ACRA affirms ААА(RU) to PJSC «Rosseti Moscow Region», outlook Stable, and affirms ААА(RU) to its bond issues

The annual meeting of shareholders of PJSC MOESK decided to make changes to the Charter related to renaming PJSC MOESK to PJSC «Rosseti Moscow Region» (hereinafter, PJSC «Rosseti Moscow Region» or the Company). The changes were adopted as part of the move to a single brand architecture and registered by Interdistrict Inspectorate of the Federal Tax Service No. 46 for the city of Moscow on July 27, 2020. ACRA has affirmed the credit rating of the Company at AAA(RU), outlook Stable, and its bonds at AAA(RU).

The credit rating of the Company is based on its strong market positions in the regions of presence, where it is the largest player, a strong operating profile based on moderate sales and regulatory risks, high business profitability, moderate leverage, and strong liquidity. The standalone creditworthiness assessment (SCA) is limited by a weak cash flow caused by substantial capital expenses. ACRA assesses the likelihood of support from the key shareholder, PJSC "ROSSETI" (AAA(RU), outlook Stable) as high. An expected decline in 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.

PJSC «Rosseti Moscow Region» 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

High likelihood of support from the key shareholder (PJSC Rosseti). PJSC «Rosseti Moscow Region» is an infrastructure monopoly that supplies electricity to the Moscow area, the political and economic center of Russia. The Company’s geographical position determines its strategic role in supporting key state functions. PJSC «Rosseti Moscow Region» is the most profitable regional electric grid company in Russia and currently does not need additional financial support from shareholders. Nevertheless, certain cases of support from Rosseti to its other subsidiaries and affiliated companies indicate that, if necessary, such support is highly likely.

An infrastructure monopoly facing moderate sales and regulatory risks. PJSC «Rosseti Moscow Region» is the dominating player in the electricity transmission market in Moscow and the Moscow Region (with a share of 88.7% in 2019). The high level of economic development and high incomes of the main consumers allow for setting tariffs that ensure 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% compared to 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.

Strong operating profile. The quality of the Company’s fixed assets is characterized by a moderate level of wear and tear. The share of the Company’s electricity losses is gradually decreasing: 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 other things, 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 the Company includes thirteen members (including representatives of the Rosseti group, Moscow City Administration, CJSC Lider, and GPB Bank (JSC)). The Company’s risk management system minimizes all major types of risk; Rosseti approves the corporate credit policy and investment regulations, which are unified for all its subsidiaries.

Weak cash flow despite rising profitability. In 2019, the Company’s revenue grew mainly due to the annual increase in tariffs. IFRS revenue increased by 1.2% y-o-y to RUB 161.5 bln. According to ACRA’s estimates, 2020 revenue should decline by 0.8% compared to 2019 due to lower demand for electric power explained by the warm winter and the pandemic. It should be noted that this decrease, in turn, should 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 the Company’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 constructing and upgrading 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 revived demand for electricity.

Moderate leverage. As of May 14, 2020, the debt portfolio of the Company 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 is made up of bond loans; the remaining share is represented by bank loans. Besides 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 does not disclose any information about this lender, therefore, the financial transparency score, as per ACRA’s methodology, is not the highest either. According to ACRA's estimates, in 2020–2022, 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 the Company’s accounts and deposits, and a significant amount of committed credit lines (RUB 133.3 bln).

Key assumptions

  • Average tariff indexation rate and average inflation rate at 3% and 3.9%, respectively from 2020 to 2022;
  • The Company’s capital development program implemented as planned (annual average investments of RUB 25.5 bln excluding VAT in 2020–2022);
  • Dividends of no more than 50% of IFRS net profit or RAS net profit, whichever is higher, minus 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;
  • Total debt to FFO before net interest payments exceeding 5.0x amid deteriorating debt structure, or the interest coverage ratio going below 5.0x;
  • FFO margin before interest payments and taxes going below 15%;
  • 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 «Rosseti Moscow Region», 001Р-01 series (RU000A100AD8), maturity date: October 18, 2022, issue volume: RUB 8 bln — АAА(RU).

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

Bonds issued by PJSC «Rosseti Moscow Region», 001P-03 series (RU000A101XH9), maturity date: July 16, 2025, call option date: July 24, 2023, issue volume: RUB 5 bln — АAА(RU).

Rationale. The issues represent senior unsecured debt of PJSC «Rosseti Moscow Region». 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 ACRA’s methodology, the credit rating of the issue is equivalent to that of PJSC «Rosseti Moscow Region», i.e. AAA(RU).

Regulatory disclosure

The credit ratings of PJSC «Rosseti Moscow Region» and the bonds (RU000A100AD8, RU000A101FY1, RU000A101XH9) issued by PJSC «Rosseti Moscow Region» 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, Methodology for Analyzing Relationships Between Rated Entities and the State, Methodology for Analyzing Member Company Relationships within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities. In the course of assigning credit ratings 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 also used.

The credit ratings of PJSC «Rosseti Moscow Region» and the bonds (RU000A100AD8, RU000A101FY1, RU000A101XH9) issued by PJSC «Rosseti Moscow Region» were published by ACRA for the first time on June 6, 2018, May 30, 2019, February 21, 2020, and July 22, 2020, respectively. The credit rating of PJSC «Rosseti Moscow Region» and its outlook and the credit ratings of the bonds (RU000A100AD8, RU000A101FY1, RU000A101XH9) issued by PJSC «Rosseti Moscow Region» 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 Moscow Region», information from publicly available sources as well as ACRA’s own databases. The credit ratings are solicited, and PJSC «Rosseti Moscow Region» 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 «Rosseti Moscow Region» is the largest regional electric grid company.

No material discrepancies between the provided data and the data officially disclosed by PJSC «Rosseti Moscow Region» in its financial statements have been discovered.

ACRA provided additional services to PJSC «Rosseti Moscow Region». No conflicts of interest were discovered in the course of credit rating assignment.

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