The credit ratings agency added that further aspects of the outlook downgrade was that, in addition to the delay in the initial public offer (IPO) for Hidroelectrica, there was uncertainty over the new date and the scale of the proposed capital increase.

S&P has affirmed Hidroelectrica’s long-term corporate credit rating as “BB”. It added that the rating reflected the hydropower company’s poor historical financial performance, weak liquidity, inherently volatile earnings, significant medium-term capital expenditure that is to be partly debt-financed, and general exposure in the changing national economy.

Weak hydrology in early 2007 hit the financial performance of Hidroelectrica last year though there is the expectation of the shortfall in output to be compensated by wetter conditions over the 2007-08 winter season.

The agency did sate, however, that the company’s hydropower assets were low cost and therefore a mitigating factor, and there were benefits from Government support with Hidroelectrica being majority-owned by the state, and electricity market reforms.

Last September 2007, S&P said the final shape of the energy sector mega-merger being proposed by the Romanian Government would impact the business risk, future risk and ratings of Hidroelectrica.

The Government had proposed merging the state-owned hydro, nuclear and thermal power utilities – Hidroelectrica, Nuclearelectrica and Termoelectrica, respectively – plus three distribution companies.

The agency said the merger plan was at a preliminary stage and has kept its ratings steady on Hidroelectrica. Back then it had only recently lifted its corporate rating on the utility due to the low cost asset base plus improving demand and market conditions, though cautioned against any sell-off of hydro power plants as they were core to the then improved outlook for the utility.