ACRA affirms AAA(RU) to PJSC ROSSETI, outlook Stable

The credit rating of PJSC ROSSETI (hereinafter, the Company, or Rosseti) has been affirmed on par with the financial obligations of the Russian Government due to the Company’s very high systemic importance for the Russian economy and the very high state influence on the Company.

Rosseti’s standalone creditworthiness assessment (SCA) at aa- is due to the Company’s monopolistic positions in the management of the Russian power grid complex, very high profitability, low leverage, and very high liquidity. The Company's SCA is restricted by, among others, substantial capital expenditures.

PJSC ROSSETI is a power grid operator in Russia. It consolidates 16 power grid companies:  FCG UES (managing high-voltage power transmission lines in Russia) and 15 subsidiaries that manage local power grids across Russia. The Company is a natural power grid monopoly, which tariffs are regulated by the government. The Company manages nine utilities companies as well. The state, represented by Rosimuschestvo, is the controlling shareholder with an 88% stake.

Key rating assessment factors

Strategic importance for the nation and state control over the Company. Rosseti is the monopoly operator of Russia’s power grid complex, the only sector in the power industry where the state retained shareholding control and direct government regulation after electricity market liberalization. Rosseti performs quasi-government functions in terms of social risk insurance (it assumes electricity retail sales if energy retailers go bankrupt), social support (cross-subsidizing in tariffs), technical policy, and power infrastructure development. In 2010–2017, the government invested RUB 72 bln into the Company, while subsidies totaled RUB 6.5 bln, and VEB.RF (AAA(RU), outlook Stable) purchased infrastructure bonds of the group’s companies for RUB 156 bln.

Infrastructure monopoly with moderate regulatory risk. The practice of holding down grid tariffs in order to sustain the overall electricity prices in Russia was used extensively in previous years as the share of the transmission tariff in the ultimate electricity price was high, and the state has retained direct regulation of grid tariffs. Tough tariff policy in the grid complex, including two tariff freezes in 2012 and 2014, has been in place since 2012. However, Rosseti improved its profitability in the above period and reduced its debt by optimizing operational and capital expenditures.

Low leverage. According to ACRA’s estimates for 2019–2022, the Company’s annual average ratio of total debt to FFO before net interest payments could amount to 1.8x. The Company will maintain the volume of its investment program in 2019–2020 at the levels of previous years, so that the leverage will not grow significantly. All of the Company’s debt is unsecured and ruble denominated; the public borrowings account for 51% of the total debt.

Weak cash flow. The Company’s annual average free cash flow could reach RUB 32 bln in 2019–2022. As capital expenditures go down, the cash flow has become positive. In ACRA's opinion, the investment to revenue ratio is to reach 27% in 2019. On average, 37% of the investment program is spent to maintain and upgrade fixed assets, 37% for new grid connections, and the remaining part for new construction projects, etc. As part of the Company's digitalization strategy until 2030, the capital investments may go up after 2021, but this growth is expected to be compensated by higher grid tariffs, and the Company's cash flow is to remain unaffected.

Key assumptions

  • Average tariff indexation rate remaining at 3%, the average inflation at 3.9% in 2020–2022;
  • The Company successfully implementing its investment program with annual investments of RUB 2030–245 bln (excl. VAT) in 2020–2022;
  • Dividend at the level of 2018 under the consolidated IFRS financial statements.

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:

  • The state's share in the Company's equity going below 50% + 1 voting share;
  • Significant decline of the Company's systemic importance for the Russian economy;
  • Significant decline in the state support to the Company under extraordinary conditions.

Rating components

Standalone creditworthiness assessment (SCA): аа-.

Support: on par with RF.

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 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.

The credit rating assigned to PJSC ROSSETI was published by ACRA for the first time on March 2, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned credit rating is based on the data provided by PJSC ROSSETI, information from publicly available sources as well as ACRA’s own databases. The assigned credit rating is based on the IFRS consolidated reporting of PJSC ROSSETI. The credit rating is solicited, and PJSC ROSSETI participated in its assignment.

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

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

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