Training on сorporate credit analysis, March 19–20

ACRA assigns AA+(RU) to IDGC of North-West, PJSC, outlook Stable

The credit rating assigned to IDGC of North-West, PJSC (hereinafter, the Company) stems from the Company's monopolistic market positions, high business profitability, low leverage and strong liquidity. The rating is restricted by low level of social and economic development of regions serviced by the Company, which increases regulatory and sales risks. The rating is backed by the high likelihood of extraordinary support from the key shareholder, PJSC "ROSSETI" (ACRA rating: AAA(RU), outlook Stable) (hereinafter, Rosseti).

The Company is a regional electric power grid company operating in the north-west area of Russia. The key shareholders of the Company are PJSC Rosseti (55.4%) and Energyo Solutions Russia (Cyprus) Limited (14.4%).

Key rating assessment factors

High likelihood of extraordinary support from the key shareholder (PJSC Rosseti). The Company has never been financially supported by its parent company. However, previous cases of extraordinary support by Rosseti of other subsidiaries and affiliates demonstrated that, in case of need, such support is highly likely. In 2015–2018, Rosseti recapitalized its subsidiaries for the total amount of RUB 49 bln.

Infrastructure monopoly subject to a moderate regulatory risk. The Company is an infrastructure monopoly supplying electricity to seven Russian administrative regions located in the north-west Russia (8% of the territory of Russia). Low per capita incomes in the area serviced by the Company (5% lower than the Russian average, or 18% lower, if the costs of living are taken into account), weak indicators of the regional budgets, and a large number of high energy-intensive customers cause high regulatory and sales risks for the Company.

Mature corporate governance system. In 2013–2018, the Company's operations have been affected by certain external factors: bankruptcy of power sales companies in the four regions of Company's presence (which have led to a total bad debt equal to the annual FFO of the Company), and termination of "last mile" agreements. Absence of cases of shareholding support in the mentioned period and a decline in the leverage (the ratio of debt / FFO before net interest went down from 3.0 in 2013 to an estimate of 1.7 by the end of 2018) characterize positively the level of corporate governance in the Company. The mature corporate governance system is based on the application of the 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 positive FCF. The investment activities are weak in the region; therefore, the Company implements no major investment projects. In the last four years (2014–2017), the Company generated positive cash flow, which was observed only in two public electric grid companies in Russia. This is caused by moderate investments: the ratio of Company's investments to revenue was 11% (the average ratio for Rosseti was 24% in the same period). In 2018, the volume of investments may grow by 28% driven by new grid connections, while in 2019–2021, the investments are expected to go down to 8% of the revenue. ACRA expects that the Company's FCF will remain positive in 2018–2020.

Low leverage. As of July 01, 2018, the debt portfolio of the Company was RUB 13 bln (1.5х of FFO before net interest payments), and the total debt, including pension obligations, was RUB 15 bln (1.6х of FFO before net interest payments). All liabilities are ruble denominated mostly fixed rate bank loans with the average maturity of two years; 70% of liabilities are due to a single lender. According to ACRA estimates, in 2018–2020, the total debt of the Company (including pensions) will be RUB 15–17 bln (1.7–2.4х of FFO before net interest payments).

Key assumptions

  • In 2018–2020, the tariff indexation rate and the average inflation rate will be 3.0% and 4.0%, respectively;
  • The Company will implement its capital development program as planned (RUB 8 bln, w/o VAT, in 2018, and RUB 4.5 bln annually in the period from 2019 to 2020);
  • The dividend will amount to 50% of the IFRS net profit less investment financing.

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 going down to 1.5х of FFO before net interest in 2018–2020;
  • Company's profitability going up to 20% of FFO before interest and tax in 2019–2020.

A negative rating action may be prompted by:

  • A loss of control over the Company by Rosseti, or less tight relations between the Company and Rosseti;
  • The Company's investment commitments for 2018 remaining unchanged in 2019–2020, amid tougher tariff regulation, including periodical tariff freezes;
  • Substantially deteriorating access to external sources of liquidity.

Rating components

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 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, the 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 IDGC of North-West, PJSC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (August 06, 2018).

The assigned credit rating is 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.

No material discrepancies between the provided data and the data officially disclosed by IDGC of North-West, PJSC in its financial statements have been discovered.

ACRA provided additional services to IDGC of North-West, PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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