ACRA affirms AAA(RU) to PJSC RusHydro, outlook Stable, and AAA(RU) to bond issues

The AAA(RU) credit rating of PJSC RusHydro (hereinafter, the Company, or the Group) is two notches higher than the standalone creditworthiness assessment (SCA) of the Company determined by ACRA at 'aa.'

The Company's credit rating stems from both the high level of support from the Russian Federation and the moderate dependence of the Company and the state on similar risk factors.

The Company's SCA hinges on its importance for the electric power sector of Russia. RusHydro is the Russia's largest hydroelectric power company, which manages 15% of the installed capacity of the entire Russian power system, as well the power infrastructure in the Far East. The Company demonstrates high business profitability, low leverage, and high liquidity.

RusHydro is one of the world's 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 (61.7%) and Bank VTB (13%).

Key rating assessment factors

The high level of support from the Russian Federation. RusHydro is the Russia's largest hydropower generating company, which operates in the strategically important electric power market, which explains the high systemic importance of the Company. In addition, the Company is entrusted with managing the federal electric power infrastructure, which supplies power to the Far Eastern region of Russia. In ACRA's opinion, the likelihood is very high that the state will support the Company in case of need.

Being the controlling shareholder, the Russian Government manages the Company's strategy, investment plans, and dividend policy, and influences its operations and financial policies, including consistent financial support. The Government supports the Company regularly; at the same time, the Company enjoys some freedom in making decisions aimed at achieving the Company's targets.

In 2012–2020, the state provided the Company with RUB 347.2 bln in capital injections and state subsidies. In 2019–2020, the capital injections for the total of RUB 13 bln were provided to fund the construction of two Pevek–Bilibino 110 kV single-circuit overhead lines (Stage 1). In 2020, the volume of state subsidies, including mark-ups to align the tariffs applied in the Far Eastern Federal District, amounted to RUB 46.8 bln and in 20201, it is expected at RUB 51 bln.

The current pricing in the power sector drives the high business profitability. The profitability of the Company exceeds the average level of Russian power generating companies. Most of the Company's EBITDA comes from the hydrogenating segment based on the competitive pricing at the wholesale electric power market using day-ahead market (DAM) contracts, competitive power takeoff (KOM) contracts, and power supply contracts (DPMs). The remaining portion of the Company's EBITDA comes from the sales segment based on regulated tariffs and prices. This segment characterized by very low margins and high regulatory risks. In 2020, the Company's return on FFO before net interest payments and taxes grew up to 31%. ACRA expects that in 2021–2023, the Company's profitability will be comparable or slightly higher than that over the past years, mainly due to growing payments under DPMs in favor of newly commissioned power plants (Zaramagskaya 1 HPP, small HPPs) and growing market prices and tariffs for electricity, power and heat energy generated by the Company.

In 2020, the total electric power generated by the Company grew by 6% up to 151.4 bln kW*h (or 14% of the national indicator), irrespective of the shrink in power consumption in Russia. According to the rules of the wholesale electricity and capacity market (WECM), the consumption priority of power generated by hydroelectric and nuclear power plants is the highest, which ensures that almost all hydropower is consumed under a general drop in the demand for electricity. At the same time, RusHydro's hydropower plants are located on different rivers, which eliminates the risk of changes in their water content and, consequently, the volume of electricity production. Moreover, HPPs do not need fuel, the most expensive item in electricity generation, which can account for up to 60% of the prime cost of 1 kWh.

The well-developed corporate governance system is a result of the consistent implementation of the Group's strategy until 2025 and prospects until 2035; the best practices applied in formation of management bodies and incentive systems for managers and staff; the conservative financial policy; the 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.

The low leverage and good debt service metrics. In 2020, the leverage (the ratio of total debt to FFO before net interest payments) went down to 2.2x, and in 2021–2023, it is expected fall below 2x. ACRA assesses the Company's debt service capacity as high. In 2020, the coverage of interest payments (the ratio of FFO before net interest payments to interest payments) remained high (7x). The change was caused mostly by the repayment of a portion of the debt out of the Company's own funds.

The low free cash flow assessment and the strong liquidity. In 2012–2019, the Company's FCF was negative due to high capital expenses and dividend payments. In 2020, the FCF became positive. ACRA expects that in 2021–2023, the annual average FCF will be positive. As of April 31, 2020, the Company’s liquidity position was very high due to the substantial amounts of cash (RUB 64.5 bln) held in accounts and deposits and undrawn credit lines (RUB 279.5 bln) committed by Russian banks.

Key assumptions

  • In 2021–2023, the average tariff indexation rate, the increase in prices at the WEPM, and the average inflation rate at 3%, 3.9% and 3.9%, respectively;
  • The Company to implement its capital expenses program as planned;
  • The Company to receive state subsidies (markup, compensations within the approved economically justified levels) as planned;
  • Dividend payments at 50% of IFRS net profit but no less than the three-year average, taking into account depreciation charges allocated for investment purposes.

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:

  • Weaker ties between RusHydro and the RF Government, leading to a lower permanent support and/or a lower likelihood of extraordinary support;
  • A decline in the 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 5x; and/or (3) lower liquidity of the Group.

Rating components

SCA: aa.

Support: state — 2 notches up to the SCA.

Issue ratings

PJSC RusHydro, unsecured loan participation notes, LPN (XS1912655054), maturity date: November 21, 2021, issue volume: RMB 1.5 bln — AАА(RU).

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 (XS1912654677), maturity date: January 27, 2022, issue volume: RUB 15 bln — AАА(RU).

PJSC RusHydro, unsecured loan participation notes, LPN (XS2082937967), maturity date: November 25, 2024, issue volume: RUB 15 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 rely exclusively 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 issues are rated AAA(RU), i.e. on par with RusHydro.

Regulatory disclosure

The credit ratings assigned to PJSC RusHydro and Euro bonds (XS1691350455, XS1912655054, XS1912654677, XS2082937967) 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 Rated Entities Related to the State or a Group, 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 ratings assigned to Euro bonds (XS1912655054, XS1912654677, XS2082937967) issued by PJSC RusHydro were first published by ACRA on November 21, 2018, November 28, 2018 and November 26, 2019, respectively. 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 publication date of this press release.

The credit ratings are 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 ratings are solicited, and PJSC RusHydro participated in their assignment.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

ACRA provided additional services to PJSC RusHydro. No conflicts of interest were discovered in the course of credit rating assignment.

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