Lagos, 29 January, 2020 — Global Credit Ratings has affirmed the long term and short term national scale Issuer ratings of North South Power Company Limited of A-(NG) and A2(NG) respectively, with the outlook accorded as Stable. The ratings are valid until October 2020.
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:
The rating takes into consideration NSP’s ability to maintain its competitive position as one of the major electricity generating companies in Nigeria, evidencing a strong operating performance and low gearing.
However, a major constraint to the ratings is the substantial receivables outstanding, which have necessitated large impairments. The debtors are a consequence of the inability of the distribution companies (“Discos”) to adequately bill and receive payment for electricity dispatched. A number of interventions have been put in place to address these industry wide constraints, including a N701bn intervention fund through Central Bank of Nigeria to improve liquidity in the sector. While most of these policies are focused on current invoices, legacy receivables remain significant and unaddressed.
Notwithstanding the debtors challenges, NSP continues to generate positive operating cash flow, with a very large positive balance in FY18. With only negligible capital expenditure, NSP has utilised excess cash to strengthen its balance sheet, whilst debt has been used solely to fund new concessions.
The ratings are supported by the stability and predictability of revenues on the back of long-term offtake agreements. To this end, revenue evidenced strong growth supported by an increase in electricity dispatched under existing contracts, as well as new contracts. To increase predictability of cash flow, NSP is currently in discussions with some Discos for possible acquisition and vertical business integration opportunity.
Operating expense are also largely stable as the major items, such as amortisation of concession value, are contractually determined. Administrative expenses have been escalating at a relatively high rate, but operating margin remains very strong at around 75%. However, after accounting for a N20.2bn impairment in FY18 (FY17: N7.6bn), a loss before tax was reported (FY17: Pre-tax profit N9.4bn). While a further large impairment has been incurred for 3Q FY19, NSP is on track to report a net profit.
NSP generated a robust operating cash flow supported by reduction in working capital absorption (a result of the write-off on trade receivable) and increase in business volume.
The Company reported a very low gearing metrics at 3Q FY19, with gross debt to EBITDA at 31% (FY18: 19%) and very strong interest coverage of 22x (FY18: 37x). Moreover, with the issuance of secured bonds in 1Q FY19, the tenor of debt has been extended to 2034.
Positive rating action is dependent on the demonstrated ability to efficiently manage current debtors, as well as resolving the long outstanding debtors’ issue. However, further large debtors’ absorptions that impair liquidity, profitability and/or debt serviceability could result in a negative rating action. Significant debt funded acquisition or investment activity may also impact the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2017)
Long term rating: BBB+(NG)
Short term: A2(NG)
Last rating (September 2018)
Long term rating: A-(NG)
Short term: A2(NG)
Senior Credit Analyst
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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- (2017-18)
Glossary of Terms/Ratios (February 2018)
RATING LIMITATIONS AND DISCLAIMERS
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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 October 2020.
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;
• 2018 audited annual financial statements (plus four years of comparative numbers),
• Unaudited management accounts as at 3Q FY19
• 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.