ACRA affirms AAA(RU) to PJSC RusHydro, outlook Stable, and AAA(RU) to bond issues

The credit rating assigned to PJSC RusHydro (hereinafter, the Company) stems from the high systemic importance of the Company for the Russian economy, and the high degree of state influence on the Company’s creditworthiness, as defined in the ACRA's methodology. In view of the above, the credit rating is two notches higher than the standalone creditworthiness assessment (SCA) of the Company assessed by ACRA at "aa."

ACRA upgraded the SCA to "aa" on the expected decrease in the Company's leverage and growth in cash flow in the forecast period, after the Company passes its investment peak in 2019. The SCA is high because the Company operates the key components of the Russian power infrastructure (HPPs and the power system in the Far East), which is supported by the Company's very high profitability, low leverage and very high liquidity.

RusHydro is one of the world largest public hydroelectric power groups focused on electric and heat energy generation and sales on the wholesale and retail markets of Russia. The key shareholders of the Company are the Russian Government (60.6%) and Bank VTB (13.3%).

Key rating assessment factors

High systemic importance of the Company for the Russian economy and high state influence on the Company’s creditworthiness. High systemic importance is explained by the strong market positions the Company holds at the strategically important electric power market. In addition, the Company is entrusted with managing the federal electric power infrastructure and power supplies to the Far Eastern region of Russia. The high state influence is determined by the direct shareholding control of the Russian Government over the Company. The Government also determines the Company’s strategy, investment plans and dividend policy, and significantly influences the operations of the Group. The Government supports the Company regularly: in 2012–2018, the state provided the Company with RUB 247.4 bln in capital injections and subsidies; in 2019-2020, the capital injection is expected to reach RUB 13 bln, and the state support is expected to exceed RUB 88 bln in 2019–2021.

HPP segment drives very high profits and low price risks. The profitability of the Company exceeds the average level for Russian power generation companies. More than 90% of the Company's profits is generated by the two segments whose aggregate revenue share is estimated by ACRA at 28%: special tariffs for new HPPs (payments under power supply contracts (DPMs)) and spot sales of hydroelectricity on the day-ahead market. At the same time, about 48% of the Company's revenue is generated in the regulated sales segment, which is characterized by very low profitability, high regulatory risks, delinquent payments that require higher reserves. In 2019–2021, the Company's profitability will remain very high (the FFO margin before net interest and taxes of 26.9%) due to growing payments under DPMs and low prime cost of electricity generated by HPPs.

Well-developed corporate governance system hinges on the consistent implementation of the 2025 strategy of the Group; application of best practices in creating management bodies and motivation systems for managers and staff; conservative financial policy; high financial transparency. The corporate governance quality assessment is constrained by the complex structure of the Group, the high degree of intervention of the shareholder (state) in the strategic decision-making process, and by certain past risk events that were not prevented and caused a significant damage to the Company.

High leverage and strong debt service capacity. In 2018, the average leverage (calculated as the ratio of total debt to FFO before net interest payments) was 2.4x, and in 2019–2021, it will go down below 2.0x, while the average ratio for 2016–2021 is estimated at 1.95x. ACRA also assesses the Company's debt service capacity as strong. For the period from 2016–2021, the weighted average coverage of interest payments (calculated as the ratio of FFO before net interest payments to interest payments) is estimated at 9.9x.

Medium assessment of free cash flow and strong liquidity. In 2012–2018, the Company's free cash flow was negative due to high capital expenses and dividend payments. ACRA expects that in 2019–2021, the free cash flow will become positive with the Company passing over the peak of investments. The Company’s liquidity position is very high, which is supported by the substantial amount of cash and equivalents and undrawn credit lines for about RUB 223 bln committed by Russian banks.

Key assumptions

  • Wholesale electric power prices and tariffs to grow not slower than the inflation rate in the Russian Federation;
  • Total capital investments at about RUB 205 bln (incl. VAT) in 2019–2021;
  • Subsidies from the federal budget at RUB 88 bln in 2019–2021 and capital injections at RUB 13 bln;
  • Annual dividend payments at RUB 15.9 bln in 2019–2021.

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:

  • A weaker ties between RusHydro and the RF Government, leading to a lower permanent support and/or a lower likelihood of extraordinary support;
  • A lower SCA caused by (1) regulative changes in the industry affecting operating and/or financial profile of the Company; (2) deteriorating financial profile of the Company, which is able to increase leverage (expressed as the ratio of the total debt to FFO before net interest payments) above 4x and/or to decrease the coverage of interest payments (calculated as the ratio of FFO before net interest payments to interest payments) below 5x; and/or (3) lower liquidity of the Group.

Rating components

Standalone creditworthiness assessment (SCA): aa.

Support: state — 2 notches up to the SCA.

Issue ratings

PJSC RusHydro, unsecured loan participation notes, LPN (XS1691350455), maturity date: September 28, 2022, issue volume: RUB 20 bln — AАА(RU).

PJSC RusHydro, unsecured loan participation notes, LPN (XS1769724755), maturity date: February 15, 2021, issue volume: RUB 20 bln — AАА(RU).

PJSC RusHydro, unsecured loan participation notes, LPN (XS1912654677), maturity date: January 27, 2022, issue volume: RUB 15 bln — AАА(RU).

PJSC RusHydro, unsecured loan participation notes, LPN (XS1912655054), maturity date: November 21, 2021, issue volume: RMB 1.5 bln — AАА(RU).

Rationale. In ACRA’s opinion, the above bonds issued by RusHydro Capital Markets DAC, an Irish SPV, and provided as a loan to the Company are senior unsecured debt instruments of the Company. Bondholders will have a limited recourse to RusHydro Capital Markets DAC and, in determining the Company’s debt service ability, they will exclusively rely on its credit quality. ACRA ranks the bonds pari passu with other existing and future unsecured and unsubordinated debt instruments of the Company. In accordance with ACRA methodology, taking into account high creditworthiness and low leverage of the issuer, as well as absence of secured debt, ACRA applied a simplified approach, according to which the issue is rated AAA(RU), on par with RusHydro.

Regulatory disclosure

The credit ratings assigned to PJSC RusHydro and Euro bonds (XS1691350455, XS1769724755, XS1912654677, XS1912655054) issued by PJSC RusHydro 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, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. To assign the above issue credit ratings, ACRA also applied the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.

The credit ratings assigned to PJSC RusHydro and Euro bond (XS1691350455) issued by PJSC RusHydro were first published by ACRA on October 03, 2017 and the credit ratings assigned to Euro bond (XS1769724755, XS1912654677, XS1912655054) issued by PJSC RusHydro were first published by ACRA on February 15, 2018, November 28, 2018 and November 21, 2018, respectively. The credit rating of PJSC RusHydro and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.

The credit ratings are based on the data provided by PJSC RusHydro, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of PJSC RusHydro. The credit ratings are solicited, and PJSC RusHydro participated in their assignment.

Disclosure of deviations from approved methodologies: the industry profile factor was assessed with a deviation from the assessment range specified in the methodology, as PJSC RusHydro manages the diversified energy sector of the Far East.

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

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

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