The credit rating of IDGC of North-West, PJSC (hereinafter, IDGC of North-West, or the Company) stems fr om the Company’s strong market positions in its regions of presence (wh ere it is the largest player), adequate business profitability, medium leverage and strong liquidity. The rating is restricted by the low level of social and economic development of the serviced regions, which increases regulatory and sales risks for the Company. ACRA views the likelihood of extraordinary support from the Company’s key shareholder, PJSC "ROSSETI" (ACRA rating: AAA(RU), outlook Stable; hereinafter, Rosseti) as high.
IDGC of North-West is a regional electric power grid company operating in the north-west of Russia. The key shareholders of the Company are Rosseti (55.4%) and Energyo Solutions Russia (Cyprus) Limited (14.4%).Key assessment factors
High likelihood of extraordinary support from PJSC Rosseti. IDGC of North-West is an infrastructure monopoly supplying electricity to the Arkhangelsk, Vologda, Murmansk, Novgorod and Pskov Regions, the Republic of Karelia, and the Republic of Komi. The Company regularly reports good financial indicators, and therefore, as a rule, it does not require additional financial support from its shareholders. However, previous cases of support from Rosseti to other subsidiaries and affiliates demonstrates that, if necessary, the provision of such support is highly likely.
Infrastructure monopoly subject to sales and regulatory risks. IDGC of North-West is a dominant player in the electricity transmission market within the boundaries of the interconnected networks in the service area (its market share in 2020 was 73%). The level of economic development of the abovementioned regions and incomes of the main consumers allow the Company to set a tariff that ensures sufficient profitability of its business. At the same time, there is a risk of socio-political factors influencing tariff decisions, which when coupled with the low level of socio-economic development of the serviced regions leads to increased regulatory and sales risks for the Company. The Company’s effective work with overdue payments translates into good payment discipline. The payment collection rate is about 99%. The size of tariffs ensure that the Company has an FFO margin before interest and taxes of 14.6%. ACRA expects the average FFO margin before interest and taxes in 2021–2023 to remain at the current level.
Mature corporate governance system. In 2013–2018, the Company’s operations were affected by external adverse factors: bankruptcy of power sales companies in four regions of the Company’s presence, which resulted in a total bad debt equal to the annual FFO of the Company, and termination of “last mile” agreements. No cases of shareholder support in the mentioned period and a decline of leverage (the ratio of debt to FFO before net interest declined from 3.0x in 2013 to 2.2x by the end of 2019) positively characterize the level of corporate governance at the Company. The mature corporate governance system is based on the application of best practices in creating management bodies and employee motivation systems, a conservative financial policy, and a high level of financial transparency.
Moderate investment commitments and FCF. In 2020, the Company’s FCF turn into negative and amounted to -RUB 0.2 bln. The year before it was positive. This is related to a decline in revenues due to lower electric power consumption on the back of the fall in business activities in the period of COVID-19 pandemic and the OPEC+ agreement. The ratio of Company’s investments to revenues over the six years is 9.5% (the average ratio for Rosseti is 23.9% for the same period). In 2020, investments were 10.6% lower than in 2019, while in 2021–2023, capital investments are expected at around 9% of revenues. Such increase in investments is associated with the need to keep existing power grid facilities in good condition. ACRA expects the Company’s FCF to be positive in 2021–2023.
Medium leverage. As of June 30, 2021, the debt portfolio of IDGC of North-West was RUB 14.2 bln. All liabilities are ruble-denominated fixed-rate and floating-rate bank loans tied to the key rate of the Bank of Russia. About two-thirds of the Company’s debt is long-term. The quality assessment of IDGC of North-West’s leverage is at the maximum level, in ACRA’s opinion, because the Company does not possess any public debt. As of December 31, 2020, the ratio of FFO before net interest was 2.6x. According to ACRA's estimations, in 2001–2023, the volume of debt is expected to decline to 2.1x.
The strong liquidity position stems from the comfortable debt repayment schedule, the volume of funds in the Company’s accounts and deposits, which amounted to RUB 2.2 bln as of June 30, 2021, and the significant size of available credit lines — RUB 39.1 bln.
Key assumptions
- Average tariff indexation rate and inflation rate of 3.0% and 4.2%, respectively, in 2021–2023;
- Implementation of the capital investment program as planned;
- Dividends amounting to no more than 50% of IFRS or RAS net profit (the largest of the two is used), taking into account the actual use of depreciation charges for investment purposes.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Lower regulatory and sales risks through longer-term and transparent tariff regulation principles;
- Leverage declining below 2.0х to FFO before net interest amid simultaneous growth of FFO margin before interest and taxes to higher than 15%;
- Increased importance of the Company for Rosseti due to cross-default conditions with IDGC of North-West in the debt liabilities of Rosseti.
- Loss of control over the Company by Rosseti, or less tight relations between the Company and Rosseti;
- Growth of total debt higher than 4.0x to FFO before net interest and decline of interest coverage below 5.0x;
- FFO margin before interest and taxes falling below 8% and significant increase in the total debt above 4.0x to FFO before net interest;
- Significant worsening in access to external liquidity sources.
Rating components
Standalone creditworthiness assessment (SCA): a+.
Adjustments: SCA +3.
Issue ratings
There are no outstanding issues.
Regulatory disclosure
The credit rating has been assigned to IDGC of North-West, PJSC under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of IDGC of North-West, PJSC was published by ACRA for the first time on August 8, 2018. The credit rating of IDGC of North-West, PJSC and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by IDGC of North-West, PJSC, information from publicly available sources as well as ACRA’s own databases. The credit rating is solicited, and IDGC of North-West, PJSC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to IDGC of North-West, PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
