Fitch Ratings has affirmed Enel Russia PJSC's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB+'.

The Outlook is Stable.

The affirmation reflects our expectation that the company will be able to reduce leverage after it increases above the rating sensitivities in 2021-2023 due to capex on wind and modernisation projects for gas plants, a weakening of EBITDA following Reftinskaya coal plant sale in 2019 and phase-out of capacity sales under capacity supply agreements (CSA) in 2020. We expect this to be gradually offset by commissioning the newly constructed renewable capacity under renewables CSAs along with modernisation CSAs over 2021-2025, which would support predictability of cash flows in the medium term. The Stable Outlook reflects our expectation of deleveraging after the 2021 peak (around 4.0x), trending towards 2.5x by 2023.

The company is subject to execution risk, as its projects are at different stages, but this is mitigated by the Enel group's expertise. The company commissioned Azov wind farm (90MW) in May 2021, which was only a short delay from the initially scheduled date at end-2020.

Key Rating Drivers

Credit Metrics Weakening Temporary: We expect funds from operations (FFO) net leverage to be above our negative rating sensitivity in 2021-2023 due to high capex, lower EBITDA and our expectations that all new wind capacities will be commissioned by end-2024 and modernisation projects be completed by end-2025. The commissioning of renewables capacities under CSAs would support EBITDA in absolute terms and improving predictability. Increasing EBITDA and reducing capex would support gradual deleveraging to below 2.5x from 2024, in our view, which is a key driver for the affirmation and Stable Outlook.

Our expectations are based on total capex of EUR0.5 billion for wind projects until 2024, CSA modernisation capex of RUB11 billion until 2025 and maintenance capex of about RUB2.4 billion annually on average as well as zero dividend payment in 2021, RUB3 billion in 2022 and in 2023 (postponed from 2021) and dividend payout ratio of 65% of net income from 2023 onwards.

EBITDA Weakness Temporary: We forecast Fitch-calculated EBITDA to decrease to about RUB7 billion in 2021 (about RUB8 billion in 2020) before gradually increasing following commissioning of renewable projects in 2021-2024 that benefit from capacity payments under renewables CSAs. Azov wind farm (90MW) was commissioned in May 2021 (initially scheduled for end-2020) and started to receive renewables CSA payments from June 2021. The company expects to commission Kola wind farm (201MW) in April 2022 and another 71MW in July 2024. This should improve EBITDA and cash flows and shift the company's business mix to renewables projects, which we forecast to account for over a third of EBITDA in 2023.

Supportive Renewable CSAs Tariffs: Similar to thermal generation in Russia, the renewables CSAs envisage stable earnings and a guaranteed return for capacity sold under the approved tariff mechanism with a favourable base rate of return of 12%, adjusted according to Russian bond yields. CSA tariffs for wind projects are untested but we expect them to be 8x higher than capacity auction tariffs. Similar to rated Russian peers, capacity sales under the CSA mitigate the company's exposure to market risk, support stable cash flow generation and enhance its business profile.

Modernisation Projects: In 2019, thermal power units of 330MW (rising to 370MW after further investments) were selected at modernisation CSA auctions, with expected commissioning over 2022-2025 and a base rate of return of 14%, adjusted according to Russian bond yields. The consistent application of the CSA framework, modernisation CSAs and auctions on the competitive capacity market over a six-year period adds to cash-flow predictability. We estimate that more than half of the company's EBITDA will derive from some form of contracted capacity in the medium term.

FCF to Remain Negative: We expect free cash flow (FCF) to remain negative over 2021-2023, reflecting high capex and dividend outflows before FCF turns neutral or slightly positive following capex moderation and improved operating cash flows. Negative FCF will add to funding requirements.

9M21 EBITDA Declined: Enel Russia reported revenue of RUB35 billion in 9M21 (up by about 10% yoy) and Fitch-calculated EBITDA of about RUB5 billion (down by 22%). EBITDA was mainly affected by lower capacity sales due to the termination of thermal CSAs for 829MW units in 2020. The latter was only partially compensated by the commencement of renewables CSA for 90MW unit from June 2021. Fitch-calculated EBITDA is expected to be around RUB7 billion in 2021 before gradually increasing following commissioning of renewable projects and modernisation of existing assets.

Derivation Summary

Following the disposal of Reftinskaya power station, Enel Russia will be comparable in scale with Public Joint Stock Company Territorial Generating Company No. 1 (TGC-1; BBB/Stable; Standalone Credit Profile (SCP) bbb-) but smaller than PJSC Mosenergo (BBB/Stable; SCP bbb-). We expect its business profile to benefit from newly constructed renewable capacity under renewables CSAs along with modernisation CSAs, which would support cash flow predictability in the medium term. This would make Enel Russia's business profile more akin to that of TGC-1 and only slightly weaker than that of Mosenergo.

We forecast a deterioration of Enel Russia's credit metrics during the intensive capex phase and business transformation but expect a gradual improvement thereafter. Enel Russia has a record of strong financial performance compared with Russian peers. Enel Russia's IDR does not incorporate any parental support from its ultimate majority shareholder, Enel S.p.A. (A-/Stable), due to our assessment of weak links, while those of Mosenergo and TGC-1 incorporate a one-notch uplift to the companies' SCPs of 'bbb-'.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Russian GDP of 2%-4.3% and inflation of 4.1%-6.2% in 2021-2025

Power price to grow above inflation in 2021 and in line with gas price over 2022-2025

Regulated electricity tariffs to increase in line with inflation annually up to 2025

Gas tariff indexation of 3%-5% a year over 2021-2025

Capex in line with management expectations for wind projects, CSA modernisation capex of RUB11 billion until 2025 and maintenance capex of about RUB2.4 billion annually on average

Zero dividend payment in 2021, RUB3 billion in 2022 and in 2023 (postponed from 2021) and dividend payout ratio of 65% of net income from 2023 onwards

Azov wind farms (90MW) commissioning in 2021, Kola wind farm (201 MW) commissioning in 2022 and Rodnikovsky wind farm (71MW) commissioning in 2024

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Implementation of business transformation and completion of wind and modernisation projects leading to a recovery in EBITDA

Continuous record of a supportive regulatory framework, coupled with Enel Russia's strong financial profile and disciplined financial policy resulting in FFO net leverage declining below 2.0x and FFO interest coverage rising above 6.0x

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to show a clear deleveraging path towards 2.5x by 2023.

Generous dividend distributions or an ambitious capex programme leading to a weakening of the financial profile, with FFO net leverage rising above 2.5x and FFO interest coverage falling below 5x on a sustained basis

Negative FCF on a sustained basis

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Comfortable Liquidity, No FX Debt: At end-9M21, cash and equivalents stood at RUB8 billion together with mostly uncommitted unused credit facilities of RUB47 billion (available for more than a year, but including RUB2 billion of committed wind-projects funding) are sufficient to cover short-term debt maturities of RUB7 billion and Fitch-expected negative FCF of about RUB8 billion in the next 12 months. Considering the recently drawn project financing at opco level, we believe that any material debt issued at parent level would be structurally subordinated, with a potential notch down from the IDR. The current credit facilities include loan agreements with the largest local banks, international bank subsidiaries and an international development bank. We expect funding from these banks to be available to the company. Debt is fully rouble-denominated. The company continues to hedge most of its foreign-currency capex.

Issuer Profile

PJSC Enel Russia is a power generating company and a subsidiary of Enel Group in Russia. The company provides electricity and heat supply to both industrial enterprises and domestic consumers. The company's strategy is focused on technological profile diversification to reduce the carbon footprint, and on efficiency and reliability of gas-fired power plants.

Summary of Financial Adjustments

Impairment loss in respect of construction in progress was excluded from EBITDA, allowance for expected credit losses of trade and other receivables was included in EBITDA

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

Enel Russia PJSC

LT IDR

BB+

Affirmed

BB+

ST IDR

B

Affirmed

B

LC LT IDR

BB+

Affirmed

BB+

LC ST IDR

B

Affirmed

B

senior unsecured

LT

BB+

Affirmed

BB+

Page

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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