ACRA affirms AAA(RU) to PJSC ROSSETI, outlook Stable, and AAA(RU) to its bond issue

The credit rating of PJSC ROSSETI (hereinafter, the Company, or Rosseti) has been affirmed on par with the financial obligations of the Russian Government due to the Company’s very high systemic importance for the Russian economy and the very high state influence on the Company.

Rosseti’s aa- standalone creditworthiness assessment (SCA) is due to the Company’s monopolistic positions in the management of the Russian power grid complex, very high profitability, low leverage, and very high liquidity. The Company’s SCA is constrained by, among other things, substantial capital expenditures.

The Company is a power grid operator in Russia. It consolidates 17 power grid companies:  PJSC FCG UES (managing high-voltage power transmission lines in Russia) and 16 subsidiaries that manage local power grids across Russia. The Company is a natural power grid monopoly whose tariffs are regulated by the government. The Company also manages six utilities companies. The state, represented by Federal Agency for State Property Management (Rosimuschestvo), is the controlling shareholder with an 88% stake.

In 2020, the functions of the sole executive body of FGC UES were transferred to PJSC ROSSETI. At the same time, the shareholder agreement between PJSC ROSSETI and Rosimushchestvo on the procedure for managing and voting using shares in PJSC FGC UES remained in force.

Key rating assessment factors

Strategic importance for the state and state control of the Company. Rosseti is the monopoly operator of Russia’s power grid complex, the only sector in the power industry where the state retained shareholding control and direct government regulation after electricity market liberalization. Rosseti performs quasi-government functions in terms of social risk insurance (it carries out electricity retail sales if energy retailers go bankrupt), social support (cross-subsidizing in tariffs), technical policy, and power infrastructure development. In 2010–2017, the government invested RUB 72 bln in the Company, while subsidies totaled RUB 6.5 bln, and VEB.RF (ACRA rating AAA(RU), outlook Stable) purchased infrastructure bonds of the group’s companies for RUB 156 bln.

Infrastructure monopoly with moderate regulatory risk. The practice of holding grid tariffs down in order to sustain overall electricity prices in Russia was applied extensively in previous years as the share of the transmission tariff in the ultimate electricity price was high, and the state has retained direct regulation of grid tariffs. Tough tariff policy in the grid complex, including two tariff freezes in 2012 and 2014, has been in place since 2012. However, Rosseti improved its profitability in the above period and reduced its debt by optimizing operational and capital expenditures.

Low leverage. According to ACRA’s estimates for 2020–2022, the Company’s annual average ratio of total debt to FFO before net interest payments will amount to 2.1x (1.7x for 2019). In 2020–2022, the Company’s investment program is expected to grow, which in turn will lead to growth of leverage. All of the Company’s debt is unsecured and ruble denominated; public borrowings account for around half of the total debt.

Weak cash flow. The Company’s free cash flow is expected to be negative in 2020–2022 due to increased capital expenditures and dividend payouts. In ACRA’s opinion, the investment to revenue ratio will reach 25% for 2020. On average, 38% of the investment program is spent to maintain and upgrade fixed assets, 39% for new grid connections, and the remaining part for new construction projects, etc. As part of the Company's digitalization strategy until 2030, capital investments may go up after 2021, but this growth is expected to be compensated by higher grid tariffs, and the Company’s cash flow is expected to remain unaffected.

Key assumptions

  • Average tariff indexation rate remaining at 3% and average inflation at 3.3% in 2021–2022;
  • The Company successfully implementing its capital investment program;
  • Dividends of no more than 50% of adjusted IFRS or RAS net profit (whichever is higher);
  • Continued level of access to external liquidity sources in 2021–2022.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • The state’s share in the Company’s equity falling below 50% + 1 voting share;
  • Significant decline of the Company’s systemic importance for the Russian economy;
  • Significant decline in state support to the Company under extraordinary conditions.

Rating components

SCA: аа-.

Support: on par with the RF.

Issue ratings

Bonds of PJSC ROSSETI (ISIN RU000A101MG4), maturity date: April 24, 2025, issue volume: RUB 10 bln — AAA(RU).

Regulatory disclosure

The credit ratings of PJSC ROSSETI and the bond issue of PJSC ROSSETTI have been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.

The credit ratings of PJSC ROSSETI and the bonds issued by PJSC ROSSETI (ISIN RU000A101MG4) were published by ACRA for the first time on March 2, 2018 and April 30, 2020, respectively. The credit rating and its outlook and the credit rating of the bonds are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by PJSC ROSSETI, information from publicly available sources as well as ACRA’s own databases. The credit ratings were assigned using the IFRS consolidated reporting of PJSC ROSSETI. The credit ratings are solicited, and PJSC ROSSETI participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC ROSSETI in its financial statements have been discovered.

ACRA provided no additional services to PJSC ROSSETI. No conflicts of interest were discovered in the course of credit rating assignment.

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