Forecasting in credit analysis, May 14–15

ACRA upgrades PJSC "Lenenergo" to AAA(RU), outlook Stable

The credit rating of PJSC "Lenenergo" (hereinafter, Lenenergo or the Company) has been upgraded due to the revision of the volume of capital expenditures in 2019-2021 given a tariff growth above the inflation rate, which provides significant support to free cash flow (FCF). Lenenergo is still characterized by a moderately strong operating profile, high business profitability, low leverage, and strong liquidity. According to ACRA estimates, there is a high likelihood that the key shareholder, PJSC "ROSSETI" (ACRA rating AAA(RU), outlook Stable), would provide extraordinary support to the Company.

Lenenergo is a regional electric grid company operating in St. Petersburg and the Leningrad Region. The key shareholders of the Company are PJSC "ROSSETI" (67.48% of common shares) and St. Petersburg (28.8%).

Key rating assessment factors

Lower FCF shortage and a cut in the investment program. In previous years, cash flow from operations (CFO) did not fully cover the Company’s investment program. At the same time, the tariff growth above the inflation rate provided support to the Company’s FCF. In 2018, FCF moved into a positive zone with FCF margin amounting to 3.4%. ACRA expects the share of investment in Lenenergo’s revenue to drop from 25-30% to 15% in 2020.

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-government 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 the RUB 48 billion extraordinary 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).

Strong liquidity position is due to a comfortable repayment schedule, which implies an offer to issue bonds worth RUB 2.4 billion in 2019, as well as the repayment of bank loans in the amount of RUB 3 billion in 2020. Other debt obligations of the Company are repayable in 2021. A significant amount of available credit lines, which exceeded total debt as of December 31, 2018, provides additional support to liquidity.

Low leverage. According to ACRA estimates, Lenenergo’s debt portfolio amounted to nearly RUB 35 billion, or 1.3x of FFO before net interest payments as of the end of 2018. All debt is denominated in rubles and borrowed at fixed rates. ACRA does not rule out that the debt load indicator may fall below 1.0x from 2020. Debt service indicators are high: according to ACRA estimates, in 2019-2021 the ratio of FFO before net interest payments to interest payments can firm above 10.0x.

Moderately strong operating profile. Regulatory risk is limited by resolutions to bring Lenenergo's tariff 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 Lenenergo. Increased indexation is associated with very high investment commitments of the Company. Lenenergo demonstrates one of the highest investment to revenue ratio. According to ACRA estimates, the Company has an adequate level of corporate governance. The board of directors of Lenenergo is made up of thirteen members, including representatives of Rosseti and 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 Lenenergo has substantially toughened. The financial transparency of Lenenergo is high.

Key assumptions

  • Growth of an expected average tariff by 6.4% in St. Petersburg and 11.8% in the Leningrad Region in 2019 (up by 3.9% and 4.0% in 2020–2021) and an annual increase in electric power transmission volumes by 0.4%
  • Reduction in capital expenditures of the Company from 2020;
  • Dividend payments amounting to 50% of 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 negative rating action may be prompted by:

  • Loss of control over Lenenergo by Rosseti, or less tight relations between the Company and the Holding;
  • FCF margin turns negative;
  • 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 tax going below 25%;
  • Substantially worsened access to external sources of liquidity.

Rating components

Standalone creditworthiness assessment (SCA): aa-.

Support: group — SCA plus 3 notches.

Issue ratings

Standalone creditworthiness assessment (SCA): aa-.

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, 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

For the first time, the credit rating of PJSC "Lenenergo" was published by ACRA on April 11, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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

No material discrepancies between the provided data and 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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