The credit rating assigned to PJSC "Lenergo" (hereinafter, Lenergo or the Company) stems from moderately strong operating profile, high business profitability, low leverage, and strong liquidity. The rating is restricted by negative free cash flow caused by substantial capital investments. The rating is supported by high likelihood that PJSC "ROSSETI" (ACRA rating AAA(RU), outlook Stable) would provide extraordinary support to the Company.
Lenergo is a regional electric grid company operating in St. Petersburg and the Leningrad Region.
Key rating assessment factors
High likelihood of extraordinary support from PJSC "ROSSETI". Lenergo is an infrastructure monopoly that supplies electric power to St. Petersburg, second largest economic center of Russia. For the Rosseti holding (hereinafter, Rosseti or the Holding) performing quasi-government energy supply functions, this region is one of the key regions in the country. The importance of the region for PJSC "ROSSETI" was confirmed by the decisive role of the Holding in securing the RUB 48 billion extraordinary capital injection for Lenergo in 2015–2016. The Company is deeply integrated into the structure of Rosseti, being a part of the single treasury system and the mechanism for providing operative liquidity to subsidiaries (in the form of loans or bonds).
Moderate regulatory risk and very high investment commitments. Regulatory risk is limited by resolutions to bring the Lenergo's tariffs to an economically reasonable level adopted at a meeting with the president of the Russian Federation on the regulation of business and financial recovery of PJSC "Lenergo". In the period from 2014 to 2017, a tariff campaign was carried out, which resulted in the average annual growth in actual tariffs of the Company of +16.5%, against the average value in Russia of +7.2%. According to ACRA forecasts, in 2018-2020, the Lenergo tariffs will be indexed in excess of inflation. Such increased indexation is associated with very high investment commitments of the Company. Lenergo demonstrates one of the highest investment to revenue ratio — 30–35%, while the average value for Russia is 22%.
Adequate corporate governance. The board of directors of Lenergo includes thirteen members (five members from Rosseti, two members appointed by Rosseti and six members appointed by St. Petersburg). The risk management system implemented in the Company minimizes all major types of risk and Rosseti's control includes approval of the credit policy and the rules for the funds placement, unified for all subsidiaries. ACRA notes that after 2015 Rosseti's control over Lenergo has substantially toughened. The financial transparency of Lenergo is high.
Moderate shortage of free cash flow amid strong liquidity position. Operating cash flow is not high enough to cover the entire Company's investment program of about RUB 76 billion (incl. VAT) or 32% of revenue in 2018–2020. According to ACRA estimates, in 2018 the FCF shortage will reach up to RUB 6 billion. However, it will be compensated by the strong liquidity of the Company. Lenergo has a significant amount of undrawn credit limits (RUB 40.2 billion), while the repayment schedule of the debt portfolio is quite comfortable (till the end of 2019, 35% of the portfolio or RUB 13.5 billion is to be repaid). Lenenergo has RUB 35 billion bonds program and three registered bonds issues with total amount of RUB 16 billion.
Low leverage. As of December 31, 2017, the debt portfolio of Lenergo amounted to RUB 36.8 billion or 1.4x of FFO to net interest payments. All debt is denominated in rubles and borrowed at fixed rates. According to ACRA estimates, with the investment program to be implemented in 2018-2020, the Company's debt may increase up to RUB 42 billion or up to 1.6x of FFO to net interest payments. The Agency notes a positive dynamics of the effective borrowing rate of Lenergo (by the end of 2017, the rate was about 8.1%) and expects its further improvement driven by a decrease in the key rate of the Central Bank. Debt service indicators are high: according to ACRA estimates, in 2018-2020 the ratio of FFO to net interest payments to interest payments will be about 7.0-8.0x.
Key assumptions
- Increase of expected average tariff by 7.5% in 2018 and by 5.0–5.5% in 2019–2020 and annual increase in electric power transmission volumes by 0.4%;
- Successful and timely implementation of the Company's capital investment program (annual volume of RUB 20–25 bln (w/o VAT) in 2018–2020);
- Dividend payments amounting to 50% of the net profit under IFRS or RAS (whichever is larger) less investment needs.
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:
- Substantial decrease in leverage (adjusted debt goes below 1.0x of FFO before interest, or interest coverage goes above 10.0x);
- FCF stably positive;
- Obtainment of Rosseti's sureties/guarantees for the principal debt of the Company.
A negative rating action may be prompted by:
- Loss of control over Lenergo by Rosseti, or less tight relations between the Company and the Holding;
- Total debt growing above 2.0x of FFO before interest amid deteriorating debt structure, or interest coverage going below 5.0x;
- FFO margin before interest and tax going below 25%;
- Substantially deteriorating access to external sources of liquidity.
Rating components
Standalone creditworthiness assessment (SCA): a+.
Support: group — SCA plus 3 notches.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Non-Financial Corporations under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and the State, Methodology for Analyzing Member Company Relationships within Corporate Groups, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
A credit rating has been assigned to PJSC "Lenergo" for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (April 10, 2018).
The assigned credit rating is based on the data provided by PJSC "Lenergo", information from publicly available sources as well as ACRA’s own databases. The assigned credit rating is based on the IFRS consolidated reporting of PJSC "Lenergo". The credit rating is solicited, and PJSC "Lenergo" participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSC "Lenergo" in its financial statements have been discovered.
ACRA provided no additional services to PJSC "Lenergo". No conflicts of interest were discovered in the course of credit rating assignment.
