RUSHYDRO RATING 'BAA3'

MOODY'S - London, 07 December 2020 -- Moody's Investors Service ("Moody's") has today upgraded RusHydro, PJSC's (RusHydro) Baseline Credit Assessment (BCA) to baa3 from ba1. Concurrently, the agency affirmed RusHydro's senior unsecured issuer rating and the ratings of its senior unsecured loan participation notes (LPNs), issued by RusHydro Capital Markets DAC for the sole purpose of on-lending the proceeds to RusHydro, at Baa3. The outlook on all the ratings is stable.

RATINGS RATIONALE

The upgrade reflects Moody's view that (1) the financial risks associated with the company's large-scale investment projects in the Far East will be mitigated by a positive regulatory decision on applying the Capacity Delivery Agreement (CDA) framework to these projects, and the company's track record of successfully implementing complex projects; (2) RusHydro's financial performance and liquidity remain robust owing to modest leverage and strong operating performance.

Moody's notes that the company's investments in the Far East covering four thermal plants and estimated at more than RUB200 billion (including VAT) will be carried out under new capacity delivery agreements that will guarantee an up to 12.5% return on investment over a 15-year period via elevated capacity payments. The projects will replace coal-fired generation with gas-fired, reducing the company's carbon footprint. An increasing share of capacity payments in the company's revenue beyond 2025 (currently these account for one-third of revenue from electricity sales on the wholesale market) will provide for better revenue visibility and reduce volatility at times of low electricity prices and sales volumes. The application of the CDA framework to the Far East projects is envisaged by the Order of the Government of Russian Federation of 15.07.2019 No 1544-r "On the list of thermal electricity generation plants that are subject to modernisation or construction in the non-pricing zones of the wholesale electricity and capacity market". Moody's expects RusHydro to finalise CDA parameters and receive all necessary approvals in the first quarter of 2021.

As a result of an increase in installed capacity and high water levels in 2020 RusHydro's revenue for the first nine months of 2020 increased 8.2% compared to the same period in 2019. Leverage measured as Moody's adjusted debt/EBITDA stood at 1.9x (1.0x on a net-debt basis) as of 30 September 2020, (CFO Pre-W/C) / Debt at 40.9%, and RCF/Debt at 41%. Moody's expects RusHydro's revenue to continue growing in the next 12-18 months underpinned by new capacity launches and state subsidies. The agency positively notes that the surcharge mechanism introduced by the government in 2017 to compensate for discounts provided to customers of the Far East operations will likely be extended for the 2021-28 period according to the order of the President of the Russian Federation. The agency expects the company's gross leverage to increase but remain modest around 2.2x on an adjusted basis (below 2.0x on a net-debt basis) because investments into new projects will be phased over a five-year period starting from 2021 and total investment cash outflows should not materially exceed RUB100 billion a year (including VAT), in line with previous years. Investment programme will be partially funded with new debt.

The agency positively notes, that RusHydro's hydro generation modernization programme launched in 2012 and aimed at replacing and reconstructing its main and auxiliary equipment has been 60% completed to date, reducing the risk of technology breakdowns and improving the efficiency of electricity generation. The company currently expects the programme to be fully completed in 2025.

RusHydro, PJSC's (RusHydro, Baa3 stable) credit quality is supported by the company's (1) strategic role as one of the largest power producers in the Russian electricity market; (2) low cost hydropower generation fleet; and (3) relatively modest leverage, with Moody's-adjusted debt/EBITDA at 1.9x as of 30 September 2020.

RusHydro's credit quality is, however, constrained by its operating environment, which is characterised by (1) weak prospects of electricity consumption growth in the next two to three years, and (2) a material excess of generation capacity in the market that is straining electricity prices. We expect RusHydro to continue to generate negative free cash flow (FCF) at least in the next 24-36 months, as a result of its significant investment programme, while remaining within the leverage parameters stated above.

RusHydro falls under our Government-Related Issuers Methodology, given the company's 61.73% ownership by the Government of Russia (Baa3 stable). In accordance with this methodology, RusHydro's Baa3 issuer rating reflects the combination of (1) its baa3 Baseline Credit Assessment (BCA), which measures the company's fundamental standalone credit quality; (2) the Russian government's Baa3 sovereign bond rating with a stable outlook; (3) a high default dependence between the state and the company; and (4) our assumption of a high level of support from the state in case of need.

LIQUIDITY

RusHydro's operating cash flow generation of more than RUB80 billion in 2021 will partially cover its annual investment of around RUB90-100 billion (including VAT) and dividend payout of 50% of net profit. As of the end of September 2020, RusHydro had more than RUB108 billion of cash and cash equivalents. In addition, the company maintains more than RUB130 billion of committed multi-year backup facilities that mature beyond June 2022 which support refinancing of its RUB71 billion of debt maturities, including two rouble-denominated Eurobonds, in 2021.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on RusHydro's rating reflects our view that the company will maintain robust financial and liquidity profiles, in line with Moody's expectations for the current rating category.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

At this stage the upgrade potential for RusHydro's ratings is limited, given that it is positioned at the level of the sovereign bond rating of Russia (Baa3 stable). The ratings could be upgraded subject to an upgrade of Russia's sovereign rating, and provided that (1) the company's operating and financial performance and liquidity remain robust; (2) macroeconomic environment and regulatory framework are supportive and provide sufficient predictability over the company's cash flow generation capacity for the medium to long term; and (3) there are no adverse changes in our assessment of the probability of the Russian government providing extraordinary support to the company in the event of financial distress.

Conversely, downward pressure on RusHydro's ratings could arise from a downgrade of the sovereign rating or a downward assessment of the probability of government support for RusHydro in the event of financial distress. Downward pressure on RusHydro's BCA would materialise on the back of (1) a negative shift in the evolving regulatory framework; or (2) weakening financial profile, resulting in a Moody's-adjusted debt/EBITDA ratio increasing above 2.5x, and FFO/debt declining to below mid-20s in percentage terms on a sustained basis. In addition, inability to maintain adequate liquidity could also pressure the company's BCA and the final rating.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

RusHydro is strongly positioned for carbon emissions reduction policies risks, however the risks arise from building and operating complex engineering structures such as dams, which change environmental landscapes and affect local ecosystems through flooding of vast land areas while creating reservoirs and blocking fish migration routes. The company takes measures to minimise the effect of the dam by implementing biodiversity conservation measures in particular cites. Around 80% of the company's installed electricity generating capacity (31 GW) is emission-free, with only Far East segment operating coal-fired capacity. RusHydro's investment plan envisages an increase in low-carbon generation by 632.3 MW by 2025 and a reduction in greenhouse gas emissions by more than 6%. This will be achieved via modernisation of existing capacity and building of around 70 MW of small hydro and other renewable capacity, primarily in remote isolated areas where fuel costs are currently excessive.

Corporate governance considerations for RusHydro include: (1) the share of independent directors is less than one-third of all members of the board, which does not conform to the recommendation of the Corporate Governance Code; (2) independent directors head only part of the committees, (3) there is no succession pool to replace top executive staff of the company, and (4) the amount of individual remuneration paid to each member of the management board and to each member of the board of directors is not disclosed.

Four out of 13 directors on the company's board are independent. Independent directors review the company's financial statements, conduct financial performance analysis and monitor the delivery against targets.

COMPANY PROFILE

Headquartered in Moscow, RusHydro is 61.73% owned by the Russian government. It is one of the world's largest hydropower companies and accounts for 13% of energy generation in Russia (including the production of Boguchanskaya HPP) and 16% of the country's installed capacity. The company consolidates Joint Stock Company RAO Energy System of East, the monopoly integrated electric utility in the Far East region. In the twelve months ended 30 September 2020, RusHydro generated RUB385 billion of revenue and RUB120.6 billion of Moody's-adjusted EBITDA.

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