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Rating Action:

Moody's reviews for downgrade 12 Russian utilities and infrastructure GRI and subsidiaries following sovereign review

09 Mar 2016

London, 09 March 2016 -- Moody's Investors Service has today placed the ratings of 12 Russian utility and infrastructure companies government-related issuers (GRIs) and their subsidiaries on review for downgrade.

This action follows Moody's placement of Russia's Ba1 government bond rating on review for downgrade on 04 March 2016. For additional information, please refer to the related announcement

https://www.moodys.com/research/--PR_344606

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

Today's rating actions reflect Moody's view that a sustained sharp fall in oil prices, which Moody's expects to remain low for several years, will heighten risks for both Russia's economic performance and the Russian government balance sheet in the coming years, including the government financing options.

These developments will likely lead to further deterioration in the operating environment for Russian utilities and infrastructure companies, resulting in a deeper and more protracted decline in domestic economic activity than previously anticipated.

FACTORS TO BE CONSIDERED IN THE RATING REVIEW

Moody's review for downgrade will assess each corporate's resilience to the increased risk arising from the prevailing negative operating conditions. In particular, Moody's will assess the corporates' liquidity profiles in a limited domestic banking system liquidity scenario and restricted access to foreign finance.

In addition, Moody's will also consider the need for adjustments of its assumptions regarding the Russian government's willingness and ability to provide support to infrastructure and utility companies in the event of need. While Russia's fiscal buffers (including the government's savings funds) remain substantial, these funds may be stretched in view of expected lower real economic growth and potential growth of calls on these funds from, in particular, the Central Bank to cover future external debt payments and/or to support the banking industry. For regulated utilities and infrastructure companies, Moody's will assess the linkage among the government's tariffs decisions in the context of prolonged low oil price environment and companies' investment programmes and profitability.

The rating review is expected to be completed within two months.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Moody's believes there is little likelihood of any upward rating pressure for the utilities and infrastructure companies covered by today's action, unless operating conditions improve materially. Confirmation of ratings could be considered if the sovereign rating of Russia is confirmed at Ba1 following the sovereign review and there is no material deterioration in operating and financial condition or companies-specific factors.

Conversely, negative pressure would be exerted on all the ratings if (1) the sovereign rating review resulted in a downgrade of Russia's sovereign rating; and/or (2) there are negative changes in the probability of the Russian government providing extraordinary support to issuers in the event of financial distress.

In addition, downward pressure on individual companies' ratings could develop for the following reasons:

The rating agency could downgrade Transneft's ratings if the challenging operating environment in Russia were to lead to a significantly weaker financial profile and increasing constraints on liquidity.

Negative pressure on Atomenergoprom's ratings could develop if the company's financial profile deteriorates, reflected in a debt/EBITDA ratio above 3x, Funds From Operations (FFO) interest coverage below 5.0x and Retained Cash Flow (RCF)/debt below 25% materially on a continued basis. In addition, the lack of adequate liquidity could put pressure on the company's rating, and downward pressure could also develop if the company's key subsidiaries see their share of external debt materially exceeding 20% of total debt on a permanent basis.

Negative pressure on FGC's rating could result from (1) a sustainable negative shift in the regulatory regime and significantly deteriorating margins; (2) a failure of the company to manage its investment programme in line with the tariff regulation and contain a deterioration of its financial profile, with FFO interest coverage and FFO/net debt falling materially and persistently below 3.5x and 25%, respectively; and (3) pressured liquidity.

Downward pressure on RusHydro's ratings could rise if there is a negative shift in the regulatory and market framework or if the company fails to limit deterioration of its financial profile, reflected in a debt-to-EBITDA ratio significantly above 3x and funds from operations interest coverage significantly below 5x and on sustained basis. The company's inability to maintain adequate liquidity could also put pressure the rating.

Downward pressure on Inter RAO's ratings could develop if there were a negative shift in the regulatory and market framework and the company failed to limit a deterioration of its financial profile, reflected in FFO interest coverage below 5.0x, RCF/debt below 30% and debt/EBITDA above 3x significantly and on a permanent basis. Furthermore, negative pressure could be exerted on the rating if the company were unable to proactively address its liquidity needs and maintain reasonable headroom under the financial covenants of its bank agreements.

Downward pressure on ROSSETI's rating could result from (1) a negative shift in regulatory regime without compensatory measures by the state leading to significantly deteriorating EBITA margin to below 10%; (2) pressured liquidity; and/or (3) a failure to manage its investment program in line with the tariff regulation and contain deterioration of its financial profiles, with FFO interest coverage and FFO/net debt falling materially and persistently below 3.0x and 20%.

The rating of NCSP is likely to be downgraded if (1) there is the increasing likelihood of transformational changes to ownership and business structure of NCSP with uncertain or negative consequences for NCSP's credit quality; (2) NCSP's financial profile were to deteriorate, with FFO interest cover and the ratio of FFO to debt trending towards below 3x and 15%, respectively; (3) NCSP's liquidity were to deteriorate.

Downward pressure on the ratings of MOESK's, Lenenergo's, IDGC of Center and Volga Region's, IDGC of Urals', IDGC of Volga's could result from (1) weakening support from state-related shareholder ROSSETI; (2) a negative shift in the regulatory and market framework; and (3) companies' failure to manage their investment programs in line with the tariff decisions resulting in a deterioration of their financial profile, margins and liquidity. Downgrade pressure on MOESK and Lenenergo's rating could also result from deterioration of their financial profiles, with FFO interest coverage falling materially and persistently below 3.5x and FFO/net debt falling below 20%.

Downward pressure on the ratings of IDGC of Center and Volga Region, IDGC of Volga and IDGC of Urals could develop if their financial profiles weaken going forward with total FFO interest coverage falling materially and persistently below 4.0x and FFO/net debt below the mid-twenties in percentage terms. Inability to timely address liquidity needs could negatively influence the rating as well.

LIST OF AFFECTED RATINGS

Atomenergoprom, JSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba1

Federal Grid Finance Limited

....Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Ba1

FGC UES, JSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba1

IDGC of Center and Volga Region, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

IDGC of Urals, JSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

IDGC of Volga, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

Inter RAO, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

Lenenergo, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

MOESK, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

Novorossiysk Commercial Sea Port, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba3-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba3

OAO AK Transneft

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba1

ROSSETI, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

RusHydro, PJSC

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2

TransCapitalInvest Limited

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Ba1

The principal methodologies used in rating OAO AK Transneft; ROSSETI, PJSC; FGC UES JSC; Transcapitalinvest Limited and Federal Grid Finance Limited were Regulated Electric and Gas Networks published in November 2014, and Government-Related Issuers published in October 2014.

The principal methodology used in rating MOESK, PJSC; Lenenergo, PJSC; IDGC of Urals, JSC; IDGC of Volga, PJSC; IDGC of Center and Volga Region, PJSC was Regulated Electric and Gas Networks published in November 2014.

The principal methodologies used in rating Atomenergoprom, JSC; RusHydro, PJSC; and Inter RAO, PJSC were Unregulated Utilities and Unregulated Power Companies published in October 2014, and Government-Related Issuers published in October 2014.

The principal methodology used in rating Novorossiysk Commercial Sea Port, PJSC was Privately Managed Port Companies published in May 2013, and Government-Related Issuers published in October 2014.

Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Fully controlled by the Russian government (the latter owns 100% of its voting shares), OAO AK Transneft (Transneft) is the largest crude oil transportation company in the world. 2014 reported sales reached around RUB611.3 billion, or $10.9 billion (net of revenues from crude oil supplies to China, which are mirrored by the oil purchase costs, under 2009-dated $10 billion, 20-year loan-for-oil deal).

JSC Atomenergoprom (Atomenergoprom) is the holding company for numerous subsidiaries which represent the civil Russian nuclear industry. The group generated revenue of RUB498.8 billion (around $8.9 billion) in 2014. 100% of Atomenergoprom's voting shares are owned by the Russian government through the State Atomic Energy Corporation Rosatom (Rosatom).

PJSC RusHydro (RusHydro) is Russia's largest and a world major hydropower business, accounting for around a half of hydropower output in Russia, majority (66.84% as of 30 June 2015) owned by the Russian government. As of end-2014, RusHydro generates revenue of RUB329.6 billion (around $5.9 billion).

PJSC Inter RAO (Inter RAO) is a Russian major electric utility engaged in thermal electricity generation and retail electricity sales in Russia, cross-border electricity trading and electric utility operations abroad. Inter RAO generated revenue of RUB805.3 billion ($13.2 billion) in 2015. Inter RAO is controlled by the Russian government through several state-controlled entities (own over 50.00% of the company as of 31 December 2015).

JSC Federal Grid Company of Unified Energy System (FGC UES, or FGC) is the monopoly electricity transmission system operator in the Russian Federation. The company's revenues, amounted to RUB173.4 billion (around $3.1 billion) in 2014 (other operating income of RUB8.2 billion, primarily from non-core activities, is not included). FGC is 80.13% owned by state-owned JSC ROSSETI.

PJSC ROSSETI (ROSSETI) is the holding company for the national transmission grid (FGC UES) and 15 distribution grid subsidiaries (including MOESK, PJSC; Lenenergo, PJSC; IDGC of Urals, JSC; IDGC of Volga, PJSC; IDGC of Center and Volga Region, PJSC). As of 31 December 2015 Russian government owns a 86.32% of ordinary shares and 7.01% of preferred shares in ROSSETI. As of the end-2014 the company generates revenue of around RUB759.6 billion (around $13.5 billion).

PJSC Novorossiysk Commercial Sea Port (NCSP) and its subsidiaries represent Russia's largest stevedore. NCSP is 50.1%-owned by Novoport Holding Ltd. The Russian government owns a 20% stake in NCSP and the "golden share". In 2014, NCSP generated revenue of $955.6 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Sergei Grishunin
Asst Vice President - Analyst
Infrastructure 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
SUBSCRIBERS: 44 20 7772 5454

Monica Merli
MD - Infrastructure Finance
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's reviews for downgrade 12 Russian utilities and infrastructure GRI and subsidiaries following sovereign review
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