Fitch Upgrades PJSC Mosenergo to 'BBB-'; Outlook Stable
12 Dec 2016 11:20 AM
Fitch Ratings-Moscow/London-12 December 2016: Fitch Ratings has upgraded PJSC Mosenergo's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+'. The Outlook is Stable. A full list of rating actions is at the end of this release.
The upgrade reflects Mosenergo's improved credit metrics and Fitch's expectations that the company will maintain a robust financial profile over 2016-2020. The standalone profile is now at 'BB+' and also reflects the company's strong market position in Moscow and the Moscow region, fairly strong efficiency compared with the Russian average, and the expected contribution to cash-flow stability of operations under capacity supply agreements (CSAs).
Mosenergo's 'BBB-' rating continues to incorporate a one-notch uplift for parental links with its majority shareholder (53.5%), Gazprom Energoholding (GEH) and ultimately PJSC Gazprom (BBB-/Stable), which is the sole owner of Gazprom Energoholding.
KEY RATING DRIVERS
Strong Financial Profile
The upgrade is supported by the fact that Mosenergo outperformed our forecasts for 2015 and is likely to outperform our 2016 projections. We expect the company to maintain strong credit metrics over 2016-2020 due to capex moderation following the completion of investments in new capacity and relatively stable cash-flow generation under the CSAs. This is in spite of an expected dividend payout ratio of 50% over 2017-2020. We expect funds from operations (FFO) net adjusted leverage to be below 1.5x on average over 2016-2020 (1.7x in 2015) and FFO fixed charge cover to be around 7.0x (6.2x in 2015) on average for the same period.
CSAs Support Cash Flows
Stable earnings and a guaranteed return for capacity sales under the CSAs are the key factors that mitigate Mosenergo's exposure to market risk, support the stability of its cash-flow generation and enhance its credit profile. The company estimates that the newly commissioned units operating under the CSAs contributed 57% of its 2015 EBITDA, which is the largest share of EBITDA among Russian generating companies.
The consistent application of the CSA regulatory framework for Russian generating companies during the recent economic crisis contributed to an improving record in its implementation. In addition, the auctions for capacity sales on the competitive capacity market set the capacity payments over a four-year period (2017-2019 and 2020) adding to the predictability of generators' cash flows. However, we continue to view Russian regulatory risk for the power sector as high compared to the regulatory frameworks in western European countries.
Moderate Capex, Higher Dividends Expected
The completion of expansion capex in 2016 should contribute to Mosenergo's financial flexibility. We expect the company to turn FCF positive from 2016. We assumed average annual investments of RUB12bn over 2016-2020, which is below the average annual capex over 2012-2015 but is well above the company's maintenance capex. We also assumed the dividend payout ratio of 50% from 2017 in line with other Russian state-owned companies.
In 2015-2016 Mosenergo disposed of its 90.5% stake in OGK-Investproekt. OGK-Investproekt was a JV between Mosenergo (90.5% stake in the JV) and OGK-2 (9.5%), both are ultimately majority owned by PJSC Gazprom through GEH. The transaction was held in two stages with the sale of a 45.5% stake to OGK-2 for RUB2.8bn in December 2015 and the sale of the remaining 45% stake for RUB2.8bn in March 2016.
However, the terms of the transaction foresee deferral of payment until 2017-2018. This will result in a total payment to Mosenergo of about RUB6.6bn over 2017-2018 and the repayment of the JV's debt to Mosenergo of more than RUB10bn over 2018-2025.
Strong Business Profile
Mosenergo's standalone rating reflects its strong market position in Moscow and the Moscow region (60% of electricity supplies and almost 70% of heat supply), the favourable location of its operations and fairly good-quality asset base, which is arguably an industry benchmark. The company's dominates electricity and heat sales in its region, which is where consumption growth is among the strongest, supported by its higher-than-average income per capita. This does not fully offset the company's exposure to electricity demand volatility, but it can alleviate the impact if electricity sales decline.
Single-Notch Uplift for Parental Links
We continue to assess the ties between the company and its ultimate majority shareholder as moderate. The strength of the ties is supported by Mosenergo's integral role in Gazprom's strategy of vertical integration and the fact that it contributed almost half of Gazprom Energoholding's EBITDA in 2015.
Mosenergo's rating is supported by its strong business and financial profile compared to Russian peers. It operates on a smaller scale and is less geographically diversified than Inter RAO or Atomenergoprom, but it benefits from a strong market position in electricity and heat sales in Moscow and the Moscow region, the most lucrative region in Russia, and its relatively good quality assets. Mosenergo's relatively stable cash-flow generation is supported by the capacity sales under CSAs, which accounts for the largest share of EBITDA (57% in 2015) compared to other Russian generating companies. The rating incorporates a one-notch uplift reflecting the links with its parent.
Fitch's key assumptions within our rating case for the issuer include:
- Domestic GDP decline of 0.4% and inflation increase of 6.1% in 2016 and by 1.3% and 5.8% in 2017, respectively
- Net power output marginal growth at CAGR of 2% over 2016-2019
- Gas tariffs indexation of 2% from July 2016, and around 3% over 2017-2019
- Power prices growth slightly below gas prices increase over 2016-2019
- Electricity tariffs to increase below inflation
- Dividends of 50% of net income under IFRS starting from 2017, which is higher than the currently approved dividend policy of 35% from net income under RAS
- Capex in line with management's forecast for 2016-2017 and around RUB13bn (net of VAT) over 2018-2020
- The cash inflow of RUB6.6bn for the sale of a 90% stake in OGK-Investproekt to PJSC OGK-2 within 2017-2018
- Debt split by FX assumed to be in line with 1H16 breakdown.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- A positive rating action is unlikely and could only follow the sovereign's and Gazprom's upgrade.
- A more transparent and predictable regulatory framework, coupled with the company's strong financial profile, could be positive for the standalone rating.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Evidence of weaker parent links, Russia's downgrade.
- Margin squeeze due to the rise of domestic gas prices not being fully compensated by growth in electricity and heat prices, weak working-capital management, significant debt-funded acquisitions and/or an intensive capex programme that would lead to a material deterioration in the company's credit metrics (eg FFO net adjusted leverage above 2.5x and FFO fixed charge cover below 5x on a sustained basis).
Mosenergo's cash position of RUB19.5bn at end-1H16 was not sufficient to cover its short-term maturities of RUB23.2bn, which accounted for about 50% of total debt. However, the company also has access to uncommitted credit facilities for RUB45.2bn from Russian banks, including state-owned VTB for RUB16.8bn and Gazprombank for RUB25bn. We also expect the company to be FCF positive from 2016.
Under its credit facilities Mosenergo does not pay commitment fees, which is common practice in Russia. For the purpose of the liquidity calculation in the liquidity tables we do not include uncommitted credit lines. However, we expect funding from state-owned bank to be available to the company.
Manageable FX Risk
The share of euro-denominated debt in total debt decreased to 29% at end-1H16 from 61% in 2012, but Mosenergo remains exposed to FX risk as its revenue is generated on the domestic market and it does not hedge its FX exposure. However, we do not view FX risk as a credit concern due to the group's strong financial profile, which has significant headroom to absorb FX shocks.
FULL LIST OF RATING ACTIONS
Long-Term Foreign-Currency IDR upgraded to 'BBB-' from 'BB+', Outlook Stable
Short-Term Foreign-Currency IDR upgraded to 'F3' from 'B'
Long-Term Local-Currency IDR upgraded to 'BBB-' from 'BB+', Outlook Stable
National Long-Term Rating upgraded to 'AA+(rus)' from 'AA(rus)', Outlook Stable
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Summary of Financial Statement Adjustments
EBITDA: Adjustments on historical data relate primarily to adjustments for non-cash items as impairment loss on PP&E (RUB10.3bn) and charge of litigations provision (RUB1.6bn).
Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)
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