Fitch upgrades ratings of Mangistau Electricity Distribution Network Company (Kazakhstan); outlook Stable
28.11.12 10:28
/Fitch Ratings, London-Moscow, November 22, 12, heading by KASE/ - Fitch
Ratings has upgraded Mangistau Electricity Distribution Company JSC's (MEDNC)
Long-term foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BB'. The
Outlook on the Long-term IDR is Stable. A full list of rating actions is provided
below.
KEY DRIVERS
- Sovereign Rating Upgrade
The upgrades reflect Fitch's upgrade of Kazakhstan's Long-term foreign and local
currency IDRs to 'BBB+' from 'BBB' and to 'A-' from 'BBB+', respectively (see
Fitch Upgrades Kazakhstan to 'BBB+' dated 20 November 2012 at www.fitchratings.com .
- State Support
MEDNC's ratings are linked to those of Kazakhstan, but notched down by three
notches to reflect that little indication has been given by MEDNC's parent, JSC
Samruk-Energo (S-E), that it will provide timely financial assistance to MEDNC in
case of need. The notching reflects the fact that S-E has not provided tangible
financial assistance to MEDNC in the past three years. The dividend payout ratio
was set back to 50% of net profit (or KZT83m) for 2011. Management expects the
dividend payout to remain 50% in the medium term. The agency believes that this
will not put significant pressure on the rating. Fitch views MEDNC's standalone
business and financial profile as commensurate with a weak 'BB-' rating.
S-E is not actively pursuing a reduction of its stake in MEDNC. However, it does
not view MEDNC as strategic. The ratings are based on the assumption that S-E will
retain at least majority ownership of MEDNC over the rating horizon.
- Near-Monopoly Position
MEDNC's credit profile is supported by its near-monopoly position in electricity
transmission and distribution in the Region of Mangistau, one of Kazakhstan's
strategic oil & gas regions. It is also underpinned by prospects for economic
development and expansion in the region, in relation to both oil & gas and
transportation, the cost-plus-based tariff mechanism under which it operates.
MEDNC also benefits from limited foreign exchange and absence of interest rate
risks.
- Small Scale, High Customer Concentration
The ratings are constrained by MEDNC's small scale of operations limiting its cash
flow generation capacity, high exposure to a single industry (oil & gas) and,
within that, high customer concentration (the top four customers represented over
65% of 2011 revenue). The latter is somewhat mitigated by the state ownership of
major customers (Ozenmunaigaz and Kaz GPZ are 100% subsidiaries of KazMunaiGaz
National Company; and Mangistaumunaigas and Karazhanbasmunai are 50% owned
by KazMunaiGaz National Company) and prepayment terms under sales agreements.
- Stable Cash Flow From Operations Expected
Fitch expects MEDNC to continue generating solid and stable cash flow from
operation over 2012-15. Free cash flows are likely to remain positive in 2012, but
may turn negative in 2013, mainly driven by substantial capex plans. For 2012,
Fitch estimates MEDNC's cash flow from operations at about KZT1.2bn, before capex
(KZT472m) and dividends (KZT83m).
- Capex Driven Leverage Increase Expected
MEDNC's funds flow from operations (FFO) adjusted leverage for 2011 slightly
improved to 2.2x from 2.9x at end-2010. This ratio is expected to remain below 3x
in 2012-2013 and to increase to around 3x in 2014, driven by an increase in capex.
FFO interest cover also slightly increased to 3.6x at end-2011 from 2.9x at
end-2010. Fitch expects that interest cover will remain in the low single-digit
territory.
RATING SENSITIVITY ANALYSIS
Positive: Future developments that could lead to positive rating actions include:
- A positive change in Kazakhstan's rating could affect MEDNC's ratings if the
link with the sovereign strengthens.
- Stronger links with the sovereign demonstrated by explicit state support (not
expected) would be positive for the ratings.
- Enhancement of business profile (diversification and scale with only modest
increase in leverage) could be positive for the ratings.
Negative: Future developments that could lead to negative rating action include:
- A negative change in Kazakhstan's rating could affect MEDNC's ratings.
- Reduction of S-E's stake to less than 50% (assuming that a new shareholder does
not offer meaningful financial support or capex funding) would be negative for the
ratings.
- Deterioration in MEDNC's FFO adjusted leverage to 4x and FFO interest cover to
2x on a sustained basis could put pressure on the ratings
LIQUIDITY & DEBT STRUCTURE
- Manageable Liquidity
Fitch views MEDNC's liquidity as manageable, comprising solely cash as the
company does not have any available credit lines. At end-Q312, MEDNC's cash
balance of KZT1.1bn was sufficient to cover short-term maturities of KZT0.9bn.
Cash balances are mostly held in local currency with a local bank, which is a
concern. At end-Q312, most of MEDNC's debt was represented by two unsecured
fixed-rate bonds of KZT800m each that mature in 2013-2014. The rest of the debt is
represented by 25-year interest-free loans provided until 2009 by MEDNC's
customers to co-finance new network connections.
FULL LIST OF RATINGS ACTIONS
Long-term foreign currency IDR: upgraded to 'BB+' from 'BB', Outlook Stable
Long-term local currency IDR: upgraded to 'BBB-' from 'BB+', Outlook Stable
National Long-term rating: upgraded to 'AA(kaz)' from 'AA-(kaz)', Outlook Stable
Short-term IDR: affirmed at 'B'
Foreign currency senior unsecured rating: upgraded to 'BB+' from 'BB'
Local currency senior unsecured rating: upgraded to 'BBB-' from 'BB+'.
Contact:
Principal Analyst, Oxana Zguralskaya, Associate Director +7 495 956 7099
Supervisory Analyst, Josef Pospisil, Senior Director +44 20 3530 1287
Fitch Ratings Limited 30, North Colonnade, London E14 5GN
Committee Chair, Angelina Valavina, Senior Director +44 20 3530 1314
Media contact:
Julia Belskaya von Tell, Moscow, tel.: + 7 495 956 9908/9901,
julia.belskayavontell@fitchratings.com
[2012-11-28]