OREANDA-NEWS. Fitch Ratings has affirmed OJSC Mosenergo's Long-term foreign currency Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable.

Mosenergo's 'BB+' rating incorporates a one-notch uplift for parental support from its majority shareholder (53.5%), Gazpom Energoholding and ultimately OAO Gazprom (BBB/Negative), which solely owns Gazprom Energoholding.

Mosenergo's standalone 'BB' rating reflects its strong market position in electricity and heat sales in Moscow and Moscow region, favourable geography of operations and relatively good quality assets. Its exposure to market risk and fuel prices growth is mitigated by the relative stability of its cash flow supported by new capacity sales under the capacity supply agreements (CSAs) with attractive economics along with its strong financial profile. Positive rating momentum could build if the company achieves the forecast credit metrics improvement, which is largely reliant on capex moderation and maintenance of prudent financial policy. However, high regulatory risk is the key factor that in our view caps Russian utilities' standalone ratings at sub-investment grade.

Mosenergo's standalone 'BB' rating reflects its strong market position in Moscow and Moscow region (66% of electricity supplies), favourable geography of operations and fairly good quality asset base, which is arguably an industry benchmark among its domestic peers. The company's geography of operations ensures its dominance in the region, which tends to be the most dynamically growing in terms of electricity consumption and the most lucrative in respect of customers' purchasing power, as reflected in the higher income per capita compared with the Russian average. While this does not fully mitigate the company's exposure to electricity demand volatility, it can alleviate the impact if electricity sales decline.

Despite its near monopoly position in Moscow and Moscow region, Mosenergo bears market risk, which is a function of volume and price risk. Fitch assess the company's exposure to the market risk in conjunction with the regulatory risk that can exacerbate price risk. While the market risk adds to the cash flow volatility, Fitch believe it is mitigated by the company's strong financial profile that contains sufficient headroom to absorb volume and/or price shocks.
Fuel Prices Growth Moderation

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
-Higher than expected growth rate for electricity and heat tariffs in comparison with domestic gas prices increase and/or capex moderation resulting in improvement of the financial profile (e.g. FFO net adjusted leverage below 1.5x and FFO interest coverage above 8x on a sustained basis).
-Stronger parental support.
-Increased predictability of the regulatory and operational framework in Russia.

Negative: Future developments that could lead to negative rating action include:
-Margin squeeze due to the rise of domestic gas pieces not fully compensated by the electric and heat prices growth, poor working capital management, significant debt-funded acquisitions and/or intensive capex programme that would lead to a material deterioration of the company's credit metrics (e.g. FFO net adjusted leverage above 3x and FFO interest coverage below 5x on a sustained basis).
-Weakening of the parental support may result in a removal of the one-notch uplift to Mosenergo's standalone rating.
-Deterioration of the regulatory and operational environment in Russia.