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Moody's assigns Ba2 rating to IDGC of Center and Volga Region; stable outlook

October 12, 2012 Moody's Investors Service
London, 12 October 2012 -- Moody's Investors Service has today assigned a
Ba2 corporate family rating (CFR) and probability of default rating (PDR)
to JSC IDGC of Center and Volga Region (IDGC of Center and Volga Region),
a Russian electricity distribution grid business servicing nine regions
in the European part of Russia and a core operating company of
state-controlled IDGC Holding (Ba1 developing). The outlook on the
ratings is stable. This is the first time Moody's has assigned a rating
to IDGC of Center and Volga Region.

RATINGS RATIONALE

IDGC of Center and Volga Region's Ba2 CFR mainly reflects (1) its higher
business risk compared with the generally low risk of regulated grid
peers operating in developed markets; (2) the company's relatively
leveraged financial profile and liquidity which remain under pressure
from a large investment programme driven by its depleted asset base; (3)
a degree of concentration of the company's customer base both
geographically and in terms of revenues from large customers. Moody's
attributes the company's higher business risk to the evolving regulation
of the Russian grid sector and uncertainties surrounding the state
strategy for the sector, including privatisation plans. The sector's
configuration is changing. The state has placed IDGC Holding, the parent
company of IDGC of Center and Volga Region, under the management of FGC
UES (Baa2 stable). A potential merger of IDGC Holding and FGC UES, also
controlled by the state is being discussed.

IDGC of Center and Volga Region's rating positively factors in (1) its
position as the dominant distribution grid business in its highly
populated service area centered in Nizhny Novgorod (including regions
located both to the east and northwest of Nizhny Novgorod and those
around the Moscow region); (2) a degree of state support available for
the company through IDGC Holding, which provides a one-notch uplift to
IDGC of Center and Volga Region's standalone credit quality; (3) the
linkage between electricity transmission tariffs and IDGC of Center and
Volga Region's investment programme, established following the recent
regulatory-asset-base (RAB) tariff revision for six of the company's nine
regional branches. Moody's additionally notes that, though IDGC of Center
and Volga Region's financial profile is somewhat more leveraged compared
with those of a few, but not all, of similarly rated Russian peers, it
remains reasonably accommodated under the current rating. Based on
management's H1 2012 accounts, the company's FFO interest coverage for H1
2012 on a last-12-months basis is 5.4x and funds from operations
(FFO)/net debt is 37.8%, including Moody's standard adjustments.

Having factored in the rating a degree of concentration of IDGC of Center
and Volga Region's customer base, Moody's also notes the company's
exposure to the risk of loss of a few large customers under the so-called
last mile agreements, which may not be fully and promptly compensated by
the regulators. However, Moody's views this exposure as commensurate with
the current rating, taking into account that (1) it is limited to 10% of
the company's revenues; (2) the company has a positive track record of
solving disputes under these agreements; and, more broadly, (3) the
government takes measures to cancel last-mile agreements (a temporary
instrument to maintain lower tariffs for population at the expense of
large industrial companies), with a compensatory mechanism for
distribution grids, including IDGC of Center and Volga Region, to be
introduced.

The rating also positively incorporates IDGC of Center and Volga Region's
long-term debt maturity profile, with short-term debt obligations in the
middle of 2012 accounting for just around 6% of its total debt, and
access to state-owned banks, which Moody's expects will mitigate
investment-driven pressures on the company's liquidity. At the same time,
Moody's positively notes management's commitment to maintaining
unadjusted debt/EBITDA significantly below 3.0x.

In Moody's view, the evolving regulation and grid sector's configuration
remains the key risk for Russian grid businesses, including IDGC of
Center and Volga Region, and a key component in determining their rating,
suppressing differences in their credit profiles. Electricity
transmission tariffs remain subject to political considerations within
the RAB regulatory model, which was implemented to improve transparency
of tariffs and attract investments to the grid sector. In this
environment, the visibility of the long-term evolution of grids'
financial profiles remains limited, although this is mitigated by a
degree of state support available for the sector and its players.

The stable outlook on IDGC of Center and Volga Region's rating reflects
Moody's view that the company has well-thought plans to develop and
adjust its business taking into account tariff evolution, availability of
funding and the wider economic environment. The stable outlook is also
predicated on Moody's expectation that IDGC of Center and Volga Region
will manage its financial profile in line with the current rating
category, with FFO interest coverage and FFO/net debt not weakening below
3.5x and 20%, respectively.
  • Full name
    PJSC Interregional Distributive Grid Company of Centre and Privolzhie
  • Registration country
    Russia
  • Industry
    Power