The credit rating of TGC-14 PJSC (hereinafter, TGC-14 or the Company) has been downgraded due to the projected growth of leverage and debt service costs, growing number of related-party transactions (Far Eastern Management Company JSC (FEMC JSC) and Spetsavtokhoziaystvo JSC), and increasing expenditures on capital investments as the Company enters the investment cycle of development. The Company has begun, among other things, implementing projects within the framework of the CSC NGF (competitive selection of capacity of new generating facilities) for the construction of two power units at its Ulan-Ude CHP-2, which are characterized by high capital intensity and penalties for failure to comply with the parameters of their implementation.
TGC-14 is currently carrying out large-scale work on the implementation of measures aimed at applying instruments for optimizing expenses on financing the said projects. Uncertainty related to the estimated costs of projects, which increase may potentially result in the need for additional borrowings, as well as to the timing, formats and results of the implementation of the above measures, including the parameters of project financing, is the reason why the outlook has been changed to Negative.
At the same time, TGC-14 maintains a strong position in heat supply services in the area of operation (the Republic of Buryatia and the Zabaykalsky Krai), as well as its adequate business profile and corporate governance that meets the industry standards. Geographic diversification reflects the level of socioeconomic development of TGC-14’s regions of presence. The profitability assessment is above medium. The Company’s credit rating is constrained by, among other things, the size of business, systemic regulatory risks, and the projected metrics for leverage, debt service, free cash flow (FCF), and capital expenditures related to a significant increase in the Company’s capital expenditure program.
TGC-14 is a regional producer and supplier of electricity and heat in the Republic of Buryatia and the Zabaykalsky Krai. The installed electric power of its production assets is 650 MW, the heating power is 2,866 Gcal/h, and the length of heating networks is 941 km. The Company’s main shareholder is FEMC JSC. In December 2023, FEMC JSC was vested with the powers of the sole executive body of TGC-14.
KEY ASSESSMENT FACTORS
Strong position in heat supply. TGC-14 is the largest heat supplier in the Zabaykalsky Krai and the Republic of Buryatia, with a market share of 26% and 31%, respectively. The Company is the sole heat supplier in Chita and Ulan-Ude. The Company owns seven power plants, 45 boiler houses, and heat supply networks. TGC-14 also produces about 35% and 11% of the electricity in the Zabaykalsky Krai and the Republic of Buryatia, respectively.
Adequate business profile. The Company’s regulatory risk is assessed as moderate, since most of its revenues are subject to tariff regulation, which may be affected by non-economic factors or untimely tariff changes. The current regulatory framework provides for coverage of the operational and capital expenses of TGC-14, as well as a weighted FFO margin at around 15–20% before net interest payments and taxes, according to the Agency’s calculations. The sales risks are assessed as low. The quality of the Company’s fixed assets is assessed as medium.
Adequate geographic diversification and corporate governance. The geographic diversification assessment is determined by the degree of economic development of the regions of presence. TGC-14’s development strategy until 2025 inclusive is aimed at maintaining and upgrading the operating assets and improving production and economic efficiency. The Company is currently working on a new, post-2025 strategy, aimed at broadening production capacity in the regions of presence, digitalization, and developing human capital. The Company has an internal control and risk management service. Each risk is assigned a risk owner who is responsible for identifying it. After the accident at the Company’s Ulan-Ude CHP-1, the approach to risk identification and specification was changed in order to ensure effective risk management and prevention. In December 2021, the Company’s shareholder structure changed — ownership of TGC-14 passed from the subsidiaries of JSCo “RZD” to FEMC JSC. The shareholders of FEMC JSC are deeply involved in the Company’s activities. In 2024, FEMC JSC sold part of its stock, after which its stake declined from 92.44% to 79.28%. TGC-14 has a management board, as well as a board of directors consisting of 11 members, five of whom are independent. In 2024, the Company changed its financial statement auditor, which led to the need to recalculate the Company’s IFRS financial statement data for 2023. TGC-14 discloses IFRS financial statements and annual reports in compliance with industry standards.
Business size and profitability. The Company’s FFO before net interest payments and taxes, as calculated according to ACRA’s methodology, grew to RUB 3.8 bln in 2024 from RUB 2.7 bln in 2023. The growth was mainly driven by the receipt of subsidies. The Agency expects the weighted average value of the indicator to be RUB 5.7 bln in 2025–2027, mainly due to subsidies to compensate for tariff differences. The Company’s FFO margin before net interest payments and taxes grew to 20% in 2024 (vs. 15% in 2023), and ACRA expects the weighted average margin to be 25% in 2025–2027 if subsidies are received as per the Company’s calculations.
Leverage and coverage. As of March 5, 2025, the Company’s debt portfolio was estimated at RUB 13.8 bln and was diversified by lenders. Currently, TGC-14 has no guarantees or sureties issued. At the end of 2024, the total debt of TGC-14 (including pension obligations and leases) amounted to RUB 9.9 bln or 2.8x of FFO before net interest payments. In 2025–2027, according to ACRA’s estimates, the Company’s leverage is expected to grow to an average weighted 4.4x.
At the end of 2024, the coverage ratio (FFO before net interest payments to interest payments) amounted to 3.1x. ACRA expects this ratio to decrease to an average of 1.2x in 2025–2027 due to an increase in TGC-14’s leverage and key rate hikes by the Bank of Russia, which drive debt service costs up.
Liquidity and FCF. As of March 5, 2025, the Company had free debt limits and cash. In 2024, the Company’s FCF calculated according to ACRA’s methodology amounted to RUB -0.7 bln vs. RUB 2.4 bln a year earlier. This decline was mainly due to higher dividend payments and capital expenditures. The Agency expects that FCF to be negative in 2025–2027 due to growth of capital expenditures.
The ratio of the Company’s investments to revenues was 16% in 2024 (vs. 10% in 2023). ACRA expects that the weighted average volume of investments will grow to 48% in 2025–2027.
KEY ASSUMPTIONS
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Implementation of the Company’s capital investment program in 2025–2027 as planned;
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Dividends to be paid in 2025 as declared, and FEMC JSC to repay all of its debt obligations to the Company out of these dividends this year;
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No dividend payments from 2026 onwards;
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The Company maintaining its current liquidity positon;
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The Company receiving annual subsidies of at least RUB 1,455 mln to cover inter-tariff differences in 2025–2027;
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Permanent balance of RUB 3.5 bln in the Company’s accounts needed to redeem the bond issue in 2026;
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The Company obtaining a positive state expert opinion on the projects for the construction of two power units at Ulan-Ude CHP-2 (for unit No. 1 — July 2025, for unit No. 2 — March 2026);
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State expert commission confirming the estimated cost of no more than RUB 38.2 bln for the projects for the construction of two power units at Ulan-Ude CHP-2 (for unit No. 1 — July 2025, for unit No. 2 — March 2026);
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The Company attracting at least RUB 30.4 bln for the implementation of the projects for the construction of two power units at Ulan-Ude CHP-2 until January 1, 2026.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Negative outlook assumes that the rating will highly likely be downgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Weighted leverage (ratio of total debt to FFO before net interest payments) declining below 2.0x;
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Weighted coverage (FFO before net interest payments to interest payments) exceeding 2.5x.
A negative rating action may be prompted by:
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Weighted ratio of total debt to FFO before net interest payments exceeding 6.0x;
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Weighted coverage declining below 1.0x;
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The Company losing its status of the sole heat supplier in Chita and Ulan-Ude;
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Dividends in 2025 exceeding the declared amounts;
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FEMC JSC failing to repay all of its debt obligations to the Company in 2025;
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Significant deterioration of access to external liquidity sources;
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The Company not receiving annual subsidies of at least RUB 1,455 mln to cover inter-tariff differences in 2025–2027;
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No permanent balance of RUB 3.5 bln in the Company’s accounts needed to redeem the bond issue in 2026;
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The Company not obtaining a positive state expert opinion on the projects for the construction of two power units at Ulan-Ude CHP-2 (for unit No. 1 — July 2025, for unit No. 2 — March 2026);
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State expert commission not confirming the estimated cost of no more than RUB 38.2 bln for the projects for the construction of two power units at Ulan-Ude CHP-2 (for unit No. 1 — July 2025, for unit No. 2 — March 2026);
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The Company not attracting at least RUB 30.4 bln for the implementation of the projects for the construction of two power units at Ulan-Ude CHP-2 until January 1, 2026.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Support: none.
ISSUE RATINGS
No outstanding issues have been rated.
REGULATORY DISCLOSURE
The credit rating has been assigned to TGC-14 PJSC under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Non-Financial Corporations under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The assessment of the economic development of the rated entity’s regions of presence was determined based on the principles of the Methodology for Assigning Credit Ratings to Regions and Municipal Entities of the Russian Federation.
The credit rating of TGC-14 PJSC was published by ACRA for the first time on May 17, 2023. The credit rating of TGC-14 PJSC and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on data provided by TGC-14 PJSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and TGC-14 PJSC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
The decision to downgrade the credit rating of TGC-14 PJSC to BBB(RU) and to change the outlook to Negative was made at a repeated meeting of the rating committee following ACRA’s review of a reasoned appeal by the rated entity against the decision of the initial rating committee to downgrade the credit rating of TGC-14 PJSC to BBB-(RU) and to change the outlook to Developing in view of the improved liquidity assessment. TGC-14 PJSC has provided new additional information on potential sources of liquidity and compensation for inter-tariff differences. As a result, the repeated meeting of the rating committee has taken into account the abovementioned new additional information when determining the credit rating. Other rating factors have not changed.
ACRA provided additional services to TGC-14 PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
