The credit rating assigned to PJSC FGC UES (the Company) is on par with the financial obligations of the Russian Government, which is caused by the very high systemic importance of the Company for the Russian economy and the very high influence of the state on the Company.
The Company’s standalone creditworthiness assessment (SCA) at ‘аа’ is based on the monopolistic control over the strategic electric power infrastructure, very high business profitability, low leverage, and very high liquidity. The SCA is restricted by the negative cash flow caused by substantial capital expenses.
The Company is the monopolistic operator of the Unified National Electrical Grid of Russia that transmits electric power through high-voltage power transmission lines and provides connections to electrical grids. The Company is a natural monopoly, and its tariffs are subject to state regulation. Key consumers of the Company’s power transmission services include power distribution and sales companies and large industrial enterprises, while grid connection revenues mainly come from power generation companies. 80.13% shares in the Company are owned by PJSC Rosseti, 19.28% by minority shareholders, and 0.59% by the Federal Agency for State Property Management of the Russian Federation.
Strategic importance for the nation and state control over the Company. The Company is a key element of the national electric infrastructure, a failure of which will lead to outages in vast areas. The Company has provided power infrastructure for the key strategic projects (the Olympic Games in Sochi, the Baikal-Amur Mainline, the Trans-Siberian Railway, etc.). The state has repeatedly provided financial support to such projects (through contributions to authorized capital, tariffs, infrastructure bond issues and their repurchase by VEB). In accordance with Federal Law dated March 26, 2003 No. 35-FZ “On Electric Power Industry,” the state’s direct or indirect share in the Company may not be less than 50% plus 1 share. The state exercises shareholding and operational control over the Company.
Infrastructure monopoly with moderate regulatory risk. Regulatory risk for the Company is offset by a small share of its services in electricity prices (6%), a high current tariff ensuring an average FFO margin before fixed charges and taxes of 61% (in 2014–2016), and a slowing down inflation in Russia, which reduces negative effects in the case tariffs are frozen. Sales risks relate to non-payments: receivables overdue for more than one year are moderate: 3.5% of revenues. The investment program is very extensive, as the Company spends 40% of its revenues on the investment program. The past years have demonstrated a relative flexibility of the investment program under adverse conditions: the investment program was cut down by 40% in 2014–2015.
Moderate leverage. According to ACRA estimates, in 2017, the ratio of debt to FFO before net interest will be 2.0, and in 2018–2019, the ratio will drop to 1.8 (the peak value of 3.3 was in 2013). 82% of debt obligations have maturities of five or more years, of which 60% have maturities of more than 30 years. 60% of the debt obligations are inflation-linked floating rate, which decreases the effective rate of the portfolio down to 6.5% (as of September 30, 2017). The floating interest rate risk is leveled by a very high coverage of interest payments by the cash flow. According to ACRA estimates, in 2017, the ratio of FFO before net interest to interest will be 7.5. The inflation’s slide to 4.5% in 2018–2019 (in the base case scenario of ACRA) will increase the coverage of interest payments to 9.4x.
Very weak cash flow. According to ACRA estimates, the Company’s cash flow will be negative in 2017-2018. ACRA expects that the cash flow may become positive in 2019. The key factor causing the negative cash flow is high capital expenses. Expiration of the Power Supply Contracts Program (“DPM”) and the new governmental priorities in promoting the upgrade of aging facilities should help the Company to stabilize capital expenses and transit to a positive cash flow. ACRA assesses the Company’s liquidity as very high: repayments will be moderate in the next few years (8.8% and 7.6% of the portfolio in 2018 and 2019, respectively). The Company has a wide access to external sources of liquidity, as undrawn credit lines amount to RUB 152.5 billion.
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:
Support: on par with RF.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation are 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 the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to PJSC FGC UES for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (November 27, 2017).
The assigned credit rating is based on the data provided by PJSC FGC UES, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated financial statements of PJSC FGC UES. The credit rating is solicited, and PJSC FGC UES participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSC FGC UES in its financial statements have been discovered.
ACRA provided no additional services to PJSC FGC UES. No conflicts of interest were discovered in the course of credit rating assignment.vided data and the data officially disclosed by PJSC FGC UES in its financial statements have been discovered.
ACRA provided no additional services to PJSC FGC UES. No conflicts of interest were discovered in the course of credit rating assignment.
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