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ACRA affirms AAA(RU) to PJSC "Lenenergo", outlook Stable, and AAA(RU) to its bonds

The credit rating of PJSC "Lenenergo" (hereinafter, Lenenergo, or the Company) is based on the Company’s strong market position in the regions where it is present, moderately strong operating profile, high business profitability, low leverage, and strong liquidity. ACRA assesses that it is highly likely that the key shareholder, PJSC "ROSSETI" (ACRA rating AAA(RU), outlook Stable), will provide extraordinary support to the Company if necessary.

Lenenergo is a regional electric grid company operating in St. Petersburg and the Leningrad Region. The key shareholders of the Company are PJSC "ROSSETI" (67.5%) and the city of St. Petersburg (28.8%).

Key rating assessment factors

High likelihood of extraordinary support from the key shareholder, PJSC "ROSSETI". Lenenergo is an infrastructure monopoly that supplies electric power to St. Petersburg, Russia’s second largest economic center. For the Rosseti holding (hereinafter, Rosseti or the Holding) performing quasi-public energy supply functions, this region is one of the key ones in the country. The importance of the region for Rosseti was confirmed by the decisive role of the Holding in securing RUB 48 bln worth of extraordinary state support and special-purpose investments in the form a capital injection for Lenenergo 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).

Infrastructure monopoly with moderate sales risk. Lenenergo occupies a dominant position in the electricity transmission market within the boundaries of interconnected networks in St. Petersburg and the Leningrad Region. Based on tariff and balance decisions, Lenenergo’s market share in terms of tariff revenue stands at 88.7% as of 2020. The level of overdue receivables is low at 2.7% of revenues for 2019.

Moderately strong operating profile. Prior to 2015, the tariff set for Lenenergo for its electricity transmission services was lower than the gross revenue required by the Company. Regulatory risk has fallen due to the execution of resolutions to bring Lenenergo's tariff to an economically reasonable level, which were adopted at a meeting with the president of the Russian Federation regarding the regulation of the business and financial recovery of Lenenergo. Increased indexation is associated with the very high investment commitments of the Company — Lenenergo has one of the highest investment to revenue ratios (31.7%).

ACRA assesses that the Lenenergo’s corporate governance meets industry standards and is at an adequate level. The board of directors of Lenenergo is made up of thirteen members, including representatives of Rosseti and the city of St. Petersburg. The Company’s risk management system minimizes all the major types of risk and Rosseti’s control includes approval of the credit policy and the rules for placement of funds, which are unified for all subsidiaries. ACRA notes that Rosseti’s control over Lenenergo substantially toughened after 2015. The financial transparency of Lenenergo is high.

Free cash flow (FCF) is expected to be negative, despite higher profits. In 2019, the Company’s FCF grew by more than 2x compared to 2018, and amounted to RUB 6.9 bln, mainly due to significant tariff growth. FCF will be used to finance Lenenergo’s extensive investment program, which focuses on building and upgrading the Company’s electric grid facilities. In connection with this, ACRA expects the Company’s FCF indicator to have a negative average annual value of RUB -5 bln in 2020–2021.

The Company’s FFO margin before interest and taxes increased to 46% in 2019 (39% in 2018). The increase in margin was due, among other things, to the return of revenue which had been lost due to tariff smoothing. ACRA expects profitability to return to the 2018 level in 2020–2021.

In 2019, the growth in Lenenergo’s revenue was primarily due to annual tariff growth. Annual results show that the Company’s IFRS revenue increased by 6% year-on-year to RUB 82.7 bln. ACRA expects revenue to grow by 2.1% year-on-year in 2020 due to annual tariff growth.

Low leverage. As of March 2, 2020, the Company’s debt portfolio amounted to RUB 25.4 bln (0.8x to FFO before net interest payments), while total debt including pension obligations stood at RUB 26.1 bln (0.8x to FFO before net interest payments). More than 80% of the debt portfolio is made up of long-term ruble-denominated bank loans and bonds with fixed interest rates. All debt is subject to repayment after 2020. The Company’s long-term obligations are almost equally divided between bank loans and public borrowings. ACRA expects the Company’s total debt (including pension obligations) to increase in 2020–2021 to an average annual indicator of RUB 37 bln (1.1x of FFO before net interest payments) due to the need to finance the investment program. Leverage is expected to gradually decline after 2020.

The strong liquidity position is due to a comfortable repayment schedule in 2021–2023. Funds in Lenenergo’s accounts totaling RUB 8.3 bln as of January 1, 2020 and a significant amount of available credit lines, which exceed the Company’s total debt by 3x, provide additional support to liquidity.

Key assumptions

  • Average tariff indexation and average inflation at 3% and 3.9% in 2020–2022, respectively;
  • Capital investment program is implemented in full and according to schedule (average annual investment at RUB 28.3 bln excluding VAT in 2020–2022);
  • Dividend payments amounting to no more than 50% of net profit under IFRS minus financing of investments.

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 negative rating action may be prompted by:

  • Rosseti’s loss of control, or looser integration between the Company and Rosseti;
  • Total debt growing above 2.0x of FFO before net interest payments amid deteriorating debt structure, or interest coverage going below 5.0x;
  • FFO margin before interest and taxes going below 25%;
  • Substantially worsened access to external sources of liquidity.

Rating components

SCA: aa-.

Support: group — SCA plus 3 notches.

Issue ratings

PJSC "Lenenergo" bonds (RU000A101DE8), maturity date: January 23, 2030, date of planned early redemption: January 29, 2025, issue volume: RUB 5 bln — AAA(RU).

PJSC "Lenenergo" bonds (RU000A101DF5), maturity date: January 23, 2030, date of planned early redemption: January 29, 2025, issue volume: RUB 5 bln — AAA(RU).

Credit rating rationale. The issues represent senior unsecured debt of PJSC "Lenenergo". Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Company. According to ACRA’s methodology, the credit rating of the bond issues is equivalent to that of PJSC "Lenenergo"— AAA(RU).

Regulatory disclosure

The credit ratings were assigned to PJSC "Lenenergo" and the bonds issued by PJSC "Lenenergo"(RU000A101DE8, RU000A101DF5) 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, 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 the Analytical Credit Rating Agency within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale for the Russian Federation was also used in the process of the credit rating assignment.

The credit rating of PJSC "Lenenergo" was first published on April 11, 2018. The credit ratings of the bond issues (RU000A101DE8, RU000A101DF5) were first published on February 5, 2020. The credit rating of PJSC "Lenenergo" and its outlook, as well as the credit ratings of the bonds issued by PJSC "Lenenergo" (RU000A101DE8, RU000A101DF5)  are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on data provided by PJSC "Lenenergo", information from publicly available sources, as well as ACRA’s own databases. The credit ratings are solicited, and PJSC "Lenenergo" participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by PJSC "Lenenergo" in its financial statements have been discovered.

ACRA provided no additional services to PJSC "Lenenergo". No conflicts of interest were discovered in the course of credit rating assignment.

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