The credit rating assigned to PJSC RusHydro (hereinafter — RusHydro, or the Company, or the Group) stems from the high systemic importance of the Company for the Russian economy, and the high degree of state influence on the Company’s creditworthiness, as defined in the ACRA methodology. In view of the above, the credit rating is three notches higher than the standalone creditworthiness assessment (SCA) of RusHydro assessed by ACRA at aa-.
The RusHydro’s SCA (aa-) is based on the key components of the power infrastructure of Russia (HPPs and the power system of the Russian Far East) managed by the Company, very high profitability, moderate leverage, and very strong liquidity. The SCA is restricted by the negative cash flow expected at the 12 to 24-months horizon, which is caused by substantial capital investments.
RusHydro is one of the world largest public hydroelectric power groups focused on electric and heat energy generation and sales on the wholesale and retail markets of Russia. The key shareholders of the Company are the Russian Government (60.6%) and Bank VTB (13.6%).
Key rating assessment factors
High systemic importance of the Company for the Russian economy and high state influence on the Company’s creditworthiness. High systemic importance is explained by the strong market positions the Company holds at the strategically important electric power market. In addition, the Company is entrusted with managing the federal electric power infrastructure and power supplies to the Far Eastern region of Russia. The high state influence is determined by the direct shareholding control of the Russian Government over RusHydro, as 12 of 13 members of the board of directors of the Company were appointed by the Government. The Government also determines the Company’s strategy, investment plans and dividend policy, and significantly influences the operations of the Group. The Government supports the Company regularly: in 2012–2017, the state provided the Company with RUB 206 bln in capital injections and subsidies, and the state support is expected to be at RUB 138 bln in 2018–2020.
HPP segment drives high profits and low price risks. The profitability of RusHydro exceeds the average level for Russian power generation companies. More than 90% of the Company's profits is generated by the two segments whose aggregate revenue share is estimated by ACRA at 21%: special tariffs for new HPPs (payments under power supply contracts (DPMs)) and spot sales of hydroelectricity on the day-ahead market. At the same time, about 48% of RusHydro's revenue is generated in the regulated sales segment, which is characterized by very low profitability, high regulatory risks, delinquent payments that require higher reserves. In 2018–2020, RusHydro's profitability will remain high (the FFO margin before net interest and taxes of 25%) due to growing payments under DPMs and low prime cost of electricity generated by HPPs.
Well-developed corporate governance system hinges on the consistent implementation of the 2025 strategy of the Group; application of best practices in creating management bodies and motivation systems for managers and staff; conservative financial policy; high financial transparency. The corporate governance quality assessment is constrained by the complex structure of the Group, the high degree of intervention of the shareholder (state) in the strategic decision-making process, and by certain past risk events that were not prevented and caused a significant damage to the Company.
Moderate leverage and strong debt service capability. In 2017, the average leverage (calculated as the ratio of total debt to FFO before net interest payments) was 2.0x, and in 2018–2020, it will be about 2.1x. Over the last two years, the leverage has decreased significantly (3.2x in 2015), which is a result of a partial refinancing of the debt of RAO ES of East through a RUB 55 bln forward transaction with VTB Bank. ACRA also assesses RusHydro's coverage as strong. At the end of 2017, the coverage of interest payments (calculated as the ratio of FFO before net interest payments to interest payments) was equal to 5.9x.
Negative free cash flow and strong liquidity. In 2012–2017, RusHydro's free cash flow was negative due to high capital expenses and dividend payments. ACRA expects that the free cash flow will stay negative and reach a breakeven point not earlier than 2020, with a decrease in capital expenses. Nevertheless, the Company’s liquidity position is strong. As of March 30, 2018, the liquidity was supported by about RUB 56 bln in cash and equivalents and by about RUB 138 bln in undrawn credit lines committed by Russian banks.
Key assumptions
- Wholesale electric power prices and tariffs to grow not slower than the inflation rate in the Russian Federation;
- Capital investments at about RUB 90 bln (incl. VAT);
- Capital injections and subsidies from the federal budget at RUB 138 bln in 2018–2020;
- Dividend payments at 50% of the IFRS net profit.
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:
- A weaker ties between RusHydro and the RF Government, leading to a lower permanent support and/or a lower likelihood of extraordinary support;
- A lower SCA caused by (1) regulative changes in the industry affecting operating and/or financial profile of the Company; (2) deteriorating financial profile of the Company, which is able to increase leverage (expressed as the ratio of the total debt to FFO before net interest payments) above 4x and/or to decrease the coverage of interest payments (calculated as the ratio of FFO before net interest payments to interest payments) below 4x; and/or (3) lower liquidity of the Group.
Rating components
Standalone creditworthiness assessment (SCA): aa-.
Support: state — 3 notches up to the SCA.
Issue ratings
PJSC RusHydro, unsecured loan participation notes, LPN (XS1691350455), maturity date: September 28, 2022, issue volume: RUB 20 bln — AАА(RU);
PJSC RusHydro, unsecured loan participation notes, LPN (XS1769724755), maturity date: February 15, 2021, issue volume: RUB 20 bln — AАА(RU).
Rationale. In ACRA’s opinion, the above bonds issued by RusHydro Capital Markets DAC, an Irish SPV, and provided as a loan to the Company are senior unsecured debt instruments of the Company. Bondholders will have a limited recourse to RusHydro Capital Markets DAC and, in determining the Company’s debt service ability, they will exclusively rely on its credit quality. ACRA ranks the bonds pari passu with other existing and future unsecured and unsubordinated debt instruments of the Company. In accordance with ACRA methodology, taking into account high creditworthiness and low leverage of the issuer, as well as absence of secured debt, ACRA applied a simplified approach, according to which the issue is rated AAA(RU), on par with RusHydro.
Regulatory disclosure
The credit ratings assigned to PJSC RusHydro and Euro bonds (XS1691350455, XS1769724755) issued by PJSC RusHydro under the national scale for the Russian Federation are 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. To assign the above issue credit ratings, ACRA also applied the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation.
The credit ratings assigned to PJSC RusHydro and Euro bond (XS1691350455) issued by PJSC RusHydro were first published by ACRA on October 03, 2017 and the credit rating assigned to Euro bond (XS1769724755) issued by PJSC RusHydro was first published by ACRA on February 15, 2018. The credit rating of PJSC RusHydro and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the rating action date (June 28, 2018).
The credit rating is based on the data provided by PJSC RusHydro, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of PJSC RusHydro. The credit rating is solicited, and PJSC RusHydro participated in its assignment.
Disclosure of deviations from approved methodologies: the industry profile factor was assessed with a deviation from the assessment range specified in the methodology.
No material discrepancies between the provided data and the data officially disclosed by PJSC RusHydro in its financial statements have been discovered.
ACRA provided additional services to PJSC RusHydro. No conflicts of interest were discovered in the course of credit rating assignment.
