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 free 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 decline in electric power consumption in March–May 2020 resulting from the quarantine measures and the overall decline in economic activity is of a limited nature. Furthermore, the impact of the aforementioned factors on the Company’s operating activities is insignificant because demand elasticity is low.

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 the 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 (Rosimushchestvo).

In 2020, the functions of the sole executive body of FGC UES were transferred to PJSC ROSSETI. At the same time, the shareholder agreement between PJSC ROSSETI and Rosimushchestvo on the procedure for managing and voting using shares in FGC UES remained in force.

Key rating assessment factors

Strategic importance for the state and state control over the Company. The Company is a key element in Russia’s electric power infrastructure, and its hypothetical failure would lead to outages in vast areas. The Company is one of Russia’s systemically important organizations and has provided power infrastructure for key strategic projects such as the Olympic Games in Sochi, the Baikal-Amur Mainline, and 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 the 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 the 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%, 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 three months, amounting to 2.8% of revenues in 2019. 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. This year, the investment program was reduced due to a change in the schedule for the technological connection to the Unified National Electric Grid made by the applicants.

Low leverage. ACRA forecasts that total debt (including pension obligations) to FFO before net interest payments should equal 2.4x in 2020. This ratio should average around 2.5x annually in 2021–2022 (1.9x in 2019). The increase in debt is due to the financing of the Company’s investment program. The main source of financing for the investment program is tariffs. The average maturity on the Company’s debt is 17 years. The effective borrowing rate as of June 30, 2020 was 5.3%. 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 8x in 2020 (7.6x in 2019) and average 7.8x annually in 2021–2022.

Negative free cash flow and high liquidity. According to ACRA, the Company’s free cash flow will be negative in 2020–2022 (in 2019 it was RUB 7.4 bln), 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 and the Company is able to take out new loans. The Company has wide access to external sources of liquidity. As of September 30, 2020, the Company had open credit lines equaling RUB 100 bln and significant funds in accounts and deposits with banks equaling RUB 50.9 bln.

Key assumptions

  • Maintaining the average tariff indexation rate at 3% and the average inflation at 3.3% in 2021–2022;
  • Implementation of capital investments in full and according to deadlines (RUB 325 bln excluding VAT in 2020–2022);
  • Dividends of no more than 50% of adjusted IFRS or RAS net profit (whichever is higher).

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: аа.

Support: on par with the RF.

Issue ratings

Bond issued by PJSC FGC UES (RU000A0ZYJ91), maturity date: October 23, 2052, issue volume: RUB 10 bln — АAА(RU).

Bond issued by PJSC FGC UES (RU000A0ZZQN7), maturity date: October 19, 2023, issue volume: RUB 10 bln — АAА(RU).

Bond issued by PJSC FGC UES (RU000A101CL5), maturity date: January 11, 2035, issue volume: RUB 15 bln — АAА(RU).

Bond issued by PJSC FGC UES (RU000A101LX1), maturity date: April 11, 2035, issue volume: RUB 15 bln — АAА(RU).

Bond issued by PJSC FGC UES (RU000A1028T1), maturity date: October 2, 2035, issue volume: RUB 10 bln — АAА(RU).

Regulatory disclosure

The credit ratings have been assigned to PJSC FGC UES and the bonds (ISIN RU000A0ZYJ91, ISIN RU000A0ZZQN7, ISIN RU000A101CL5, ISIN RU000A101LX1, ISIN RU000A1028T1) 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 for the Russian Federation was also applied to assign credit ratings to the above issues.

The credit rating of PJSC FGC UES and the credit ratings of the bonds (ISIN RU000A0ZYJ91, ISIN RU000A0ZZQN7, ISIN RU000A101CL5, ISIN RU000A101LX1, ISIN RU000A1028T1) issued by PJSC FGC UES were published by ACRA for the first time on November 28, 2017, December 12, 2017, October 25, 2018, January 30, 2020, April 29, 2020, and October 10, 2020, respectively.

The credit rating and credit rating outlook of PJSC FGC UES and the credit ratings of the bonds (ISIN RU000A0ZYJ91, ISIN RU000A0ZZQN7, ISIN RU000A101CL5, ISIN RU000A101LX1, ISIN RU000A1028T1) issued by PJSC FGC UES are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned 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 the IFRS consolidated financial statements of PJSC FGC UES. The credit ratings are solicited, and PJSC FGC UES participated in their 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.

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