ACRA affirms ААА(RU) to PJSC MOESK, outlook Stable, and affirms ААА(RU) to its bond issues

The credit rating of PJSC MOESK (hereinafter, the Company, or MOESK) is based on its strong market positions in the regions of presence, where it is the largest player, strong operating profile based on moderate sales and regulatory risks, high business profitability, moderate leverage, and strong liquidity. The standalone creditworthiness assessment (SCA) is restrained by weak cash flow caused by substantial capital expenses. ACRA assesses the likelihood of support from the key shareholder, PJSC "ROSSETI" (hereinafter, Rosseti; ACRA rating: AAA(RU), outlook Stable) as high. An expected decline in the electric power consumption in March–May 2020 resulting from the quarantine measures introduced in Moscow area and a slump in the economy is of a limited nature; the demand elasticity is low and the effects on the Company's operations are insignificant.

MOESK is a regional electric power grid company operating in Moscow and the Moscow Region. The key shareholders of the Company are PJSC Rosseti (50.9%), СJSC Lider (an asset management company of NPF Gazfond) (17.6%), and Bank GPB (JSC) (9.8%).

Key rating assessment factors

The high likelihood of support from the key shareholder (PJSC Rosseti). MOESK is an infrastructure monopoly that supplies electricity to Moscow area, a political and economic center of Russia. The Company’s geographical position determines its strategic role in supporting the key state functions. MOESK is the most profitable regional electric grid company in Russia, and today, it needs no shareholders' financial support. Nevertheless, certain cases of support from Rosseti to its other subsidiaries and affiliated companies indicate that, in case of need, such support is highly likely.

The infrastructure monopoly facing moderate sales and regulatory risks. MOESK is a dominating player in the electricity transmission market in Moscow and the Moscow Region (with the share of 88.7% in 2019). The high level of development and high incomes of the main consumers allow for setting a tariff, which ensures a sound profitability of the Company's business. In view of this, the likelihood of socio-political factors affecting tariff decisions is not high. Moreover, the operating region's strong economy and the effective measures taken by the Company to collect overdue charges ensure a good level of payment discipline. In 2019, the share of overdue receivables in the Company's revenues declined to 5% against 5.6% in 2018. Despite the fact that the tariff growth rate in Moscow area on average lagged behind inflation in 2013–2019, the tariffs allowed the Company to keep the FFO margin before interest and taxes high (26.5%). According to ACRA's estimates, the annual average FFO margin before interest and taxes should remain unchanged in 2020–2022.

The strong operating profile. The quality of the Company's fixed assets is characterized by a moderate wear and tear. The share of electricity losses decreased from 8.1% in 2018 to 7.67% in 2019. The investment program (16.3% of revenues in the period under review) matches the scale of the Company and is aimed, among others, at reducing such losses.

ACRA assesses the level of the Company's corporate governance as adequate and consistent with industry standards. The board of directors of MOESK includes thirteen members (including representatives of the Rosseti group, Moscow City Administration, CJSC Lider, and GPB Bank (JSC)). The Company's risk management system allows for minimizing all major types of risk; Rosseti approves the corporate credit policy and investment regulations unified for all its subsidiaries.

The cash flow is weak despite rising profitability. In 2019, the Company's revenue grew mainly due to the annual increase in tariffs. The IFRS revenue went up by 1.2% y-o-y to RUB 161.5 bln. According to ACRA's estimates, the 2020 revenue should decline by 0.8% against 2019 due to a lower demand for electric power explained by the warm winter and the pandemic. It should be noted that this decrease, in turn, would push down the Company's electricity transmission costs and expenses for electricity purchased in order to compensate for transmission losses, which partially offsets the negative impact of these factors on MOESK’s net profit.

In 2019, the free cash flow decreased to –RUB 2.2 bln from RUB 1.3 bln in 2018, which is explained by the Company's capital investments and dividend payments. Capital investments are part of the investment program aimed at the construction and upgrade of the Company's electric grids. ACRA expects that in 2020–2022, the Company's annual average free cash flow will be positive due to lower capital investments and the reviving demand for electricity.

The moderate leverage. As of May 14, 2020, the debt portfolio of MOESK amounted to RUB 87.6 bln (2.3x to FFO before net interest payments), and the total debt including pension obligations was RUB 91.7 bln (2.4x to FFO before net interest payments). 49.1% of the loan portfolio are bond loans; the remaining share is represented by bank loans. Except this year's two call options for bond loans totaling RUB 10 bln, all debt is long-term. The Company's leverage quality assessment is not the highest, since more than 50% of the loan portfolio is concentrated on a single lender. The Company disclosed no information about such lender, therefore, the financial transparency score, as per ACRA's methodology, is not the highest too. According to ACRA's estimates, in 2020–2022, the debt is expected to remain at the current level due to the need to finance the investment program.

The strong liquidity position is underpinned by a comfortable debt repayment schedule, as well as the volume of cash (RUB 12.8 bln as of May 14, 2020) held in accounts and deposits of MOESK, and a significant amount of committed credit lines (RUB 133.3 bln).

Key assumptions

  • In 2020, the average tariff indexation rate and the average inflation rate at 3% and 3.9%, respectively;
  • The Company to implement its capital development program as planned (the annual average investments of RUB 25.5 bln without VAT in 2020–2022);
  • Dividend not to exceed 50% of IFRS net profit or RAS net profit, whichever is higher, less depreciation charges allocated for investment purposes.

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:

  • Loss of control over the Company by Rosseti, or less tight relations between the Company and Rosseti;
  • The total debt to FFO before net interest payments exceeding 5.0x amid deteriorating debt structure, or the interest coverage ratio going below 5.0x;
  • The FFO margin before interest payments and taxes going below 15%;
  • A substantial deterioration in access to external sources of liquidity.

Rating components

SCA: aа.

Support: group — SCA plus 2 notches.

Issue ratings

Bonds issued by PJSC MOESK, 001Р-01 series (RU000A100AD8), maturity date: October 18, 2022, issue volume: RUB 8 bln, — АAА(RU).

Bonds issued by PJSC MOESK, 001P-02 series (RU000A101FY1), maturity date: February 14, 2025, call option date: February 22, 2023, issue volume: RUB 10 bln, — АAА(RU).

Rationale. The issues represent senior unsecured debt of MOESK. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to the ACRA methodology, the credit rating of the issue is equivalent to that of the Company, i.e. AAA(RU).

Regulatory disclosure

The credit ratings of PJSC MOESK and the bonds (ISIN RU000A100AD8, RU000A101FY1)  issued by PJSC MOESK were 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, the Methodology for Analyzing Member Company Relationships within Corporate Groups, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning credit rating to the bond issues above, the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was used.

The credit rating of PJSC MOESK and the credit ratings of bonds (ISIN RU000A100AD8, RU000A101FY1) issued by PJSC MOESK were first published by ACRA on June 6, 2018, May 30, 2019, and February 21, 2020, respectively. The credit rating of PJSC MOESK and its outlook and the credit ratings of the bonds (ISIN RU000A100AD8, RU000A101FY1)  issued by PJSC MOESK 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 MOESK, information from publicly available sources as well as ACRA’s own databases. The credit ratings are solicited, and PJSC MOESK participated in their assignment.

Deviations from the methodology: the "company size" rating factor was assessed with a deviation from the range set forth in the methodology, as PJSC MOESK is the largest regional electric grid company.

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

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

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