GCR assigns North South Power Company Limited a first time Issuer rating of BBB+(NG); Outlook Stable

11 Sep 2017 In Rating Notifications

GCR assigns North South Power Company Limited a first time Issuer rating of BBB+(NG); Outlook Stable

Lagos, 11 September, 2017—Global Credit Ratings has assigned long term and short term national scale Issuer ratings to North South Power Company Limited of BBB+(NG) and A2(NG) respectively, with a Stable outlook accorded. The ratings are valid until August 2018.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to North South Power Company Limited (“NSP” or the “Company”) based on the following key criteria:

NSP was established in 2012 by a group of Nigerian and African shareholders to carry on the business of developing, owning and operating power plants and other energy infrastructure systems across Africa. The Company’s emphasis is on renewable energy systems, such as, solar, wind, thermal and hydro power plants. It currently manages and operates the 600 Megawatt Shiroro Hydroelectric power plant, through a 30-year concession (initiated in 2013) from the Federal Government of Nigeria (“FGN”). The Company leverages strong backing off its diverse shareholder base, as well as enjoying a good relationship with regulators, underpinning a strong commitment to a safe and healthy work environment.

Revenue progression over the review period has been supported by a ramp up in generation capacity, although the 134% uptick to N28bn in FY16 was attributed largely to the execution of Power Purchase Agreements (“PPAs”) with the Nigeria Bulk Electricity Trading PLC. This resulted in selling prices being indexed against the USD/Naira exchange rate and the US inflation index, to allow for a more accurate cost reflective tariff, given that the functional currency is the USD. As such, the depreciation of the Naira in FY16 had an immediate positive impact on revenue. Although, revenue of N10.7bn as at end June (“1H FY17”) was behind budget, it surpassed the N8.5bn reported in the comparative period in FY16.

Profitability has been supported by the lean cost base, improved capacity utilisation and more recently, the upward revision in the tariff structure. This has seen the operating margin rise from a low 52% in FY14 to 73% in FY16, and an improvement in net interest cover to 9.9x (FY15: 3.4x). Although, commencement of annual payment of concession fees from year six (FY19) could lead to higher expenses, the impact would be largely moderated by the settlement of the bulk of existing loans over the next year.

Strong cash flow generation has enabled growth to be funded internally over the past five years, resulted in stable debt of between N11-N12bn. With debt decreasing marginally at FY16 and 1H FY17 and given firmer earnings, both net debt to equity and net debt to EBITDA declined to 25% and 37% respectively at FY16 (FY15: 127% and 169%). Notwithstanding this, the requirement for all power generated to be transmitted to the national grid has served to constrain financial flexibility. As many customers have not timeously settled the distribution companies, distribution companies have, in turn, incurred high debtors with the generation companies (over N300bn at FY16). In this regard, 35% of NSP’s asset base comprised debtors at FY16. However, recent interventions by the Central Bank of Nigeria and World Bank allowed the off-taker to settle around 80% of outstanding invoices, enhancing liquidity in 2H FY17.

GCR has considered the strong latent electricity demand amidst the sizeable deficit in supply and government support (via policy and liquidity backing). Notwithstanding this, and despite the relatively low cost of operating hydroelectric plants, execution of diversification efforts may be curtailed by adverse currency movements, construction/performance risk and structural macroeconomic challenges (inter alia).

Positive rating action over the medium would be supported by a significant reduction in debtors and successful completion of the proposed capacity expansion and thus, revenue diversification programme on schedule and within budget. Conversely, earnings underperformance, combined with a significant increase in the cost base and/or other contractual obligations, leading to deterioration in the liquidity position and other credit protection metrics, could result in a downgrade.

 

 

NATIONAL SCALE RATINGS HISTORY

Rating Class Rating Outlook Date
       
Initial Rating/Last rating      
Long term BBB+(NG) Stable August 2017
Short term A2(NG) Stable August 2017
       
       

ANALYTICAL CONTACTS

Primary Analyst

Kunle Ogundijo

Analyst

Lagos

+23 41 462 2545

.(JavaScript must be enabled to view this email address)

Committee Chairperson

Dave King

Chairman

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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2017

Glossary of Terms/Ratios (February 2017)

 

 

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

 

 

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings expire in August 2018.

NSP participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings were contested by NSP, but the appeal was not successful.

The information received from NSP to accord the credit rating included;

  • 2016 audited annual financial statements (plus four years of comparative numbers),
  • Unaudited management accounts as at 1H FY17
  • industry comparative data and regulatory framework
  • a breakdown of facilities available and related counterparties.
  • information specific to the rated entity and/or industry was also received.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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