IR Releases

Moody’s affirms credit rating of JSC Lenenergo at Ba2 (stable outlook) and national rating at Aa2.ru (stable outlook)

MICEX-RTS: LSNG/LSNGP

Credit rating:
Moody’s Ba2 (Outlook: Stable)
Confirmed: February 2014

Press release*
10.02.2014

Moody’s affirms credit rating of JSC Lenenergo at Ba2 (stable outlook) and national rating at Aa2.ru (stable outlook)

On February 7, 2014 Moody's Rating Agency changed to stable from developing the outlook on JSC Russian Grids. Concurrently, Moody's has affirmed the Ba1 corporate family rating (CFR) and the Ba1-PD probability of default rating (PDR) of Russian Grids, as well as the ratings of six Russian Grids' subsidiaries. The six subsidiaries are: JSC FGC UES (Baa3 issuer rating), which operates the Russian national transmission grid, JSC IDGC of Center and Volga Region, JSC IDGC of Urals, JSC IDGC of Volga, JSC Lenenergo, JSC MOESK (all Ba2 CFR), which operate distribution grids. The outlook on the ratings is stable…

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In stabilizing the outlook on Russian Grids, Moody's recognizes the holding company's strengthened links to the Russian government and enhanced role as manager of the Russian grid sector following the take-over of control over FGC UES's national transmission business from the government. The stable outlook also factors in Moody's expectation that the pressure on Russian Grids' subsidiaries and consolidated profile from the government's tariff freeze decision made in September 2013 will likely be mitigated by a reduction in Capex programs for the majority of the company's subsidiaries. As a result, Moody's expects Russian Grids to be able to limit deterioration of its consolidated financial profile over the next 12-18 months to within the current rating category, with funds from operations (FFO)/interest coverage ratio and FFO/net debt ratio likely to remain above 3.0x and 20%, respectively.

Regulatory pressure and uncertainty in the context of weakening economic conditions remain currently the key rating constraints. In this environment, Moody's positively considers Russian Grids' ongoing negotiations with the Russian government to access government's long-term funding to support its subsidiaries' investment needs.

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Similarly to the affirmation of Russian Grids' rating, the affirmation of the ratings with stable outlooks of its six operating subsidiaries, FGC UES and five rated distribution grid subsidiaries, factors in Moody's expectation that the government will allow the subsidiaries to maintain a degree of linkage between tariffs and investment programs. The rating agency's expectation also takes into account compensatory measures introduced for distribution grids exposed to revenue losses following the cancelation of the so-called 'last-mile' agreements.

Moody's notes that tariff decisions under the new tariff freeze guidance have been taken for five rated distribution grids. However, tariff decisions for FGC UES have yet to be made. Investment programs for all grids are under review and expected to be finally approved by April 2014. Moody's positively considers that all the rated subsidiaries, except Lenenergo, are discussing a reduction of investment programs with the government to avoid a material deterioration in their financial profiles. However, the actual reductions and their impact on the companies' financial profiles are yet to be known and assessed.

Lenenergo may even increase investments compared to its previous plan. However, the company should benefit from exceptional tariff decisions made by the regulators, factoring in the strategic importance of these investments to the regional economy.

Overall, while a linkage between tariffs and investment decisions is an important mitigant of the low predictability of domestic grid regulation, the linkage cannot offset the risk of government-initiated new tariff revisions in weakening economic conditions. The evolving regulation remains a key risk and a key component in determining the ratings of Russian Grids and its subsidiaries, largely suppressing differences in rated businesses' credit profiles.

Credit Rating of JSC Lenenergo
Agency	Rating	Assigned
Moody’s	Ba2 (stable outlook)	November 2009
Moody’s Interfax Rating Agency (rating on national scale)	Aa2.ru (stable outlook)	November 2009

Affirmed:

· March 2011

· February 2012

· January 2013

· February 2014

* Important information:
The full text of the credit opinion is available on the website of JSC Lenenergo in the section Ratings: http://www.lenenergo.ru/shareholders/investors/ratings/