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Rating Action:

Moody's upgrades Rosseti and its regional electricity distribution subsidiaries to Ba1, affirms FGC at Ba1

 The document has been translated in other languages

07 Dec 2017

London, 07 December 2017 -- Moody's Investors Service, ("Moody's") has today upgraded to Ba1 from Ba2 the corporate family ratings (CFRs) and to Ba1-PD from Ba2-PD the respective probability of default ratings (PDRs) of Russian national power transmission and distribution company ROSSETI, PJSC (Rosseti) and its subsidiaries (MOESK, PJSC, Lenenergo, PJSC, IDGC of Center and Volga Region, PJSC, IDGC of Urals, JSC, IDGC of Volga, PJSC). Concurrently, the agency has affirmed the Ba1 CFR and Ba1-PD PDR of FGC UES, JSC (FGC). The outlook on all ratings is stable.

"Our decision to upgrade Rosetti reflects its strong financial profile, ample liquidity, it's dominant market position and the regulatory environment which allows for operating costs and investments to be recovered albeit with delays," says Julia Pribytkova, a Vice President -- Senior Analyst at Moody's.

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

RATINGS RATIONALE

- UPGRADE OF ROSSETI AND REGIONAL DISTRIBUTION SUBSIDIARIES

Today's upgrade of Rosseti and its regional electricity distribution subsidiaries reflect Moody's opinion that (1) the regulatory environment for the Russian energy grids, albeit still evolving, provides for a timely recovery of operating costs, a somewhat deferred but guaranteed recovery of investments into infrastructure and an adequate return on such investments; (2) electricity distribution volume risks are limited in the future, given the companies' strong or dominant positions in the majority of their markets; (3) their financial profiles have recovered after a weak 2015 and are strong for the current rating category; and (4) liquidity for all group companies is robust.

As Rosseti is an 88% state-owned company, Moody's applies its Government-Related Issuer (GRI) rating methodology in determining the company's rating. FGC is an 80.13% owned subsidiary of Rosseti, but according to the shareholder agreement between the Russian Government and Rosseti, the government retains direct control over FGC, therefore the rating agency also considers it to be a GRI. According to the GRI methodology, Rosseti's and FGC's ratings of Ba1 are driven by a combination of (1) the companies' baseline credit assessment (BCA), a measure of standalone credit strength, of ba1; (2) the Ba1 rating of the Russian government, with a stable outlook; (3) the high default dependence between the companies and the government; and (4) the high probability of provision of state support to the companies in the event of financial distress.

As part of this rating action Moody's has upgraded the BCA of Rosseti to ba1 from ba3 following an upward revision of the following qualitative factors for Rosseti and its rated subsidiaries, namely:

- Stability and predictability of regulatory regime has been revised to Ba from B for all group companies, following a review of the track record of application of regulatory norms to the sector during 2011-17.

- Asset ownership model has been revised to Aaa from Baa for all group companies reflecting the fact that close to 100% of the companies' infrastructure is fully owned, and credit risk stemming from a change in ownership is minimal given the absence of privatisation plans.

- Revenue risk has been revised to Baa from Ba for all group companies (except for FGC), reflecting the grids' strong positions on the Russian market and limited competition. In the case of FGC the factor scoring has been revised to A from Baa reflecting the company's monopoly position on the Russian market. At the same time Moody's expects that the operating environment for these companies will remain challenging. This is the result of continuing weak domestic demand resulting from Russia's structurally weak growth potential, as well as the limited availability of favourably priced investment capital.

- Scale and Complexity of Capital Program -- all group companies (except for FGC) have been repositioned at different but higher levels on this factor reflecting a step-down in capex as they move toward completion of large-scale modernisation programmes, and considering moderate routine maintenance requirements going forward.

- Financial policy - to Baa from Ba for all group companies. Moody's views the group's dividend and financial policies as relatively conservative and aimed at maintaining a robust financial profile, sound liquidity and an internal limit on leverage at 3.0x measured by debt/EBITDA.

Moody's has also revised the assumption of extraordinary state support embedded within the ratings of Rosseti and FGC to "high" from "strong" given the Russian government's credit strength, and a demonstrated track record of providing extraordinary support to the group companies in the event of need.

Moody's equalised the ratings of the regional distribution subsidiaries of Rosseti at Ba1 notwithstanding their varying scale of operations, market positioning and other company-specific factors, taking into consideration (1) close involvement of Rosseti as the management company into subsidiaries' budgeting and funding process; (2) Rosseti's key role in determining their strategy and oversight of its implementation, and (3) a track record of Rosseti orchestrating cash flow streams including dividend payments and intracompany loans within the group to maintain overall group liquidity and sustainable adherence to group-wide financial policies, in particular a limit on leverage measured by debt/EBITDA of 3.0x.

For assessments of qualitative factors for particular companies of the Rosseti group, which may differ across the group to reflect regional specifics, please refer to their Credit opinions published on www.moodys.com.

- AFFIRMATION OF FGC

Moody's has affirmed the CFR of FGC at Ba1. Concurrently, Moody's upgraded its BCA to ba1 from ba2 following the revision of qualitative metrics and also reflecting the company's strong financial metrics and liquidity. Moody's notes that FGC, albeit part of the Rosseti group, is positioned stronger than other group companies on the Cost and recovery factor and Revenue risk, given its monopoly position on the Russian market, and weaker on the Scale and Complexity of Capital Program factor given its potentially more demanding investment plan.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the companies will maintain strong financial metrics and robust liquidity in line with the agency's expectations.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Positive pressure on the ratings and the outlook could arise if the government bond rating of Russia were upgraded, provided that (1) there is a clear evidence that the regulatory regime for the sector is evolving in the positive direction, providing for robust and predictable long-term recovery of costs and investments; and (2) the companies maintain strong credit profiles and robust liquidity in line with Moody's expectations. Continued evidence of state support for the sector, as well as companies' disclosure standards, would also be prerequisites for a higher rating.

Conversely, (1) negative developments in the regulatory environment for the sector pressuring the companies' ability to recover costs and investment, and/or providing for a lower transparency into the companies' future cash flow generating capacity, or (2) FFO interest coverage and FFO/net debt falling materially and persistently below 4.0x and mid-twenties, respectively, or (3) downward reassessment of government support for the sector, or (4) liquidity constraints, could exert negative pressure on the ratings.

LIST OF AFFECTED RATINGS

Upgrades:

ROSSETI, PJSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

IDGC of Center and Volga Region, PJSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

IDGC of Urals, JSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

IDGC of Volga, PJSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

Lenenergo, PJSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

MOESK, PJSC

.... Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, upgraded to Ba1 from Ba2

.Stable Outlook

Affirmations:

FGC, JSC

.... Probability of Default Rating, Affirmed at Ba1-PD

.... Corporate Family Rating, Affirmed at Ba1

.Stable Outlook

Federal Grid Finance Limited

....Senior Unsecured Medium-Term Note Program, Affirmed at (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed at Ba1

.Stable Outlook

The principal methodologies used in rating ROSSETI, PJSC, FGC UES, PJSC and Federal Grid Finance Limited were Regulated Electric and Gas Networks published in March 2017, and Government-Related Issuers published in August 2017. The principal methodology used in rating IDGC of Center and Volga Region, PJSC, IDGC of Urals, JSC, IDGC of Volga, PJSC, Lenenergo, PJSC and MOESK, PJSC was Regulated Electric and Gas Networks published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

PJSC ROSSETI (ROSSETI) is the holding company for the national transmission grid (FGC) 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 2016 Russian government owns a 88.75% of ordinary shares and 7.01% of preferred shares in ROSSETI. As of December 31, 2016 the company generated revenue of around RUB904.0 billion (around $13.5 billion).

JSC Federal Grid Company of Unified Energy System (FGC, or FGC) is the monopoly electricity transmission system operator in the Russian Federation. The company's revenues, amounted to RUB255.6 billion (around $3.8 billion) in 2016 (other operating income of RUB6 billion, primarily from non-core activities, is not included). FGC is 80.13% owned by state-owned PJSC ROSSETI.

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.

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.
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