The credit rating of Rosseti of North-West, PJSC (hereinafter, Rosseti 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 constrained 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 PJSC ROSSETI (ACRA rating: AAA(RU), outlook Stable; hereinafter, Rosseti) as high.
In 2022, the Agency expects a decrease in the Company's performance against 2021, in particular, a decrease in the supply of electricity on the back of a reduction in industrial production output in the serviced regions caused by sanctions. At the same time, the Company's financial stability is supported by an increase in electricity consumption in H1 2022. In this regard, the Agency expects that the Company will be able to maintain operational stability and ensure the reliability of regional energy system in the next 12 months.
Rosseti of North-West is a regional electric power grid company operating in the north-west of Russia.
KEY ASSESSMENT FACTORS
High likelihood of extraordinary support from PJSC Rosseti. Rosseti of North-West is an infrastructure monopoly supplying electricity to the Arkhangelsk, Vologda, Murmansk, Novgorod and Pskov Regions, the Republic of Karelia, and the Komi Republic. 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. Rosseti 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 is about 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 before net interest and taxes margin of 15%. ACRA expects the annual average FFO before net interest and taxes margin in 2022–2024 to decline due to the growth of the Company's expenses outrunning the growth of its incomes.
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 2021) 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 2021, the Company’s FCF was negative at about -RUB 0.3 bln (-RUB 0.2 bln in 2020). 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, as well as growing investments to upgrade fixed assets. The ratio of Company’s investments to revenues for 2021 amounted to 11% (9% in 2020). In 2022–2024, capital investments are expected at 9–11% of revenues, which is associated with the need to keep existing power grid facilities in good condition. ACRA expects the Company’s FCF to turn positive in 2022.
Medium leverage. As of June 30, 2022, the Company's debt portfolio was RUB 16.1 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 are short-term and due in H1 2023. In ACRA’s opinion, the quality assessment of the Company's leverage is not at the maximum level, because the Company does not possess any public debt. As of December 31, 2021, the ratio of FFO before net interest was 2x (2.6x in 2020). According to ACRA’s estimates, in 2022–2024, the volume of debt is expected to decline to 2.1x.
The strong liquidity position stems from the volume of funds in the Company’s accounts and deposits, which amounted to RUB 4 bln as of June 30, 2022, and the significant size of available credit lines — RUB 43.4 bln.
KEY ASSUMPTIONS
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Implementation of the capital investment program as planned.
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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 highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Lower regulatory and sales risks through longer-term and transparent tariff regulation principles;
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Leverage declining below 2.0х to FFO before net interest amid simultaneous growth of FFO before net interest and taxes margin to higher than 15% and the ratio of capex to revenue declining below 10%;
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Increased importance of the Company for Rosseti due to cross-default provisions in the debt liabilities of Rosseti.
A negative rating action may be prompted by:
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Loss of control over the Company by Rosseti, or less tight relations between the Company and Rosseti;
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Growth of total debt higher than 4.0x to FFO before net interest;
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Decline of interest coverage below 5.0x;
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FFO before net interest and taxes margin falling below 8%;
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Significant worsening in access to external liquidity sources.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): a+.
Adjustments: group.
Issue ratings
There are no outstanding issues.
regulatory disclosure
The credit rating has been assigned to Rosseti 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 Rosseti of North-West, PJSC was published by ACRA for the first time on August 8, 2018. The credit rating of Rosseti 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 data provided by Rosseti of North-West, PJSC, information from publicly available sources, and ACRA’s own databases. The credit rating is solicited, and Rosseti 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 Rosseti of North-West, PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
