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

The credit rating of PJSC FGC UES (hereinafter, the Company) is on par with the financial obligations of the Russian Government due to the high systemic importance of the Company for the Russian economy and the high influence of the state on the Company.

The standalone creditworthiness assessment (SCA) of аа is primarily based on the Company’s specific role as a monopolistic operator of the Unified National Electrical Grid, which is a strategic electric power infrastructure, as well as the Company’s high business profitability, low leverage, and high liquidity. The Company’s negative cash flow, which is a result of substantial capital investments as part of a major investment program aimed at improving the efficiency of fixed assets, limits the SCA.  

The Company 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 regional distribution companies, retail electricity supply companies, and large industrial enterprises, while technological connection services are consumed by power generating companies and large industrial consumers. PJSC ROSSETI owns 80.13% of shares in the Company, 19.28% are in free float, and 0.59% are owned by the Federal Agency for State Property Management of the Russian Federation.

Key rating assessment factors

Strategic importance for the nation and state control over the Company. The Company is a key element in Russia’s electric infrastructure, and its hypothetical failure would lead to outages in vast areas. The company is included in Russia’s list of systemically important organizations and it has provided power infrastructure for key strategic projects (the Olympic Games in Sochi, the Baikal-Amur Mainline, the Trans-Siberian Railway, etc.). The state has repeatedly provided financial support for such projects through contributions to authorized capital, as well as RUB 140 bln in infrastructure bond issues and their subsequent repurchase by State Development Corporation "VEB.RF" (previously Vnesheconombank). In accordance with Federal Law No. 35-FZ, dated March 26, 2003, “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 shareholder 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 (around 7%) and its high current tariff ensuring an average FFO before interest payments and taxes of 53.6%, which should mitigate negative consequences if tariffs are frozen. Sales risks are not substantial, as indicated by low levels of receivables overdue by more than one year, amounting to 3.5% of revenues for 2018 (4.3% in 2017). The Company’s investment program is extensive, as the Company spends on average around 40% of its revenues on it. Recent years have shown relative flexibility in the investment program, the scale of which can be significantly modified in adverse conditions. It was reduced by 40% in 2014–2015.

Moderate leverage. According to ACRA, total debt (including pension obligations) to FFO before net interest payments should equal 2.5x for 2019. This ratio should average around 2.4x annually for 2020–2021 (1.9x for 2018). The increase in debt is due to the financing of the Company's investment program, which is approved by the Ministry of Energy. The main source of financing for the investment program is tariffs, equaling 79%. The average maturity on the Company’s debt is 17.9 years and the effective borrowing rate as of June 30, 2019, was 6.93%. The Company’s high cash flow coverage on interest payments partially offsets the floating interest rate risk on long-term bonds. According to ACRA, FFO before net interest payments to interest payments should amount to 7.6x (8.9x for 2018) and average 9.1x annually for 2020–2021.

Negative cash flow and high liquidity. According to ACRA, the Company's free cash flow will average RUB -18 bln annually for 2019-2021 (RUB -267 mln in 2018), primarily due to high capital costs. ACRA assesses the Company’s liquidity as high. Debt to be repaid in the coming years will be moderate, as the Company is able to take out new loans. The Company has wide access to external sources of liquidity. As of September 30, 2019, the Company had open credit lines equaling RUB 75 bln and significant funds in accounts and deposits with banks equaling RUB 42.4 bln.

Key assumptions

  • Maintaining the average tariff indexation rate at 3% and the average inflation at 3.9% in 2020–2021;
  • Successful implementation in 2020–2021 of capital investments amounting to RUB 100-102 bln excluding VAT;
  • Dividend payments below 50% of IFRS net profit excluding actual investments made at the expense of net profit on electric power transmission, but not more than the volume stipulated in the investment program approved by the Ministry of Energy.

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 state control over the Company, in particular, a breach of the shareholder agreement with PJSC ROSSETI;
  • Significant decline in the systemic importance of the Company for the Russian economy;
  • Substantial decrease in financial support from the state and an increase in payments (dividends, etc.) in favor of PJSC ROSSETI.

Rating components

SCA: aa.

Support: on par with the RF.

Issue ratings

Certified exchange-traded interest-bearing unregistered bond issued by PJSC FGC UES (RU000A0ZYJ91), maturity date: October 23, 2052, issue volume: RUB 10 bln — АAА(RU).

Exchange-traded bond issued by PJSC FGC UES, series 001P-01R (RU000A0ZZQN7), maturity date: October 19, 2023, issue volume: RUB 10 bln — АAА(RU).

Regulatory disclosure

The credit ratings were assigned to PJSC FGC UES and bonds (RU000A0ZYJ91, RU000A0ZZQN7) issued by PJSC FGC UES 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, 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating assigned to PJSC FGC UES and credit ratings assigned to bonds (RU000A0ZYJ91, RU000A0ZZQN7) issued by PJSC FGC UES were first published by ACRA on November 28, 2017, December 12, 2017, and October 25, 2018, respectively.

The credit rating and credit rating outlook of PJSC FGC UES and the credit ratings assigned to bonds (RU000A0ZYJ91, RU000A0ZZQN7) issued by PJSC FGC UES are expected to be revised within one year following the publication date of this press release.

The assigned credit ratings are 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 ratings are solicited, and PJSC FGC UES participated in the rating process.

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.

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