S&P: PJSC Territorial Generating Company No. 1 Assigned 'BB+/B' And 'ruAA+' Ratings; Outlook Stable
We also assigned TGC-1 our 'ruAA+' national scale rating.
We think that TGC-1's business risk profile is constrained by inherent volatility in the spot electricity market, its dependence on gas prices, its exposure to an opaque and short-term heating tariff regime, and a track record of state intervention in the industry. Other constraints include exposure to country risk in Russia, which we assess as high.
Supportive factors include the company's solid competitive position in the service area of St. Petersburg and Leningrad oblast, as well as the Republic of Karelia and the Murmansk oblast. Generation is a beneficial mix of gas-fired and hydropower plants. The heating business accounts for about 45% of TGC-1's total revenues and supports the utility's stable cash flows. The substantial share of low cost hydrogeneration underpins the company's higher profitability compared with its closest peers, including Mosenergo PJSC. The average plant age is reasonable following the recently commissioned power plants under capacity supply agreements, which improves the company's competitiveness and operating efficiency.
Our view of TGC-1's financial risk profile is based on our forecast credit metrics, including adjusted funds from operations (FFO) to debt of greater than 40% and leverage ratios (debt to EBITDA) of below 2.0x. However, our assessment also reflects a relatively weaker ratio of free operating cash flow to debt due to TGC-1's sizable investment needs for further asset modernization.
In addition, we consider that TGC-1's financial policy framework allows the company to take a more leveraged position than we currently factor into our base-case scenario, for example, in case of additional investment projects, acquisitions, or a higher dividend payout. This has a negative impact on the company's stand-alone credit profile.
The Gazprom group owns 51.8% of TGC-1 through its fully owned subsidiary Gazprom Energoholding. We think that TGC-1 is a strategic investment for the Gazprom group, in line with the group's investments into other Russian electricity and heat generators such as Mosenergo, Moscow Integrated Power Co. PJSC, and OGK-2 PJSC. In our view, it's unlikely Gazprom will sell the company in the near term. That said, we think that TGC-1 is less important for the Gazprom group's long-term strategy than its core gas and oil assets. We therefore view TGC-1 as a moderately strategic subsidiary of the Gazprom group and apply a one-notch uplift to our assessment of TGC-1's stand-alone credit profile (SACP).
The stable outlook mainly reflects that on the ultimate parent, Gazprom.
We expect that the ratings on TGC-1 will continue to be constrained by the foreign currency rating on Gazprom, given the company's status within the group.
On a stand-alone basis, we expect that TGC-1 will continue to benefit from its solid competitive position in the service area, beneficial mix of generating assets, moderate financial leverage, and adequate liquidity. These strengths should offset the risks associated with its large capex program and exposure to volatile spot electricity prices.
We would lower our ratings on TGC-1 if we lowered the local or foreign currency rating on Gazprom, because it would signal Gazprom's lessened ability to support the company. In addition, we don't believe TGC-1 can be rated above its ultimate parent, given Gazprom's majority ownership of the company and its ability to control the company's strategy and financial policy.
We could also lower the ratings if we saw material deterioration in TGC-1's SACP, for example, if the company made acquisitions or enlarged its investment program, with debt to EBITDA increasing toward 3x and FFO to debt falling toward 30% with no signs of recovery.
The upside is currently limited in our view. We expect that the company's ratings will continue to be constrained by the foreign currency rating on Gazprom.