Moody's maintains Eesti Energia ratings

Moody's Investors Service said that recent discussions initiated by Estonia's Ministry for Economic Affairs about the possible unbundling of Eesti Energia into separate companies raises concerns that could be negative for the rating. However, as discussions are at a preliminary stage - no proposal has been submitted to the Cabinet yet - Moody's said it will maintain Eesti Energia's long-term senior unsecured A3 ratings for now.

Moody's said it understands that the Estonian Ministry for Economic Affairs is considering a number of options as part of the deregulation of the country's electricity sector with a view to ensuring (1) greater transparency in the markets, including access to the high-voltage grid, and (2) greater independence in the management of the networks.

One of these options includes maintaining Eesti Energia with separate legal and economic entities under a holding company umbrella; while other options include splitting off the transmission grid or even a complete unbundling of the company and the establishment of separate independent legal companies.

Moody's understands that there is no discussion about privatization at this point.

The current ratings reflect Moody's perception of Eesti Energia's strategic importance to the state, given its vertically integrated structure and dominant market position in a protected market, in which full market liberalization is not likely before 2013. A change in these assumptions, including Moody's perception of the implicit support of the state given the company's strategic importance, could have negative rating implications.

Moreover, Eesti Energia is already quite small in the context of the European markets, which means that a potential break-up of the company into separate independent companies - possibly resulting in a significant downsizing in terms of size and transformation of its business risk profile from the current vertically integrated model - could have an adverse affect on the company's credit standing, the agency said.

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