Fitch affirms MEDNC at 'BB', changing outlook to "Positive"

/IRBIS, November 23, 2011/ - Fitch Ratings has affirmed Mangistau Electricity Distribution Company ("MEDNC"): Long- term Issuer Default rating ("IDR") in foreign currency at "BB", a short-term foreign currency IDR "B", the long-term local currency IDR "BB +" and National Long-term rating "AA-(kaz)". As indicated by Fitch on November 22, forecast of long-term IDR and National Long-term rating of the company was revised from "stable" to "positive." Simultaneously, Fitch has affirmed the senior unsecured debt rating companies in foreign currency at "BB" rating and senior unsecured debt in national currency "BB+". The rating actions follow the holding of regular review of ratings of MEDNC and also reflect the increase by Fitch of long-term IDR of Kazakhstan in foreign currency from "BBB-" to "BBB" and in local currency "BBB" to "BBB +" November 21, 2011 . The forecast for the sovereign long-term IDR remains "positive". As stated, the ratings of MEDNC are linked to the sovereign ratings of Kazakhstan, but are three levels lower, reflecting insufficient evidence of readiness MEDNC parent company ("Samruk-Energo") to provide timely financial support MEDNC if necessary. Fitch considers the independent business position and financial performance as the corresponding rated "BB-" with a small margin of safety. "Positive" outlook for national rating of MEDNC reflects recalibration of national rating scale of Fitch on Kazakhstan after raising sovereign ratings. The increase in the difference in levels between sovereign ratings and MEDNC ignores the fact that Samruk-Energy did not provide substantial financial support for companies in the past two years. In addition, dividend payments MEDNC for 2010 increased to 100% of net profit from 50% in previous years, despite the considerable needs of the company in capital investment. It is noted that Samruk-Energy is not taking active steps to reduce its stake in MEDNC. However MEDNC is not regarded as a strategic asset. Ratings are based on the assumption that Samruk-Energy will retain at least majority stake in MEDNC in the long run. Credibility of MEDNC is maintained by its monopoly position in the area of electricity transmission and distribution in Mangistau region ("BB+"/forecast "Stable"), one of the strategic oil and gas regions of Kazakhstan. Credibility is also supported by the prospects of economic development and expansion in the region with respect to oil and gas as well as the transport sector, the tariff setting mechanism of the "cost plus", according to which the company operates, and the expected reduction in leverage, as the maturity of the bonds allocated to internal in 2014. Positive factors for MEDNC are also limited foreign exchange and interest rate risks The ratings of MEDNC are constrained by small scale of its activities, which limits the ability to generate cash flow, heavy reliance on one industry (petroleum), and high customer concentration within it (in fiscal year 2010 the share of the top three customers accounted for more than 60% of revenue). This last point is smoothed out a good credit standing and the fact that customers MEDNC in the public domain. In 2010, the company has ceased direct sales of electricity. The Agency considers this point as neutral for ratings, since the contribution of this segment in revenue was negligible. Fitch notes that liquidity of MEDNC is adequate for the next 18 months and consists solely of cash (the company does not have any lines of credit). As of September 30, 2011 cash from the company amounted to 1,943 million tenge. The main part of the debt was represented by four MEDNC releases unsecured bond with a fixed rate (for a total of KZT 2.8 billion). The maturities of the bonds occur between 2011 and 2014 on one issue per year. The remainder of the debt represented by 25-year interest-free loans granted to customers MEDNC for co-financing of new connections to the networks. At the same time such fees were abolished customers since January 1, 2009. Fitch expects positive free cash flow for the company in 2011. [2011-11-23]