ACRA AFFIRMS AA+(RU) TO TGC-1, OUTLOOK STABLE, AND ASSIGNS AA+(RU) TO THE SERIES BO-001P-01 (RU000A105NB4) BOND ISSUE OF TGC-1

The credit rating of TGC-1 (hereinafter, the Company, or TGC-1) has been affirmed based on the Company’s adequate market position, which is explained by TGC-1’s successful operations in Russia’s north-western electric power generation and heat supply markets, including Saint Petersburg, the Leningrad Region, the Murmansk Region, and the Republic of Karelia, good business profile, and high geographic diversification (presence in regions with a predominantly high level of socio-economic development). The Company has good corporate governance, and the financial risk profile is characterized by high business profitability, low leverage, and good liquidity. The rating is constrained by the medium size of business and regulatory risks. The rating is supported by the high likelihood of extraordinary support from PJSC “GAZPROM” (ACRA rating AAA(RU), outlook Stable), the sole shareholder of Gazprom energoholding LLC.

The Company’s standalone creditworthiness assessment (SCA) has been changed from aa- to a+ due to free cash flow (FCF) turning negative in the medium term amid higher capital investments in 2021–2024 compared to 2020 in order to carry out new investment projects, including RES Capacity Supply Agreements (CSAs) and the Competitive Selection of Modernization Project, and the deterioration of a number of indicators. This deterioration is due to the completion of payments for CSAs and the growth of the Company’s expenses outstripping its revenues. FFO before net interest payments and taxes has been declining since 2020 (RUB 27.6 bln in 2019, RUB 24.5 bln in 2020, RUB 23.2 bln in 2021, RUB 17.4 bln for 9M 2021, RUB 16.9 BLN for 9M 2022) along with profitability (28.4% in 2019, 27.5% in 2020, 22.7% in 2021, 24.2% for 9M 2021, and 23% for 9M 2022). ACRA also notes that the Company’s financial transparency has worsened as in 2022 it refused to make its IFRS financial reporting public, and that the debt structure is concentrated on one lender and the peak of repayments is scheduled for 2023.

In 2022, the Agency expects the Company’s key metrics to decline compared to last year, in particular, lower electricity generation amid a decline in business activity triggered by sanctions, which will continue into 2023. Nevertheless, given the assessment of the Company’s risk profile, the Agency expects TGC-1 to maintain its operational stability and ensure that the power systems in the regions of presence are stable for at least the next 12 months.

TGC-1 is the second largest electric power generating company (after Rosenergoatom) and the largest thermal power generator operating in the north-west of Russia. The total installed capacity of the Company’s power plants is 6.9 GW, including 2.9 GW for HPPs and 4.0 GW for CHPPs, and 13,500 Gcal/h. The Company occupies about 35% of the electric power market in its regions of presence. TCG-1 supplies thermal power to Saint Petersburg (with a market share of 42.1%) and some municipalities of the Leningrad Region, Murmansk Region, and the Republic of Karelia. The TGC-1 group includes three branches and two subsidiaries engaged in electricity and thermal power generation and thermal power transmission. The main shareholders of TGC-1 are Gazprom energoholding LLC (51.79%) and Fortum Power and Heat Oy (29.45%).

key assessment factors

High profitability and low price risks. TGC-1’s FFO margin before interest payments and taxes declined to 23% in 2021 (from 27.5% in 2020). ACRA expects this indicator to have declined again by the end of 2022. This is due to the expiration of CSA payments for newly commissioned TPPs and expenses growing faster than revenues. In the future, the margin is expected to stabilize and possibly grow after the Company carries out capital investments aimed at the upgrade and phased replacement of fixed assets. In 2021, TGC-1’s revenues grew by 15.1% year-on-year and amounted to RUB 102.3 bln. This growth of revenues was driven by an increase in electricity and heat generation amid colder weather and the removal of restrictions related to the COVID-19 pandemic. According to ACRA’s assessments, in 2022 the Company’s revenues will grow by 4.7% year-on-year to RUB 107.1 bln, mainly due to price growth and tariff indexation. The amount of receivables overdue for more than six months was 9.1% of revenues in 2021. TGC-1 is subject to certain regulatory risks, as the share of electricity supplied by the Company under regulated tariffs is about 20% and that for thermal power is 100%.

Good geographic diversification and corporate governance. The Company’s regions of presence are Saint Petersburg, the Leningrad Region, the Murmansk Region, and the Republic of Karelia. Good geographic diversification is complemented by a high level of socio-economic development in virtually all of these regions. The Company adheres to the power industry strategy of PJSC “GAZPROM” for 2018–2027. Planning is carried out on a three-year horizon by preparing a business plan for production and financial and economic results. The Company’s board of directors approves the plan for the forthcoming year and financial results are set out in senior management’s KPIs. The Company has a Corporate Governance Code and a number of related provisions. A full-fledged risk management system is in place. Most of the members of the board of directors are representatives put forward by Gazprom energoholding LLC (seven representatives), in addition to four representatives of Fortum Power and Heat Oy. Three members of the board are independent. Gazprom energoholding LLC has acted as the sole executive body of TGC-1 since September 30, 2019. The financial transparency assessment is not at the highest level because the Company decided not to publish IFRS financial reporting in 2022.

Moderate investment commitments. The Company’s financing of investments (under IFRS) in upgrading its fixed assets grew by 22.6% in 2021 and amounted to RUB 17.1 bln excluding VAT (vs. RUB 13.9 bln excluding VAT in 2020). All current capital expenses are used to rebuild and upgrade the core power generating and transmitting assets. The ratio of financing of investments under IFRS to revenues amounted to 17% in 2021 (14% and 16% in 2019 and 2020, respectively). ACRA expects the volume of financing of investments under IFRS to grow in 2022–2023 and average 20% of revenues annually. The wear and tear of the Company’s fixed assets is assessed as moderate. As part of the CSA program, the Company has upgraded about 25% of its generating assets, and is actively participating in another generating assets modernization program (KOMMod). The TGC-1’s annual investments exceed its depreciation charges.

Free cash flow. In 2021, the Company’s FCF was negative at RUB -2.9 bln (vs. RUB 3.6 bln in 2020). According to ACRA’s forecast, in 2022–2023, the Company’s FCF may be negative in view of, among other things, growing investments and declining payments under CSA contracts. Investments are growing as the Company is taking part in the government’s KOMMod and RES CSA programs.

Low leverage and good liquidity. As of November 1, 2022, the Company’s debt portfolio amounted to RUB 15.1 bln and was entirely made up of bank loans. 89% of the Company’s liabilities are subject to repayment in 2023; a single creditor accounts for 66% of the debt portfolio. The Company’s liquidity sources are sufficient to completely refinance the debt portfolio. TGC-1 has not issued any guaranties or sureties. At the end of 2021, the Company’s total debt, including pension liabilities, amounted to RUB 18.2 bln or 0.9x with respect to FFO before net interest payments (0.8x in 2019).

The Company’s liquidity is assessed as good. As of November 1, 2022, the Company had RUB 76.2 bln under committed credit lines and loans. As of November 1, 2022, the Company had transferred RUB 5.5 bln (as a loan on market terms) to the cash pooling system of PJSC “GAZPROM” and that amount may be recalled by the Company at any time. TGK-1 is a part of the unified treasury system of PJSC “GAZPROM”, thanks to which it has access to liquidity.

High likelihood of extraordinary support from the key shareholder. The Company’s importance for Gazprom is related to the role played by the electric power sector in the business of PJSC “GAZPROM”, as well as by the unique position of the Company in supplying electric power to Saint Petersburg, the second largest economic center of Russia. In the period from 2013 to 2017, the PJSC “GAZPROM” group lent RUB 31 bln to the Company to finance its investment program and refinance loans. Since December 2019, the Company has been part of the treasury and liquidity framework of PJSC “GAZPROM”. PJSC “GAZPROM” has granted the Company the right to borrow up to RUB 21.8 bln.

key assumptions

• The Company successfully implementing its capital investment program in line with targets;

• Dividend payouts of no more than 50% of the Company’s net profits under IFRS.

potential outlook or rating change factors

The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

• Decline in regulatory risks driven by the introduction of a long-term and transparent pricing framework, as well as upgrade of the Company’s fixed assets, coupled with improvement of the structure of debt and the weighted FCF margin exceeding 3%;

• Weighted FFO before net interest payments and taxes exceeding RUB 30 bln and weighted FFO margin before net interest payments and taxes exceeding 25%, coupled with improvement of the structure of debt and the weighted FCF margin exceeding 3%;

• Growing importance of the Company for the business of PJSC “GAZPROM”, including expressed in inclusion of cross-default provisions in the obligations of PJSC “GAZPROM”.

A negative rating action may be prompted by:

• Loss of control over the Company by PJSC “GAZPROM” or a looser relationship between the Company and PJSC “GAZPROM”;

• Growing investment commitments of the Company and lower prices for electric and thermal power and higher prices for gas;

• Significant deterioration of access to external sources of liquidity.

rating components

SCA: а+.

Support: Group — SCA plus three notches.

ISSUE RATINGS

Rationale. The issue represents senior unsecured debt of the Company. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Company in terms of priority. As per ACRA’s methodology, the credit rating of the issue is on par with that of the Company, i.e. AA+(RU).

key issue properties

Sources: ACRA, issuer’s data

regulatory disclosure

The credit rating has been assigned to TGC-1 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, Methodology for Analyzing Rated Entities Associated with a State or a Group, 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 Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.

The credit rating of TGC-1 was published by ACRA for the first time on January 22, 2018. A credit rating has been assigned to the series BO-001P-01 (RU000A105NB4) bond issue of TGC-1 for the first time. The credit rating of TGC-1 and its outlook and the credit rating of the series BO-001P-01 (RU000A105NB4) bond issue of TGC-1 are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on data provided by TGC-1, information from publicly available sources, and ACRA’s own databases. The credits ratings are solicited, and TGC-1 participated in their assignment.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to TGC-1. No conflicts of interest were discovered in the course of credit rating assignment.