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Rating Action:

Moody's confirms Enel Russia's Ba3 rating, stable outlook

08 Aug 2019

London, 08 August 2019 -- Moody's Investors Service ("Moody's") has today confirmed Enel Russia, PJSC's (Enel Russia) Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR). The outlook has been revised to stable, from rating under review.

The action completes the review for downgrade initiated on 13 June 2019 following Enel Russia's announcement to sell its largest generating asset Reftinskaya GRES (RGRES) to the electricity-generating arm of SUEK JSC (Ba2, stable) for RUB21 billion (around $323 million), plus a contingent component of RUB3.0 billion. The transaction was approved by the company's shareholders and the Russian Federal Antimonopoly Service. Moody's expects Enel Russia to exclude Reftinskaya GRES from its financials by year-end-2019. The company will continue to operate the plant under a lease title issued by the buyer in the subsequent 6 to 12 months until the buyer obtains an operating license.

The 3.8GW Reftinskaya GRES facility, located in the Urals, is the biggest coal-fired power plant in Russia. The plant accounts for around 40% of Enel Russia's current generating capacity. The disposal will exacerbate the deterioration of the company's financial profile in 2020-21 driven by investment into its wind farm projects and termination of conventional capacity delivery agreement (CDA) payments from 2021. However, the agency expects Enel Russia's metrics to start recovering from 2022 as it begins to receive full CDA payments under its Azov and Kola renewables projects.

RATINGS RATIONALE

Moody's believes that the transaction, which is in line with Enel group's worldwide decarbonisation strategy, will be positive for the company's operating and credit profile in the long-term perspective. While the sale will reduce Enel Russia's EBITDA by around a third, or more than RUB5.0 billion in 2020, the effect on free cash flow generation will be less pronounced. This is because RGRES, which was built in 1970s, is the most capital-intensive asset of Enel Russia, requiring around RUB2.5 billion (and more as it approaches the end of its useful life), or half of its generated EBITDA, of maintenance and modernisation investment a year.

Other factors, such as 1) the higher cost of modernisation of coal generation compared with gas-fired generation; 2) risks associated with receiving sufficient regulatory support of large-scale investment via the CDA mechanism; 3) feedstock price volatility and foreign exchange risks associated with imported coal; and 4) relative weakness of the spot electricity market in the Urals where RGRES operates compared with other hubs of the European Russia, would continue to put pressure on Enel Russia's operations had it opted to continue to operate the asset. In addition, contemplated environmental legislation adjustments to address the global climate change concerns and decarbonisation trends will also impact the competitiveness of carbon-exposed industries in Russia, although the effect of such changes will become more pronounced only in mid-2030s.

The deal closure and the elimination of the coal-fired component should raise Enel Russia's appeal to Environmental, Social and Governance (ESG)-focused investors, unlock its equity value and reduce its cost of capital.

The agency expects Enel Russia to prioritise debt reduction over shareholder remuneration during the high investment cycle in 2020-21. Moody's understands that once the disposal is finalised, Enel Russia will record a RUB16.0 billion loss under the Russian Accounting standards (RAS); this reflects the difference between the transaction price and the book value of the asset under RAS. The RAS accounting loss will limit the company's ability to pay an extraordinary dividend; however, a potential share buyback remains an option. The agency does not anticipate that the share buyback option will be utilised in a way to put additional negative pressure on the company's metrics.

LIQUIDITY

Enel Russia will substantially rely upon external funding until the end of its investment phase in 2021. In 2019-20 its operating cash flow and proceeds from the RGRES sale will be sufficient to cover maintenance capex, debt repayments and ordinary dividends, however, most of the project capex will need to be funded with new debt. The company's liquidity is underpinned by more than RUB60.0 billion in committed backup facilities which cover full project costs.

The agency understands that as part of the larger Enel group, Enel Russia could benefit from access to group's support, operational excellence and best practices.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Enel Russia will conduct a prudent financial policy with regard to the distribution of RGRES sales proceeds to efficiently address the anticipated deterioration of its financial profile in 2020-21, and will demonstrate sustainable improvement in credit metrics afterwards, following commissioning of the wind operations.

WHAT COULD MOVE THE RATINGS UP/DOWN

Currently, Enel Russia is weakly positioned in its rating category given the anticipated deterioration in its financial profile over the next 18 months. Therefore, the upgrade prospects at this point in time are remote. In a longer term, Enel Russia's ratings could be upgraded if it demonstrates timely and efficient implementation of the wind farm projects and strengthens its financial profile in accordance with our expectations, with FFO/Debt exceeding 25% while maintaining strong liquidity. An upgrade will also take into account the company's development plans and financial policies at that time.

The ratings could be downgraded if the company experiences material delays and cost overruns in the wind projects implementation, failing to recover financial metrics as anticipated by the agency by end-2022. A persisting deterioration of FFO/debt to low teens, and RCF/debt to 8%-10% would create negative pressure on the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Enel Russia, PJSC operates four thermal power plants: gas-fired 2.5 GW Konakovskaya GRES, 1.5GW Nevinnomysskaya GRES, 1.6 GW Sredneuralskaya GRES and a coal-fired 3.8GW Reftinskaya GRES (to be disposed of from year-end 2019). The company's total gross installed electrical capacity is 9.4GW (5.6GW without RGRES). Enel S.p.A's (Baa2 positive) share in the company's authorised capital is 56.43%, PFR Partners Fund I Limited's share is 19.03%, Prosperity Capital Management Limited's share is 7.68% and other minority shareholders' share is 16.86%. In the last twelve months ended 30 June 2019, the company reported consolidated revenues of RUB74.5 billion (around $1.14 billion) and Moody's adjusted EBITDA of RUB16.7 billion (around $255 million).

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julia Pribytkova
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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