The credit rating of TGC-14 PJSC (hereinafter, the Company, or TGC-14) is due to its strong position in heat supply services in the area of operation (the Republic of Buryatia and the Zabaykalsky Krai), adequate business profile, as well as corporate governance that meets the average industry standards. Geographical diversification reflects the level of socio-economic development of the Republic of Buryatia and the Zabaykalsky Krai. The profitability assessment is medium. The Company's credit rating is constrained by the size of business, systemic regulatory risks, medium leverage and coverage, as well as weak free cash flow (FCF) due to the expected significant increase in the Company's capex program.
TGC-14 is a regional producer and supplier of electricity and heat in the Republic of Buryatia and the Zabaykalsky Krai. The Company operates production assets with an installed electric capacity of 650 MW and a heat capacity of 3,125 Gcal/h, as well as heating networks with a length of 941 km. The main shareholder of the Company (with a 93.8% stake) is Far Eastern Management Company JSC (FEMC JSC).
key assessment factors
Strong position in heat supply. TGC-14 is the largest heat supplier in the Zabaykalsky Krai and the Republic of Buryatia, with a market share of 26% and 30%, respectively. The Company is the sole heat supplier in Chita and Ulan-Ude. The Company owns seven power plants, 52 boiler houses, as well as heat supply networks. TGC-14 also produces about 31% and 11% of the electricity in the Zabaykalsky Krai and the Republic of Buryatia, respectively.
Adequate business profile. The Company's regulatory risk is assessed as moderate, since most of its revenue is subject to tariff regulation, which may be affected by non-economic factors or untimely tariff changes. The current regulatory framework provides for coverage of the operational and capital expenses of TGC-14, as well as weighted margin at about 11% of FFO before net interest and tax, according to the Agency's calculations.
The sales risks is assessed as low. The quality of the Company's fixed assets is assessed as low, including due to the accident followed by fire at the Ulan-Ude CHP-1 in December 2021. The Company's investment program is characterized by capital investments at about 11% of annual revenue.
Adequate geographical diversification and corporate governance. Geographical diversification assessments are determined by the degree of economic development in the regions of presence. TGC-14 development strategy up to 2025 is aimed at maintaining and upgrading its operating assets and improving the production and economic efficiency. The Company has an internal control and risk management service. Each risk is assigned a risk owner. After the accident at the Ulan-Ude CHP-1, the Company has changed its approach to risk identification and specification in order to ensure effective risk management and prevention. In December 2021, the Company's shareholder structure had changed: the ownership of TGC-14 passed from the subsidiaries of JSCo "RZD" to FEMC JSC. The shareholders of FEMC JSC are deeply involved in the Company's activities. The Company has a management board, as well as a board of directors consisting of eleven members, four of whom are independent. The Company repaid a RUB 2.9 bln loan on behalf of FEMC JSC in late March–early April 2023 at the expense of its own working capital. In early May 2023, the Company made a debut bond issuance for RUB 3.5 bln. The proceeds were used, among other things, to compensate the said outflow of funds. Dividend payments are planned to increase mainly to return these funds from FEMC JSC to the Company. The Company discloses its IFRS financial statements and annual reports in compliance with industry standards.
Small business size and medium profitability. The Company's FFO before net interest and tax, as calculated according to ACRA's methodology, increased to RUB 1.8 bln in 2022 from RUB 0.9 bln in 2021. The growth was driven by the receipt of compensation for the difference in tariffs, increased electricity sales and heat supply tariffs. In order to reduce the end-user burden, until the end of 2022, the Company's heat supply tariff was below an economically reasonable level, and the difference was compensated to the Company at the expense of regional budgets. Since 2023, due to the outpacing growth of heat tariffs for Chita residents, according to the Company's expectations, the gross revenue requirement for heat will be compensated in full by tariff revenues, which will exclude the need for subsidies compensating the tariff difference. ACRA expects that the weighted average value of the above indicator in 2023–2025 will be about RUB 2 bln. The Company's FFO before net interest and tax margin grew to 12% in 2022 (7% in 2021). ACRA expects that the weighted average margin in 2023–2025 will remain at about 12%.
Medium leverage and coverage. As of April 10, 2023, the Company's debt portfolio of RUB 1.5 bln was diversified by lenders. Currently, the Company has no guarantees or sureties issued. At the end of 2022, the total debt of TGC-14 (including pension obligations and guarantees for the loan to FEMC JSC) amounted to RUB 4.5 bln (or 2.6x of FFO before net interest). According to ACRA's estimates, by the end of 2023–2025, the Company's weighted average debt is expected to grow to RUB 7.4 bln due to an increase in capital investments. By the current date, the Company has already granted RUB 870 mln to FEMC JSC in loans due by the end of 2032.
According to the results of 2022, the coverage ratio (FFO before net interest to interest) amounted to 11.3x. ACRA expects this ratio to decrease in 2023–2025 to an average of 2.0x due to an increase in the debt and, consequently, in the debt service costs.
Medium liquidity and weak FCF. As of April 10, 2023, the Company had free debt limits (including factoring) totaling RUB 6.7 bln.
According to the results of 2022, the Company's FCF, as calculated according to ACRA's methodology, amounted to RUB 2.1 bln against RUB 430 mln a year earlier. ACRA expects that in 2023–2025, the FCF will decline to negative values due to the growth of both capital investments and projected dividend payments.
The ratio of the Company's investments to revenue for 2022 was 8% (9% in 2021). ACRA expects that the weighted investments will grow to 13% in 2023–2025.
Implementation of the Company’s capital investment program for 2023–2025 as planned.
Dividends in 2023–2025 as declared.
FEMC JSC to service its debt obligations to the Company in 2023–2025 as planned at the expense of the dividends from the Company.
potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- The weighted FFO before net interest and tax margin exceeding 15%, along with the weighted leverage (total debt to FFO before net interest) declining below 2x and the weighted coverage (FFO before net interest to interest) exceeding 5x.
A negative rating action may be prompted by: The weighted leverage (total debt to FFO before net interest) growing above 3.5x;
The weighted coverage ratio (FFO before net interest to interest) declining below 2.5x;
The Company losing its status of the sole heat supplier in Chita and Ulan-Ude;
Dividends in 2023–2025 exceeding the declared amounts;
FEMC JSC failing to service its debt obligations to the Company in 2023–2025 at the expense of the dividends from the Company;
Significant deterioration of access to external sources of liquidity.
Standalone Creditworthiness Assessment (SCA): bbb+.
No outstanding issues have been rated.
The credit rating has been assigned to TGC-14 PJSC under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to TGC-14 PJSC for the first time. The credit rating of TGC-14 PJSC and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating is assigned based on data provided by TGC-14 PJSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited and TGC-14 PJSC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided additional services to TGC-14 PJSC. No conflicts of interest were discovered in the course of credit rating assignment.