OREANDA-NEWS. Fitch Ratings has affirmed JSC Moscow United Electric Grid Company's (MOESK) Long-term foreign currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook. In addition, Fitch has assigned the company's RUB5bn domestic bonds a local currency senior unsecured rating of 'BB+'.

MOESK's 'BB+' Long-term IDR benefits from a one-notch uplift for parental support from its majority shareholder, JSC Russian Grids, and ultimately the state. The standalone rating of 'BB' reflects the company's position as a near-monopoly electricity distributor in Moscow and Moscow region and its sound credit metrics remaining within Fitch's negative rating guidelines, despite anticipated deterioration due to expected tariff and volume growth moderation. Fitch consider the regulatory risk to be high and view it as a key factor due to which the standalone ratings of Russian utilities are capped at sub-investment grade.

Following the tariff freeze for 2014, MOESK expects flat tariff growth for 2015 and a low single digit annual tariff increase over 2016-2017. This is well below the tariffs rise set by the regulator under the regulatory asset base (RAB) framework over 2012-2017 and significantly lower than our previous expectations of the tariff growth at least in line with Russia's inflation, which Fitch forecasts at 8% in 2014 and 9% in 2015. Frequent modifications of the regulatory regime and political interventions undermine the predictability of the RAB framework, which is necessary for networks to make long-term investment decisions.

Fitch expect the regulatory risk in the Russian power sector to heighten in 2015 due to the slowing economy and social commitments of the government. The uncertainties surrounding the regulatory regime are the key factor due to which the standalone ratings of Russian utilities (including networks) are capped at sub-investment grade. The instability builds uncertainties into companies' operations and weighs on their cash flow generation, increasing business and financial risks.

Although the RAB regulatory framework provides for volume changes to be captured in the tariff dynamics, even if delayed to non-recessionary periods, Fitch assess the regulatory track record as weak and believe that MOESK is not immune from volume risk, particularly during the economic and/or financial downturn. Following moderate growth in 2014, Fitch forecast the growth of electricity volumes distributed by the company to materially slowdown in 2015 on the back of a GDP decline forecast by Fitch at 1.5% and expect modest volumes growth over 2016-2017. Fitch believe the volumes dynamics will continue to benefit from the company's geography of operations and diversified end-customer base.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Improvement of the Russian regulatory framework for electricity distribution and track record of its stability and predictability.
- Evidence that the company can maintain FFO gross adjusted leverage (excluding connection fees) well below 3.5x and FFO fixed charge cover (excluding connection fees) above 4.5x on a sustained basis would be positive for the standalone rating.
- Evidence of stronger ties with the parent.

Negative: Future developments that could lead to negative rating action include:
- Significant deterioration of the credit metrics on a sustained basis (FFO gross adjusted leverage (excluding connection fees) above 4.5x and FFO fixed charge cover (excluding connection fees) below 3.25x) due to, for example, low tariff growth, high capex, persistent underperformance of the regulated operating expenses and/or acquisitions.
- Further material adverse changes to the regulatory framework.
- Weaker links with the parent and ultimately the state.