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Fitch Downgrades TGK-2 to 'CC' on Weak Liquidity; Off RWN

May 04, 2012 | Fitch Ratings

Fitch Ratings-London/Moscow-04 May 2012: Fitch Ratings has downgraded OJSC Territorial Generation Company No.2's (TGK-2) Long-term foreign and local currency Issuer Default Ratings (IDR) to 'CC' from 'CCC' and National Long-term rating to 'CC(rus)' from 'B-(rus)'. The agency has also downgraded the foreign and local currency senior unsecured ratings of TGK-2's rouble-denominated bonds maturing in 2013 to 'C'/'RR6' from 'CCC'/'RR4', and the National senior unsecured rating to 'C(rus)' from 'B-(rus)'. All ratings have been removed from Rating Watch Negative (RWN).

The downgrades reflect TGK-2's weak cash generation and liquidity and significant short debt maturities in 2012. TGK-2's ratings are also constrained by weak corporate governance when compared to international standards. Although audited IFRS accounts for 2011 are not yet available, Fitch expects that the company's financial performance has remained weak and that an improvement in 2012 is uncertain.

Fitch assesses TGK-2's liquidity as weak and insufficient to meet its current obligations. This is evidenced by little cash on hand of RUB255m at end-Q112 compared to short-term debt of RUB8bn, increasing trade payables, and Fitch-projected negative funds from operations (FFO).

Although the company paid the coupon on its RUB5bn domestic bond on schedule in March 2012, Fitch has concerns that TGK-2 will struggle to continue meeting its obligations, including the next coupon of about RUB225m due in September 2012. Together with Fitch's revised recovery prospects, this has led to the two-notch downgrade of the bonds.

In Q112, TGK-2 obtained new loans from some of the largest Russian banks for over RUB500m, including an overdraft facility. Fitch views availability of further debt funding as uncertain despite TGK's ongoing negotiations with banks.

In December 2011, TGK-2 announced a plan for a RUB13.5bn new equity issue under closed subscription rules. It was registered on 1 March 2012 at RUB0.01 per share which is equal to the face value, but is significantly above the current market price. The previous equity issue announced in July 2010 for RUB19bn was cancelled by the Russian Securities Markets Commission in October 2011 due to an under-subscription and a challenge brought forward by TGK-2's minority shareholders against the Sintez Group, its majority shareholder.

Given the size of the upcoming debt maturities and continuous poor operating cash flows, the agency believes that TGK-2 may have to restructure its debts in 2012. This would likely lead to a further downgrade. Conversely, a successful extension of the debt maturity profile or the completion of the announced equity issue would be positive for the ratings.

Although TGK-2's aggressive capital structure is Fitch's key concern, the company's operations are also poor despite progress with the oil-to-gas fired capacity switchover in the Arkhangelsk region. About half of TGK-2's revenues come from regulated monopolistic heat sales. Additionally, a considerable part of TGK-2's electricity generation originates in the Arkhangelsk regulated market. In 2011, TGK-2 reported a pre-tax loss of RUB2.6bn, highlighting very weak operations. Fitch believes that state-imposed tariff control measures are partly responsible for such poor results.

Unresolved corporate governance issues, including a prolonged litigation between shareholder groups, related party transactions bringing little apparent economic benefit and the continued absence of independent directors or minority shareholders' representatives on its board (despite proposals to address this issue) are additional negatives for the ratings and TGK-2's creditors.

TGK-2 is a heat and power generation company that operates in six regions across the north of European Russia. TGK-2 owns 15 combined heating power plants, 13 boiler houses and 2,000km of heat supply pipes. Its combined installed electric capacity is 2,237 MW and heat capacity is 9,461 GCal per hour. It also leases 56 boiler houses from local authorities.

Company: TGK-2

Full company nameTerritorial generating company #2, PJSC
Country of riskRussia
Country of registrationRussia


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