ACRA upgrades TGC-1 to AA+(RU), outlook Stable

The credit rating of TGC-1 (hereinafter, the Company) has been upgraded due to a change in the importance of the Company for Gazprom (AAA(RU), outlook Stable), the sole shareholder of Gazprom energoholding LLC, which, in its turn, is the largest shareholder of TGC-1. The change is explained by the inclusion of the Company in the cash-pooling framework of Gazprom, following which the Company was granted a RUB 20 bln borrowing limit. This is considered by ACRA as a strengthening of the support from Gazprom.

The Company's standalone creditworthiness assessment (SCA) has remained at 'aa-' regardless the downgraded assessment of free cash flow. According to ACRA's forecast, free cash flow of the Company should decrease to negative values in 2020–2022, which is caused, among others, by higher capital expenditures and lower payments under capacity supply agreements (aka DPMs).

The credit rating is a result of the Company's adequate market position (which is explained by successful operations of TGC-1 in the Russian north-western markets of electric power generation and heat supply, including Saint Petersburg, Leningrad Region, Murmansk Region, the Republic of Karelia), good business profile, and high geographical diversification (presence in well-developed regions). The Company demonstrates good corporate governance practices, high business profitability, low leverage, and good liquidity. The rating is restricted by, among other things, the medium business scope and the regulatory risks. The rating is supported by a high likelihood of support from Gazprom.

The COVID-19 pandemic has had a moderate impact on the Company's operations. In March–May 2020, electricity consumption decreased due to quarantine measures and an overall slowdown in the economy, while the demand showed low elasticity. Over 9M 2020, on the back of warm weather, the supply of thermal energy decreased by 4.6% y-o-y, and electricity generation decreased by 1.2% y-o-y. Such a slight decrease is due to the diversification of generating assets of TGK-1, which include TPPs and HPPs in almost equal shares. In view of the above, the behavior of performance indicators was multidirectional: electricity generation decreased at thermal power plants and increased at hydro power plants due to high water content in the regions of the Company's presence.

TGC-1 is the second largest electric power generating company (after Rosenergoatom) and the largest thermal power generator operating in the north-west of Russia. The total installed capacity of the Company's power plants is 6.9 GW, including 2.9 GW for HPPs and 4.0 GW for CHPPs, and 13.5 thousand Gcal/h. In the regions of its presence, the Company occupies about 35% of the electric power market. TCG-1 supplies thermal power to Saint Petersburg (with the market share of 46%) and municipalities of the Leningrad Region, the Murmansk Region, and the Republic of Karelia. The Company also exports electric power to Norway and Finland, and the share of such exports in the Company's revenues amounted to about 2% in 2019.

The TGC-1 group of companies includes three branches and two subsidiaries engaged in electricity and thermal power generation and thermal power transmission.

The main shareholders of the Company are Gazprom energoholding LLC (51.79%) and Fortum Power and Heat Oy (29.45%).

Key rating assessment factors

New TPPs and HPPs drive high profitability and low price risks. The Company's FFO margin before interest and taxes has grown to 28% in 2019 against 25% in 2018, which is a result of growing prices for electric power and capacity and higher tariffs and subsidies for heat power. ACRA expects that the margin may drop to 22% in 2020 and further decline in the coming periods on the back of expiration of 10-year capacity supply contracts for newly commissioned TPPs. In the future, the margin is expected to stabilize and possibly grow, if the Company will maintain capital investments aimed at the upgrade and phased replacement of fixed assets. In 2019, the Company's revenue reached 97.3 RUB bln, which is 5.2% higher than in 2018. This was driven by growing prices in the unregulated electricity market, increased regulated tariffs for electric power and heat energy, and higher volume of subsidies for heat supply. According to ACRA's estimates, the Company's revenue for 2020 may decline by 8.1% to RUB 89.4 bln due to lower sales of thermal power (caused by warm weather), lower prices for electricity, declining payments under DPMs, and lower volume of exported electricity (caused by unfavorable prices). The Company has virtually no overdue receivables, as in 2019, the collection rate for electricity charges was 98.6% and the collection rate for heat charges was 98.8%. The amount of receivables overdue for 6+ months declined to 10.9% of revenues in 2019 against 12.8% in 2018. The Company is subject to certain regulatory risks, as the share of electricity supplied by the Company under regulated tariffs is about 20% and that for thermal power is 100%.

Moderate investment commitments. In 2019, the Company's investments intended to upgrade its fixed assets grew by 21% up to RUB 13.2 bln w/o VAT (against RUB 10.9 bln w/o VAT in 2018). All current capital expenses are used to rebuild and upgrade the core power generating and transmitting assets. In 2019, the ratio of investments to revenue amounted to 14%, which is comparable with 12% in 2018. ACRA expects that in 2020–2022, the annual average ratio will grow to 17% and the investments will reach RUB 15.2 bln. The wear and tear of the Company's fixed assets is assessed as moderate. As part of the DPM program, the Company has upgraded about 25% of its generating assets, and it is currently actively participating in another generating assets modernization program (KOMMod). The Company's annual investments exceed its depreciation charges.

Weak free cash flow. In 2019, the Company's FCF grew up to RUB 6.3 bln against RUB 5.2 bln in 2018. According to ACRA's forecast, in 2020–2022, the FCF may decline to negative values in view of, among other things, growing investments and declining payments under DPM contracts. The investments will ramp up as the Company takes part in the KOMMod program.

Low leverage and good liquidity. As of November 1, 2020, the Company's debt portfolio was equal to RUB 10.6 bln (0.4x of FFO before net interest), and the total debt, including pension liabilities, amounted to RUB 11.8 bln (0.4x of FFO before net interest). The Company's liabilities include bank loans and outstanding bonds (62% and 38%, respectively) and are expected to be repaid smoothly in 2021–2022. 56% of the debt portfolio falls on Sberbank. The Company has liquidity sources enough for a full refinancing of the debt portfolio. At the end of 2019, the total debt of the Company, including pension liabilities, amounted to RUB 18.4 bln or 0.8x with respect to FFO before net interest (RUB 20 bln in late 2018). According to ACRA's estimates for 2020–2022, the total debt is expected to increase up to 1.3x of FFO before net interest, as the investment program will expand.

The Company's liquidity is assessed as good. As of November 1, 2020, the Company had RUB 72 bln under committed credit lines and loans. On December 17, 2020, the Company transferred RUB 12 bln (as a loan on market terms) to the cash-pooling system of Gazprom and that amount may be recalled by the Company at any time. TGK-1 is a part of Gazprom's unified treasury system, thanks to which it has access to liquidity.

High likelihood of support from the key shareholder. The Company's importance for Gazprom is explained by the role played by the electric power sector in the Gazprom's business, as well as by the strong position of the Company in electric power supplies to St. Petersburg, the second largest economic center of Russia. In the period from 2013 to 2017, the Gazprom group lent RUB 31 bln to the Company to finance its investment program and refinance loans. Gas supplies from Gazprom account for about 42% of the Company's expenses. On December 13, 2019, the Company became a part of the treasury and liquidity framework of Gazprom, and in 2020, it was granted the right to borrow up to RUB 20 bln.

Key assumptions

  • In 2020–2022, average price growth by 3% for electric power, indexation of tariffs for thermal power and gas by 4% and 3%, respectively; annual average inflation rate at 3.8%;
  • In 2020–2022, the Company to successfully implement its capital investment program for RUB 45.6 bln w/o VAT;
  • Dividend payouts of not more than 50% of the Company's net profits under IFRS.

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 positive rating action may be prompted by:

  • A decline in regulatory risks driven by the introduction of a long-term and transparent pricing framework amid an upgrade of the Company's fixed assets;
  • The average weighted FFO before net interest and taxes exceeding RUB 30 bln and the FFO margin before interest and taxes exceeding 25%;
  • Growing importance of the Company for Gazprom's business expressed in inclusion of cross-default provisions in Gazprom's obligations.

A negative rating action may be prompted by:

  • Loss of control over the Company by Gazprom or less tight corporate relationships between the Company and Gazprom;
  • Growing investment commitments of the Company and lower prices for electric and thermal power and higher prices for gas;
  • A less easy access to external sources of liquidity.

Rating components

SCA: aa-.

Support: Group — 2 notches up to the SCA.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations Under the National Scale for the Russian Federation, 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.

The credit rating of TGC-1 was published for the first time on January 22, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating is based on data provided by TGC-1, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and TGC-1 participated in its assignment.

No material discrepancies between provided data and data officially disclosed by TGC-1 in its financial statements have been discovered.

ACRA provided no additional services to TGC-1. No conflicts of interest were discovered in the course of credit rating assignment.

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