“The change of the outlook to negative reflects our concern that Hidroelectrica’s cost structure and financial profile will be adversely affected by the extraordinarily low hydrological conditions persisting since 2011, growing operating costs and the company’s limited ability to renegotiate bilateral supply contracts, which will exert significant pressure on its rating,” said Richard Miratsky, a Moody’s Vice President — Senior Analyst and lead analyst for Hidroelectrica.
Miratsky said the negative outlook also shows the possibility that Moody’s could revise downwards its assumption of extraordinary support from the Romanian government, given its plan to partially privatize Hidroelectrica.
The rating agency expects that a draught, which severely affected Hidrolectrica’s output in 2011 and continues into the first quarter of 2012, will have a significant adverse impact on Hidroelectrica’s financial performance and cash flow generation.
“This is because the company had to significantly increase its purchases of electricity on the open market in 2011 to fulfil its contractual electricity deliveries. As a result of drought conditions, Hidroelectrica’s electricity generation fell to 14.4 terawatt hours in 2011, down 27% from 2010, and the company forecasts output of 15 TWh in 2012, which is also significantly below its average annual output,” Moody’s said.
Moody’s notes that Hidroelectrica declared a Force Majeure in September 2011 because of persistent drought and low water levels, which essentially curtailed any deliveries to its long-term clients.
The rating agency expects Hidroelectrica’s costs to rise significantly, mainly due to the company’s need to acquire electricity at market prices set by higher-cost thermal producers.
In addition, with installed capacity of some 6,400 megawatts, Hidroelectrica’s generation represents around a third of overall electricity production in Romania. The absence of low-cost, hydro-based energy production has pushed electricity prices in Romania to record levels, which further exacerbates pressures on Hidroelectrica’s costs, Moody’s said in its statement.
Although Hidroelectrica’s liquidity position is supported by the manageable maturity profile of its long-term debt, Moody’s expects that the sizeable investment plan will significantly increase the company’s leverage and weaken its financial profile, thereby requiring continuing unrestricted access to external financing.
The rating agency also cautions that Hidroelectrica’s liquidity position relies on continuing availability of short-term bank facilities and the company’s ability to renew those credit lines.