
Ba3 corporate family rating to JSC OGK-1 ("OGK-1", or "the company"), a
Russian thermal electricity generator. The rating outlook is stable. At the
same time, Moody's Interfax Rating Agency, which is majority owned by
Moody's, assigned a national scale credit rating ("NSR") to the

According to Moody's and Moody's Interfax ("Moody's"), the Ba3 global scale
rating reflects the company's global default and loss expectation, while the NSR reflects the standing of the company's credit quality relative to
its domestic peers.


The company's ratings positively reflect: (i) OGK-1's sustainable solid
market positions in the unified energy systems of Central Russia and Urals;
(ii) a relatively conservative financial profile with some headroom to
increase debt while remaining in the current rating category;
(iii) potential benefits from the wholesale market liberalization that
should positively influence the company's revenues and margins. These
positive factors are underpinned by the favorable growth in demand for
electricity, which is expected to grow ahead of capacity additions in the
company's key markets.

Furthermore, although a part-privatization for OGK-1 is scheduled for the
first half of 2008, the Ba3/ ratings continue to incorporate a modest
degree of support from the state that results from the company still being
part of RAO UES of Russia ("RAO UES"), the state-controlled integrated
utility group, and beyond that also from the Russian government's active
interest in the sector's investment strategies, being seen as key
requirements for further economic growth of the country.
Should such support weaken materially over the next couple of years without
being replaced by support from a strong new strategic shareholder, OGK-1's
ratings could at such a time become more aligned within the single-B rating

At the same time, the company's ratings are constrained by i) uncertainties
associated with the Russian power sector restructuring process and timing of
the company's privatization; (ii) limited ability to improve margins and
hence cash generation in the upcoming few years when the wholesale power
market liberalization is at its early stages; the ability to increase prices
and shift demand to the competitive segment of the wholesale market needs to
be demonstrated within an emerging regulatory environment that will need to
balance the generators'
needs for profitability and growth and their customers' needs for reliable,
cheap power); (iii) OGK-1's business as a pure power generator with a lack
of diversification down- and upstream; (iv) broadly rising gas prices driven
by the company's key supplier Gazprom, which is also establishing
shareholdings in the generation sector; (v) an ambitious investment
programme with execution risks that could lead to a rapid increase in
leverage and also depends on timely raising equity finance at a time when
many generators may seek to access the markets; (vi) limited standalone
track record.

Given that the company's rating positioning in the Ba3 category also
benefits from some moderate shareholder and state support, OGK-1's ratings
could come under downward pressure (mostly due to the transitional nature of
its current financial profile, which may deteriorate as a consequence of its
investment programme), if the company is unable to partly raise equity for
the funding and at the same time improve cash generation.

Similar to other Russian thermal power generators that are currently part of
RAO UES, the state-owned vertically integrated monopoly power business under
restructuring, OGK-1 is in transition towards being an independent generator
in the Russian market, with the state's indirect shareholding (through RAO
UES or possibly a state-controlled successor) to be reduced, finally to a
relatively immaterial level. Following RAO UES's liquidation in the middle
of 2008 and OGK-1's potential equity raising in the first half of 2008, the
company should be controlled by private shareholders. However, neither the
ultimate timing nor shareholder structure are yet clear.

Clarity with the ownership structure and expected appearance of a strong
strategic investor could be ratings-positive and help the company to balance
the strain on its financials resulting from its investment programme and
strengthen positions in its key markets, given on-going liberalization of
the wholesale power market. Nevertheless, risks of a delay in the
privatization (and possible negative implications for OGK-1's ability to
finance its investment programme) would be mitigated at least in the short-
and medium term by the state's indirect shareholding and importance of the
company's business, given a rapidly growing demand for electricity in
OGK-1's target markets of the Moscow region of Central Russia and in the
Urals and Tyumen regions.

OGK-1's 2007-2010 ambitious investment programme of Rbl54.1 billion includes
three new construction projects and one major overhaul with introduction of
fully new equipment at available premises. Given an emerging competitive
segment of the wholesale power market, politically biased tariffs and
developing contractual relationship with the dominant domestic gas supplier
Gazprom, OGK-1's revenues are expected to remain largely regulated in the
short- and medium-term and will be insufficient for the company to implement
its investment programme without attracting external finance. OGK-1 is
considering raising both equity and debt, with a cap on leverage at 3x
Debt/EBITDA. Although OGK's current financial profile, with its Debt to
EBITDA as low as 0.3x, is very conservative and leaves headroom to
materially increase debt, the company's ability to implement the programme
in line with the leverage target largely depends on success of its planned
equity offering. A delay -- or lower proceeds - may materially increase
OGK-1's needs for debt financing, which will need to be carefully managed
from a liquidity perspective, should the company be unable to postpone
and/or reschedule its investments.

Three of OGK-1's investment projects were regarded by RAO UES as priorities.
This may limit the company's flexibility to reschedule, but at the same time
should mean that RAO UES and/or the state may at least temporarily support
the company, if there were a delay in its potential equity offering and/or
below-expectation proceeds. While the company's liquidity situation
historically has been exposed to short-term debt maturities which were only
partially covered from internal sources, OGK-1's recent and expected
progress in extending debt maturities and the company's established
relationship with both Russian and foreign banks should support its
liquidity. According to the company, as of mid-August 2007, it has access to
unused bank facilities of around Rbl8.2 billion, including both committed
and uncommitted credit lines.

The rating outlook remains stable as the company is well positioned to
develop its business in accordance with its plans and it is expected to
manage leverage in line with the current rating category provided that the
forthcoming IPO is successful. In the case of a delayed privatization, state
support should continue to provide some stability to the ratings.

The following factors could have a positive impact on the company's
ratings: (i) successful equity offering, with a strategic investor stepping
in; (ii) material improvements in the operating environment for the company
driven by market liberalization and on-going sector restructuring; (iii)
demonstrated sustainable increases in margins and cash flow generation ahead
of projections; (iv) confirmed ability to manage investments while keeping
tight control over leverage within the target of total debt to EBITDA ratio
not exceeding 3x.

A negative pressure on the company's ratings could result from (i) absence
of equity offering or its insufficient size, (ii) weakening state's support,
(iii) a negative shift in the regulatory regime and (or leading to)
deteriorating margins; (iv) inability to adjust the investment programme and
schedule to control leverage, with total debt to EBITDA ratio increasing
above 3x and RCF to Debt ratio falling materially below 25%.

Company: OGK-1

Full company nameThe first power generating company on the wholesale energy market
Country of riskRussia


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