S&P Cuts Rtgs On Lietuvos Energija To BB+/B; Otlk Neg.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/6/98--Standard & Poor's today lowered its long- and short-term issuer credit ratings on Lietuvos Energija to double-'B'-plus/B from triple-'B'-minus/A-3. At the same time Standard & Poor's also lowered its senior unsecured rating to double-'B'-plus from triple-'B'-minus. The ratings were removed from CreditWatch, where they were placed on Sept. 3, 1998. The outlook is negative.

The downgrade reflects pressure on the company's financial profile resulting from unpaid electricity export to Belarus and lack of ongoing tariff relief. While cash revenue shortfalls have been offset by delays in vendor payments, this situation is not sustainable. Furthermore, Lietuvos Energija must renegotiate several bank loans over the next few months, and raise new debt, in difficult capital markets. These concerns are partially offset by Lietuvos Energija's monopoly position as the owner and operator of the Lithuanian national grid, the bulk of the country's electricity production facilities (with the exception of Ignalina nuclear power plant (INPP), owned by the Lithuanian government) and currently the entire Lithuanian distribution sector, as well as continued support from the government, which owns 86.5%.

Electricity exports (almost entirely to Belarus), which consist of about one-third of revenues, subsidize retail rates. Exports to Belarus, historically paid through a three-way barter transaction including Russia, increased in 1998. However, payment for export this year has been low, and as a consequence, Lietuvos Energija's half-year result was down to Lithuanian litai (LIT) 38 million compared with LIT60 million for the same period last year. Although Lietuvos Energija still anticipates that the three-way barter trade will continue. In addition, Lietuvos Energija expects to receive heavy fuel oil and other goods in exchange for the electricity delivered to Belarus. However, Lietuvos Energija's financial profile will deteriorate if payments are not resumed or compensatory tariff increases effected. Given the political pressures associated with increasing tariffs to domestic consumers, revenue increases appear unlikely.

While Lietuvos Energija's domestic accounts receivables turnover has improved, the nonpayment from exports to Belarus has driven up total accounts receivables. The receivables collection period (net of provisions) has increased to 63 days at June 31, 1998 compared with 50 days at Dec. 31, 1997.

Despite historical underinvestment, Lietuvos Energija appears to have some room for flexibility in reduction of capital expenditures, particularly within generation if INPP continues to operate.

OUTLOOK: NEGATIVE

The outlook reflects a downside ratings potential if Lietuvos Energija's ability to internally generate, or externally access cash diminishes. Lietuvos Energija will need hard currency to make interest payments and nondiscretionary capital expenditures. Bank loans must be renegotiated, and new financing is needed. The rating assumes a continuation of government support, either through subsidies or waiver of payments. However, although positive from a monetary policy standpoint, the currency board pegging the Lithuanian litai to the U.S. dollar may restrict the government's ability to provide further financial support. Standard & Poor's said. -- CreditWire