TEXT-S&P keeps Irkutskenergo 'B-' rtg on neg due to liquidity

(The following statement was released by the ratings agency)

Dec 31 - Standard & Poor's Ratings Services said today that it maintained on CreditWatch with negative implications its 'B-' long-term corporate credit and 'ruBBB-' Russia national scale ratings on Russian regional power and heat utility Irkutskenergo , AO EiE (IRGZ.MM). The ratings were placed on CreditWatch on July 22, 2008, due to very weak liquidity.

"Although the company's liquidity continues be very weak and there is significant refinancing risk with debt maturities of Russian ruble (RUR) 2.7 billion in January 2009 and total short-term debt of RUR8.9 billion, the company has improved its funding position," said Standard & Poor's credit analyst Peter Kernan.

According to management, the company received funds from the settlement of accounts receivables, including that with affiliated parties. In addition, the company has signed a new one-year facility with a Russian bank. We estimate that cash on hand and availability under the new bank line should be sufficient to cover the upcoming January 2009 maturities if the company doesn't have new significant working capital outlays.

Notwithstanding this, liquidity remains very weak with short-term debt of RUR8.9 billion. Another liquidity challenge faced by the company is the minority buyback claims triggered by the demerger of Irkutskenergo's 100% subsidiary Irkutsk Electricity Grid Co. (IEGC), which owns and operates the group's transmission, distribution, and dispatching assets. The IEGC demerger should complete today. Legislation required Irkutskenergo to buy back equity from minority shareholders for RUR3.1 billion by Nov. 19, 2008, but the company partially delayed the payments and intends to complete the buyback by the end of January 2009.

Irkutskenergo is also negotiating to obtain bank facilities from Gazprombank (BBB-/Negative/A-3), JSC VTB Bank (VTBR.MM) (BBB/Negative/A-3), and other Russian banks to cover the shortfalls for the equity buyback and upcoming short-term debt payments. However, uncertainty remains as to whether these facilities will be available to the company in time. Irkutskenergo, together with its controlling shareholder Evrosibenergo, was included in the list of strategic enterprises recently approved by the Russian government, however. Although this does not guarantee state support, we believe it should improve the company's access to financing from state-owned banks.

We will continue to closely monitor and assess the company's liquidity situation, structure, and financial position. Based on these assessments, we will either resolve the CreditWatch status or lower the rating while keeping it on CreditWatch with negative implications. The ratings could be lowered if the company fails to preserve the accumulated cash cushion needed to meet the maturities due January 2009 or is unable to attract funding to refinance other short-term maturities after that date. We do not consider the inability to make timely payments on the share buyback as a default. However, such a scenario has further emphasized the company's very weak liquidity situation.

The ratings could be affirmed if the company manages to improve its liquidity position and debt maturity schedule.