The credit rating assigned to PJSC MOESK (the Company or MOESK) stems from the strong operating profile, high business profitability, moderate leverage, and strong liquidity. The rating is restricted by the negative free cash flow caused by substantial capital expenditures. The rating is backed by the high likelihood of extraordinary support from the key shareholder, PJSC "ROSSETI" (ACRA rating AAA(RU), outlook Stable).
MOESK is a regional electric power grid company operating in the territory of Moscow and Moscow region. The key shareholders of the Company are PJSC Rosseti (50.9%), PJSC Lider (an asset management company of NPF Gazfond) (17.6%), and Bank GPB (JSC) (9.8%).
High likelihood of extraordinary support from the key shareholder (PJSC Rosseti). MOESK is an infrastructure monopoly that supplies electricity to the Moscow region, a political and economic center of Russia. The Company's geographical coverage determines its strategic role in many state projects. For example, the power infrastructure accessibility indicators are used in the Doing Business rating of the Moscow region. In 2012, in his May decrees, the President of the Russian Federation set the objective to improve the Russia's rating, and it was this group of indicators (that are in the MOESK area of responsibility) that made the greatest progress in 2013–2018. For many years, MOESK has been the most profitable regional electric grid company in Russia, and no support has been required from its shareholders. However, certain cases of extraordinary support from Rosseti to its subsidiaries and affiliated companies (for example, in 2015–2016, Rosseti played a decisive role in securing the RUB 48 billion extraordinary capital injection for Lenergo, a regional electric grid company that supplies electricity to St. Petersburg and the Leningrad Region) indicate that, in a critical situation, such support is very likely to be provided.
Infrastructure monopoly with moderate regulatory risk. The fact that MOESK serves the Moscow region, the leading region among the regions of the Russian Federation in terms of socio-economic development, eliminates regulatory risks for the Company, as it reduces the likelihood of socio-political factors affecting tariff decisions and ensures a good level of payment discipline. Despite the fact that in the period from 2013 to 2017, tariffs in the Moscow region grew by an average of 5% per year but lagged behind inflation (7.8% on average over the period), such tariffs allowed the Company to keep a very high level of profitability: 30% by FFO before net interest and taxes. According to ACRA forecasts, the average growth in MOESK tariffs will be 3.6% in 2018–2020, which will ensure the average FFO margin before net interest and taxes of 25%.
High investment commitments and moderate FCF shortage. Operating cash flow is not enough to cover the entire investment program of MOESK. In 2015–2017, the ratio of the Company's investments to revenues reached 21% (the average figure for Rosseti was 22% in the same period) and it is expected to be about 17% in 2018–2021.
The Company's investments are moderately high, 30% higher than depreciation charges. ACRA expects the Company to keep its investments at a moderately high level, which is caused by new construction projects in the region, including the housing renovation project. According to ACRA forecasts, in 2018–2020, the Company's cash flow may become positive if the Company stops increasing its investment program.
Moderate leverage. As of March 31, 2018, the debt portfolio of MOESK amounted to RUB 91 billion (2.4x of FFO before net interest). The loan portfolio includes bond loans (49%) and bank loans (51%). The Company's leverage is assessed by ACRA as high. All liabilities are denominated in rubles, and they have fixed interest rates. The average debt maturity is three years. In 2019, the Company will need to repay almost half of the debt (taking into account the likelihood of repayment of the offer for bond loans). According to ACRA estimates, in 2018–2020, the total debt of the Company (including pension liabilities) will be around RUB 90 billion (2.1-2.5x of FFO before net interest).
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: group — SCA plus 2 notches.
No outstanding issues have been rated.
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 Relationships Between Rated Entities and the State, 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.
A credit rating has been assigned to PJSC MOESK for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (June 4, 2018).
The assigned credit rating is based on the data provided by PJSC MOESK, information from publicly available sources as well as ACRA’s own databases. The credit rating is solicited, and PJSC MOESK participated in its assignment.
Disclosure of deviations from the approved methodologies: the "company size" factor was assessed with the deviation from the assessment range set forth in the methodology.
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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