GCR upgrades North South Power Company Limited’s National Scale Rating to A-(NG); Outlook Stable

22 Oct 2018 In Rating Notifications

GCR upgrades North South Power Company Limited’s National Scale Rating to A-(NG); Outlook Stable

Lagos, 22 October, 2018—Global Credit Ratings has upgraded the long term national scale Issuer rating of North South Power Company Limited to A-(NG), while the short term rating was affirmed at A2(NG), with the outlook accorded as Stable. The ratings are valid until August 2019.


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 has established itself as a major private electricity supplier in Nigeria. Total generating capacity is 600 Megawatt (“MW”), whilst a number of projects in the pipeline could see generating capacity more than double over the medium term. NSP is also diversifying its energy sources, leveraging strong technical backing off its diverse shareholder base and an experienced management team.

The upward growth trajectory was sustained in FY17, as revenue registered at a new high, largely underpinned by the full-year impact of contractual repricing. Moreover, long term offtake agreements contribute to the stability and predictability of revenues. Despite an uptick in total expenses, at over 50% in all periods under review, the EBITDA margin is robust and provides substantial headroom to absorb potential earnings shocks. Interest coverage has also strengthened substantially and is expected to remain strong. However, the large charges related to debtors impairments and currency fluctuations remain a concern. NSP expects further margin enhancement to be driven by the planned increase in capacity over the medium term.

Although, around 70% of receivables date prior to the execution of improved tariff agreement with Nigerian Bulk Electricity Trading PLC (“NBET”) in 2016, the major constraint to NSP’s credit rating remains the rising debtors’ book, with another substantial working capital absorption in FY17. Positively, the intervention from the Central Bank of Nigeria through disbursements from the Payment Assurance Fund has somewhat eased the liquidity pressure with the prompt settlement of around 80% of current invoices, while a portion of the legacy debt was paid in 1H FY18. The Federal Government of Nigeria continues to explore options to settle the outstanding obligation. In addition, efforts to open the industry up to competition and allow generating companies to sell directly to eligible customers are positively considered, as this will serve to diversify/mitigate revenue collection risks. Sustaining the current trend is critical to strengthening the cash flow position of generating companies and enhancing financial strength.

With no major capex activity in the last couple of years, gross debt reduced to N8.9bn at FY17 and N7.5bn at 1H FY18. Combined with the sustained growth in profitability, debt service metrics have improved, with net debt to equity tapering to 21% at FY17 and 7% at 1H FY18. The decline in net debt to EBITDA to 19% at 1H FY18 (FY17: 40%) further demonstrates the strengthening of the balance sheet.

Growth prospects in the power sector remain strong given the latent demand and entrenched government support. Accordingly, NSP has outlined a comprehensive strategy for growth over the medium term, however, overcoming macroeconomic headwinds, as well as securing adequate funding (at affordable rates) will prove key to the timely actualisation of planned projects.

Positive rating action over the medium would be supported by the resolution of the industry’s liquidity issues, leading to a sustained reduction in debtors. The successful implementation of expansion projects within the specified timeframe would further entrench NSP’s market position. Conversely, further large debtors’ absorptions that impair liquidity, could result in a need for debt to meet operational requirements. A substantial rise in the cost base or project cost overruns, could lead to a deterioration in credit protection metrics.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Analyst
Lagos
+23 41 904 9462
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Committee Chairperson
Dave King
Chairman
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2018
North South Power Company Limited Rating Report- 2017
Glossary of Terms/Ratios (February 2018)

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 process 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 2019.

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 have been disclosed to North South Power Limited with no contestation of the ratings

The information received from NSP to accord the credit rating included;
• 2017 audited annual financial statements (plus four years of comparative numbers),
• Unaudited management accounts as at 1H FY18
• Medium term budget
• 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.

 

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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