ACRA assigns A(RU) to LLC Teploenergo, outlook Stable

The credit rating assigned to LLC Teploenergo (hereinafter, the Company) is based on the Company’s stable market position (a result of successful operations in the heating supply markets in Saint Petersburg and the Leningrad Region), an adequate business profile, low leverage, high coverage, good profitability, as well as a good liquidity.

Teploenergo is a regional company that produces and transports heating energy and provides heating supply services in St. Petersburg and the Leningrad Region. The sole owner of the Company is E. V. Kochnev.

Key rating assessment factors

Stable market position. The Company provides heating supply services to consumers in certain districts of St. Petersburg and the Leningrad Region, where it has a market share of 1.6% (top five heating supply companies in the city). The Company operates in areas of the city where residential real estate is being built. The specifics of the business are the territorial distribution of consumers between different heating supply organizations being unable to change service providers, which means that there is no direct competition in terms of heating supply to existing consumers. The main area of competition is the struggle for the number of new technological connections when developers choose heating supply organizations. The Company has been a successful player in terms of getting new technology connection contracts for several years, and expects to maintain its competitive advantage in the future.

Adequate business profile. Regulatory risk is estimated as average. Despite applying the basic rule of tariff formation (“costs plus”), the cost calculation is adjusted annually depending on external factors. During long-term periods of regulation, the tariff is adjusted annually, taking into account the deviation of the actual parameters of its calculation from the planned ones and changes in the planned indicators for upcoming periods. As part of curbing tariff growth for heating supply services, a preferential tariff is set for the population, the amount of which is lower than economically justified. The difference is reimbursed to the Company in the form of a subsidy from the budget of St. Petersburg. However, there is a risk of not receiving the necessary amount of subsidies to cover expenses due to the common practice of the regulatory body restricting the inclusion of part of the costs incurred by the Company in the tariff base or overstating planned energy consumption. ACRA notes that the second source of the Company’s revenue, namely technological connections to the heating source, is based on concluded contracts and full advance payment of services, which reduces the regulatory risk for the Company. Sales risk is also assessed as lower than average. The Company’s business is characterized by a solid level of collection of payments for heating supply, with the ratio of accounts receivable overdue by more than three months to revenue for 2019 amounting to 2.5%. The Company’s fixed assets are characterized by a low level of depreciation (28%), as they are only 5−7 years old. The Company’s investment program for 2020−2024 is aimed at further expanding activities. The scale of the program is significant for the Company (about 72% of revenue), but it is fully covered by funding sources.

Geographical diversification and corporate governance. The Company operates primarily in Saint Petersburg, as well as in the Leningrad region. Low geographical diversification is offset by a high level of economic development in the regions of operation.

ACRA assesses the Company’s corporate management as adequate. The key document defining the Company’s development strategy is its investment program for 2020−2024, approved by the St. Petersburg tariff committee and by the city’s energy and engineering infrastructure committee. The Company does not have a risk management system, but there is a description of the main risks of its activities. The Company does not have a Board of Directors. The CEO, who owns the Company, resolves the main issues. In this regard, ACRA notes that there is a “risk of an irreplaceable person.” Financial transparency is low. The Company does not have financial statements under IFRS, however, there are RAS statements.

Free cash flow expected to be negative, despite good profitability. In 2019, the Company’s free cash flow (FCF) decreased compared to the previous year and amounted to RUB 164 mln (RUB 204 mln in 2018). The decrease in FCF in 2019 is mainly due to an increase in capital expenditures. ACRA expects that by the end of 2020, FCF will be negative (RUB -335 mln) due to investment program financing. According to ACRA, FCF will have a positive average annual value of RUB 155 mln in 2021−2022.

The Company’s profitability on FFO before interest and taxes increased to 130% in 2019 (67% in 2018). The increase in profitability is mainly due to the increased volume of funds received under contracts for technological connections. ACRA expects profitability to return to historical levels in the future and projects it to reach 63% in 2020−2022. According to ACRA, the level of profitability will gradually decrease in the future as the share of cash revenues from technological connections decreases.

Low leverage and high coverage. Until now, the Company has been operating without attracting significant amounts of debt financing. As of September 14, 2020, the Company’s debt portfolio was RUB 150 mln (0.08x FFO before net interest payments). The debt portfolio is represented by a single annual ruble-denominated technical grant loan with a final maturity in 2021. This loan is not related to the Company’s activities and has a mirror source of repayment. ACRA estimates that in 2020−2022, debt will increase to RUB 300 mln due to the issue of market bonds.

The coverage ratio (FFO before net interest payments to interest payments) for 2019 was not calculated due to the Company’s lack of debt. In the future, ACRA expects this figure to be higher than 10x.

The Company’s good liquidity position is based on a comfortable debt repayment schedule in 2021. Additional liquidity support is provided by funds on accounts and deposits, amounting to RUB 390 mln as of September 14, 2020, and loans issued in the amount of RUB 400 mln with a refund period until the end of 2020.

Key assumptions

  • Average rate of tariff indexation and inflation growth at 4% and 3.6%, respectively, in 2020−2022;
  • Capital investment program implemented in line with the stated terms and volumes (RUB 6 bln without VAT in 2020−2022);
  • Annual dividend payments no more than RUB 100 mln per year in 2020−2022;
  • Presence in the heating supply scheme of Saint Petersburg with the status of single heating supply organization.

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:

  • Reduced regulatory risks via long-term and transparent tariff regulation principles
  • Increase in FFO before net interest and taxes above RUB 5 bln;
  • Significant increase in the volume of heating transfer
  • Increase in average annual FCF to positive figures in 2020−2022.

A negative rating action may be prompted by:

  • Loss of status as single heat supply organization;
  • Increase in total debt above 1x FFO before net interest with deterioration of the debt structure and decrease in interest payment coverage below 10x;
  • Significant decrease in the monetary volume of the contract base for technological connections;
  • Significant loss of access to external sources of liquidity.

Rating components

SCA: а.

Support: none.

Issue ratings

There are no outstanding issues.

Regulatory disclosure

The credit rating was 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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to LLC Teploenergo for the first time. The credit rating 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 the data provided by LLC Teploenergo, information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited, and LLC Teploenergo participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by LLC Teploenergo in its financial statements have been discovered.

ACRA provided no additional services to LLC Teploenergo. No conflicts of interest were discovered in the course of the rating process.

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