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Atomic Energy Power Corp. JSC
Primary Credit Analyst:
Sergei Gorin, Moscow (7) 495-783-4132; sergei.gorin@standardandpoors.com
Secondary Contact:
Karen Vartapetov, Moscow (7) 495-783-40-18; karen.vartapetov@standardandpoors.com
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Company Description
Business Risk: Fair
S&P Base-Case Operating Scenario
Financial Risk: Significant
S&P Base-Case Cash Flow And Capital Structure Scenario
Liquidity: Adequate
Covenant Analysis
Government Influence
Ratings Score Snapshot
Reconciliation
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Table Of Contents (cont.)
Related Criteria And Research
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Atomic Energy Power Corp. JSC
Business Risk: FAIR
Vulnerable Excellent
Financial Risk: SIGNIFICANT
Highly leveraged Minimal
bb bbbb+
Anchor Modifiers Group/Gov't
CORPORATE CREDIT RATING
BB+/Negative/B
Russia National Scale
ruAA+/--/--
Rationale
Business Risk : Fair Financial Risk : Significant
• Strong international position and domestic
monopoly in the nuclear industry chain.
• Benefits of a vertically integrated business model,
with full nuclear cycle capabilities.
• Supportive outlook for Russian nuclear industry
growth.
• Exposure to inherent industry, operational, and
construction-related risks.
• A complex corporate structure.
• Our view of a very high likelihood of government
support for the group in the event of financial
distress.
• The government's provision of large capital
injections, asset transfers, and political backing.
• Adequate liquidity backed by ample cash and large
amounts of available committed long-term credit
lines.
• An ambitious capital-expenditure program, leading
to heavily negative free operating cash flow (FOCF),
although the government partly finances the
program through equity injections.
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Outlook : Negative
The negative outlook reflects the outlook on Russia. Standard & Poor's Ratings Services would lower its ratings on
Atomic Energy Power Corp. JSC (AtomEnergoProm) in the event of a sovereign downgrade.
Downside scenario
We might also lower the ratings if the company's stand-alone credit profile (SACP) deteriorates to 'b+' or below, or
if we consider that the likelihood of government support has reduced to moderately high or less. We regard both
scenarios as unlikely, however.
Upside scenario
If we revise the outlook on Russia to stable, we would take a similar action on AtomEnergoProm, assuming the
company's credit metrics develop in line with our base-case expectations.
Standard & Poor's Base-Case Scenario
Assumptions Key Metrics
• A consolidated EBITDA of about Russian ruble
(RUB) 220 billion in 2015, declining to RUB180
billion in 2016 on the impact of rising cost inflation
and regulatory pressure on AtomEnergoProm's
capacity payments, followed by restoration to
RUB220 billion in 2017 as new generating units
come online.
• Capital expenditures of about RUB220
billion-RUB270 billion in 2015-2016, with an
increase to about RUB370 billion in 2017 (including
Finnish Hanhikivi nuclear power plant project).
• Government equity injections covering about 34% of
the group's investment needs in 2015-2017.
• Modest dividend payouts of RUB10 billion-RUB11
billion per year.
• Consolidation of Uranium One's debt in the amount
of about RUB80.0.
• Asset retirement obligation of about RUB70
billion-RUB90 billion, which we add to the
company's debt as an analytical adjustment.
• Debt to EBITDA of about 1.1x in 2015, increasing to
2.0x-2.5x by year-end 2018.
• FFO to debt of more than 60% in 2015, declining to
about 30% by 2018.
2014A 2015E 2016F
Debt to EBITDA(x) 0.9 1.1 2.0
FFO to debt(%) 99 >60 30-40
All figures are fully Standard & Poor's adjusted,
including adjustments for asset retirement obligations,
pension obligations, and surplus cash. FFO--Funds
from operations. f--Forecast. e--Estimate.
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Company Description
AtomEnergoProm is a vertically integrated group of companies that operate Russia's nonmilitary nuclear assets (see
chart). The group covers all stages of the nuclear cycle, from the extraction of uranium to the generation of electricity
at nuclear power plants. AtomEnergoProm is one of the most important government-related entities (GREs) in Russia
due to its crucial role for the Russian economy as an electricity supplier.
Business Risk: Fair
Our business risk profile assessment reflects the following positive factors:
• A strong international position and domestic monopoly across the nuclear industry chain. The group is the world's
second-largest uranium producer by resource base and third-largest producer of uranium. We estimate the group's
market shares to be 36%in the uranium enrichment services (including services to global peers), and about 17% in
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the nuclear fuel fabrication.
• Supportive medium-term growth prospects. The company has an ambitious goal of increasing the nuclear installed
capacity to 34 gigawatts (GW) by 2030 from current 26.3GW (including the effect from decommissioning of existing
11 GW in total). Furthermore, the group's long-term contract portfolio for uranium enrichment services and fuel
supplies is increasing, thanks to 30 new reactors to be built in 12 countries. The group should maintain its solid
market position in the construction of nuclear power stations, uranium extraction, conversion, and enrichment, as
well as in fuel assembly production, thanks to a favorable growth outlook for the Russian nuclear industry and the
group's foreign operations.
• Generally high barriers to entry and tough competition in the industry. AtomEnergoProm holds a legally established
monopoly in Russia's nuclear electricity generation; it owns low-cost centrifugal technology of uranium enrichment
(along with just two other companies in the world); and each reactor design has historically required a certain fuel
assembly type (AtomEnergoProm is usually an international fuel supplier for Russian-type reactors). Usually the
order backlog for fuel deliveries and uranium enrichment is very long term and rather predictable, and a large
amount is contracted until 2020 and thereafter.
These strengths are balanced with the following weaknesses:
• Exposure to inherent industry, operational, and construction-related risks.
• Complex group structure.
• Need for sizeable investments into research and development in the long-term.
• Existing trade barriers in foreign markets, together with politically based decisions as to the choice of nuclear-fuel
providers or counterparties' need to diversify suppliers, potentially threatening AtomEnergoProm's market share.
• Regulatory pressure in Russia's electricity generation industry aimed at controlling retail electricity prices. The
framework lacks a long-term track record, while the government has the tendency to meddle in the industry.
S&P Base-Case Operating Scenario
• The consolidated EBITDA margin will be 30%-35% in 2015-2017 following the start-up of new units; a stronger
contribution from the fuel fabrication, enrichment, and engineering segments; positive impact of the ruble's
depreciation against foreign currencies (as about 40% of total revenues are foreign currency denominated [largely
dollar- and euro-denominated]); and cost-control procedures.
• Our base-case scenario envisages AtomEnergoProm's consolidated adjusted EBITDA of about RUB 180 billion-220
billion in 2015-2017.
Peer comparison
We classify AtomEnergoProm's business risk profile as satisfactory, similar to that of Russian Railways JSC and
Federal Grid Co. of the Unified Energy System. All of these entities enjoy monopoly positions (nuclear power
generation, for instance, benefits from prioritized capacity load, ahead of other types of generation) and significant
ongoing support from the government. We assess the business risk profile for electric power utility, RusHydro (OJSC),
as fair. RusHydro's exposure to hydrological risk makes it dependent on weather conditions and explains higher
volatility of earnings. In addition, its overall profitability is vulnerable to weak margins at its Far Eastern segment.
Compared with its direct global competitor, French conglomerate AREVA--whose business model also includes
uranium extraction, conversion, and enrichment--AtomEnergoProm's operations incorporate electricity generation at
nuclear power stations and therefore enjoy the benefits of full vertical integration. AtomEnergoProm has also
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generated much stronger profitability margins than AREVA.
AtomEnergoProm's financial metrics are close to those of Federal Grid Co.'s and RusHydro's, which have significant
financial risk profiles, according to our assessment. All three companies post negative FOCF, stemming from
ambitious investment programs that significantly rely on external financing. AREVA's financial risk profile primarily
reflects a long track record of and our expectations of continued very weak credit metrics and shortfalls in FOCF,
leading to high debt leverage figures (with debt to EBITDA above 10x). Therefore, we assess its financial risk profile as
highly leveraged.
Table 1
Atomic Energy Power Corp. JSC -- Peer Comparison
Industry Sector: Electric
Atomic Energy Power
Corp. JSC AREVA
Federal Grid Co. of the
Unified Energy System
Russian Railways
JSC
RusHydro
(OJSC)
Rating as of Dec. 10,
2015
BB+/Negative/B BB-/Developing/B BB+/Negative/-- BB+/Negative/-- BB/Stable/B
(Mil. €) --Fiscal year ended Dec. 31, 2014--
Revenues 7,099 8,354 2,467 26,285 4,867
EBITDA 3,326 (297) 1,522 5,045 1,100
Funds from operations
(FFO)
2,824 (826) 1,257 3,943 870
Net income from cont.
oper.
996 (4,198) (307) (1,408) 364
Cash flow from
operations
2,523 231 785 3,882 615
Capital expenditures 3,263 1,151 820 6,692 985
Free operating cash
flow
(740) (920) (35) (2,810) (371)
Discretionary cash
flow
(885) (951) (41) (2,829) (445)
Cash and short-term
investments
241 100 0 0 0
Debt 2,849 8,942 3,318 14,583 2,709
Equity 22,025 (244) 8,158 28,982 8,470
Adjusted ratios
EBITDA margin (%) 46.8 (3.5) 61.6 19.1 22.4
Return on capital (%) 7.6 (12.0) 8.1 4.3 6.5
EBITDA interest
coverage (x)
8.7 (0.7) 4.6 4.6 4.8
FFO cash int. cov. (X) 9.9 (1.7) 2.9 6.8 3.3
Debt/EBITDA (x) 0.9 (30.2) 2.2 2.9 2.5
FFO/debt (%) 99.1 (9.2) 37.8 26.9 31.9
Cash flow from
operations/debt (%)
88.6 2.6 23.6 26.5 22.5
Free operating cash
flow/debt (%)
(26.0) (10.3) (1.1) (19.4) (13.9)
Discretionary cash
flow/debt (%)
(31.1) (10.6) (1.3) (19.6) (16.6)
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Financial Risk: Significant
The major constraints of AtomEnergoProm's significant financial risk profile are:
• An ambitious capital expenditure program, which will likely result in significantly negative FOCF, but only gradual
debt accumulation in 2015-2017, owing to substantial state funding. The group has indicated it intends to spend
RUB220 billion–RUB270 billion per year in 2015-2016 with a rise to RUB370 billion in 2017. However, we expect
the state to finance about 34% of total investments via capital injections (including funds for Hanhikivi power
station), and we assume the actual extent of the group's capital spending will depend on availability of these
injections.
• The risk of implementing projects that lack economic substance, but are important to the government.
These weaknesses are mitigated by:
• Strong ongoing government support in the form of equity injections and subsidies and a benign dividend policy.
• Modest dividend requirements, enabling profits to be reinvested in AtomEnergoProm or Rosatom. In addition, the
government compensates AtomEnergoProm for unfavorable tariff regulations in certain remote areas of Russia--for
example Chukotka, which is a special price sector--and supports its exports.
• Currently low debt and ample liquidity deposits. In our view, the state supports the group's debt policy. For
instance, Rosatom guaranteed the group's RUB10 billion bond issued in 2010 (now repaid).
• Strong bank relationships and a significant amount of available, committed, long-term credit lines.
• A favorable debt maturity profile.
Under our base case, we project that AtomEnergoProm's leverage ratio (debt to EBITDA, including our adjustments,
notably for asset-retirement and pension obligations) will not exceed 3.0x for the next three years. We view this ratio
as commensurate with the ratings, despite the group's investment program and our projection of heavily negative
FOCF. We understand the group has some financial flexibility because it can defer certain projects. However, any
decisions on postponement would need the government's approval, in our view.
S&P Base-Case Cash Flow And Capital Structure Scenario
• Strong, ongoing state support for AtomEnergoProm in the form of equity injections, at least until 2015-2020. We
incorporate RUB156 billion in 2015 and RUB83 billion in 2016 of capital injections from the government (including
those destined for the Akkuyu and Hanhikivi power plants).
• A significant negative FOCF until at least 2017.
• Modest dividend payouts of RUB10 billion-RUB11 billion per year.
Financial summaryTable 2
Atomic Energy Power Corp. JSC -- Financial Summary
Industry Sector: Electric
--Fiscal year ended Dec. 31--
2014 2013 2012 2011 2010
Rating history BBB-/Watch Neg/A-3 BBB/Stable/A-2 BBB/Stable/A-2 BBB/Stable/A-3 BBB-/Stable/A-3
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Table 2
Atomic Energy Power Corp. JSC -- Financial Summary (cont.)
(Mil. RUB)
Revenues 498,807 436,135 394,815 389,375 391,430
EBITDA 233,667 181,077 152,889 174,281 179,654
Funds from operations (FFO) 198,448 150,201 125,739 149,068 141,470
Net income from continuing operations 69,971 32,107 24,736 59,715 92,376
Cash flow from operations 177,297 146,508 62,934 128,866 127,822
Capital expenditures 229,281 250,833 207,950 199,812 135,872
Free operating cash flow (51,984) (104,325) (145,016) (70,946) (8,050)
Discretionary cash flow (62,172) (119,767) (154,029) (93,033) (11,385)
Cash and short-term investments 16,915 26,617 (2,150) 0 0
Debt 200,216 271,591 253,344 178,924 135,926
Equity 1,547,561 1,347,049 1,280,921 1,226,034 1,075,950
Adjusted ratios
EBITDA margin (%) 46.8 41.5 38.7 44.8 45.9
Return on capital (%) 7.6 4.8 4.6 8.4 12.2
EBITDA interest coverage (x) 8.7 8.1 6.8 9.4 9.5
FFO cash int. cov. (x) 9.9 6.5 5.3 15.5 9.9
Debt/EBITDA (x) 0.9 1.5 1.7 1.0 0.8
FFO/debt (%) 99.1 55.3 49.6 83.3 104.1
Cash flow from operations/debt (%) 88.6 53.9 24.8 72.0 94.0
Free operating cash flow/debt (%) (26.0) (38.4) (57.2) (39.7) (5.9)
Discretionary cash flow/debt (%) (31.1) (44.1) (60.8) (52.0) (8.4)
RUB--Russian ruble.
Liquidity: Adequate
We assess the group's liquidity as adequate under our criteria and estimate the ratio of sources of liquidity to uses at
more than 1.2x for the 12 months started July 1, 2015.
Principal Liquidity Sources
For the 12-month period started July 1, 2015, we calculate the following principal liquidity sources:
• Unrestricted cash and equivalents of RUB261 billion (about US$4.7 billion), although we note that about 33% of it is
located at the Akkuyu subsidiary, and is targeted for related nuclear power plant construction;
• Equivalent of RUB321 billion in available, committed, long-term credit lines, of which RUB21.4 billion is available to
AtomEnergoProm, and the rest to its subsidiaries;
• Cash flow from operations of RUB115 billion-RUB130 billion; and
• Capital injections from the government totaling RUB83 billion.
Principal Liquidity Uses
For the same period, we calculate the following principal liquidity uses:
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• Debt maturities of about RUB81 billion;
• Capital spending of about RUB250 billion, although we believe that actual outlays will depend on availability of
financing from the government; and
• Dividends of about RUB10 billion.
We expect that AtomEnergoProm's capital spending will correlate with the levels of equity injections from the
government. Furthermore, we believe that the group has the necessary flexibility in its investments to defer some
construction projects if the government were to reduce financing.
Covenant Analysis
AtomEnergoProm has significant headroom under the existing covenants on its various obligations, in our view.
Government Influence
Standard & Poor's Ratings Services views AtomEnergoProm as a GRE. In accordance with our criteria for rating GREs,
our view of a very high likelihood of extraordinary government support is based on our assessment of
AtomEnergoProm's:
• Very important role for the government and the Russian economy, given that it manages the country's civil nuclear
industry assets, including the construction and operation of nuclear power stations, which provide 17% of total
electricity output in Russia. AtomEnergoProm also manages uranium extraction, accounting for 10%-14% of the
global market according to various estimates; enrichment (about 36%); and fuel production (17% globally) across
the full cycle. It also employs about 132,000 people.
• Very strong link with the government. As specified in legislation, the government wholly owns AtomEnergoProm
through state-owned atomic energy corporation, Rosatom. The privatization of major nuclear assets is not on the
government's agenda and such a move would require legislative amendments. The government closely monitors the
group's activities.
Ratings Score Snapshot
Corporate Credit Rating
BB+/Negative/B
Business risk: Fair
• Country risk: High
• Industry risk: Intermediate
• Competitive position: Fair
Financial risk: Significant
• Cash flow/Leverage: Significant
Anchor: bb
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Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Neutral (no impact)
Stand-alone credit profile : bb
• Likelihood of government support: Very high (+1 notch from SACP)
Reconciliation
Table 3
Reconciliation Of Atomic Energy Power Corp. JSC Reported Amounts With Standard & Poor's AdjustedAmounts (Mil. RUB)
--Fiscal year ended Dec. 31, 2014--
Atomic Energy Power Corp. JSC reported amounts
Debt
Shareholders'
equity EBITDA
Operating
income
Interest
expense EBITDA
Cash flow
from
operations
Capital
expenditures
Reported 271,686 1,484,510 234,145 125,009 12,749 234,145 167,229 233,937
Standard & Poor's adjustments
Interest expense
(reported)
-- -- -- -- -- (12,749) -- --
Interest income
(reported)
-- -- -- -- -- 14,133 -- --
Current tax expense
(reported)
-- -- -- -- -- (24,085) -- --
Postretirement benefit
obligations/deferred
compensation
8,245 -- (1,564) (1,564) 1,117 (2,383) (1,191) --
Surplus cash (126,943) -- -- -- -- -- -- --
Capitalized interest -- -- -- -- 4,656 (4,656) (4,656) (4,656)
Asset retirement
obligations
45,941 -- -- -- 8,205 (7,043) 2,986 --
Non-operating income
(expense)
-- -- -- 9,144 -- -- -- --
Reclassification of
interest and dividend
cash flows
-- -- -- -- -- -- 12,929 --
Non-controlling
Interest/Minority
interest
-- 63,051 -- -- -- -- -- --
Debt - Guarantees 1,287 -- -- -- -- -- -- --
EBITDA - Other
income/(expense)
-- -- 1,086 1,086 -- 1,086 -- --
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Table 3
Reconciliation Of Atomic Energy Power Corp. JSC Reported Amounts With Standard & Poor's AdjustedAmounts (Mil. RUB) (cont.)
Total adjustments (71,470) 63,051 (478) 8,666 13,978 (35,697) 10,068 (4,656)
Standard & Poor's adjusted amounts
Debt Equity EBITDA EBIT
Interest
expense
Funds from
operations
Cash flow
from
operations
Capital
expenditures
Adjusted 200,216 1,547,561 233,667 133,675 26,727 198,448 177,297 229,281
RUB--Russian ruble.
Related Criteria And Research
Related Criteria
• Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Standard & Poor’s National And Regional Scale Mapping Tables, Sept. 30, 2014
• Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014
• Corporate Methodology, Nov. 19, 2013
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Methodology: Industry Risk, Nov. 19, 2013
•• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers,
May 7, 2013
• Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
• Russian Nuclear Energy Monopoly AtomEnergoProm Lowered To 'BB+/B', 'ruAA+' After Sovereign Downgrade;
Outlook Negative, Jan. 29, 2015
Business And Financial Risk Matrix
Business Risk Profile
Financial Risk Profile
Minimal Modest Intermediate Significant Aggressive Highly leveraged
Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+
Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb
Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+
Fair bbb/bbb- bbb- bb+ bb bb- b
Weak bb+ bb+ bb bb- b+ b/b-
Vulnerable bb- bb- bb-/b+ b+ b b-
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Ratings Detail (As Of December 10, 2015)
Atomic Energy Power Corp. JSC
Corporate Credit Rating BB+/Negative/B
Russia National Scale ruAA+/--/--
Corporate Credit Ratings History
29-Jan-2015 BB+/Negative/B
26-Dec-2014 BBB-/Watch Neg/A-3
28-Apr-2014 BBB-/Negative/A-3
26-Mar-2014 BBB/Negative/A-2
19-Jul-2012 BBB/Stable/A-2
14-Dec-2011 BBB/Stable/A-3
29-Jan-2015 Russia National Scale ruAA+/--/--
26-Dec-2014 ruAAA/Watch Neg/--
15-Oct-2009 ruAAA/--/--
Related Entities
TENEX-Service
Issuer Credit Rating BB/Negative/B
Russia National Scale ruAA/--/--
Uranium One Inc.
Issuer Credit Rating B+/Stable/--
Senior Secured B+
Senior Unsecured B
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and
debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.
Additional Contact:
Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com
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