Fitch affirms long-term default rating of Central Asian Electric Energy Corporation at "BВ-"; outlook Stable
04.06.15 17:03
/Fitch Ratings, Moscow, June 4, 15, heading by KASE/ – Fitch Ratings has
affirmed Kazakhstan-based Joint Stock Company Central-Asian Electric-Power
Corporation's (CAEPCo) Long-term foreign currency Issuer Default Rating (IDR)
at 'BB-'. The Outlook is Stable. A full list of ratings actions is at the end of
this comment.
The affirmation reflects CAEPCO's solid business and financial profile.
KEY RATING DRIVERS
CAEPCo's 'BB-' rating reflects its vertical integration, stable regional market
position (despite overall small size) with access to cheap regulated coal
supplies and currently benign regulatory regime, offset by uncertainties
regarding the regulatory regime post-2015. CAEPCo's ageing assets require
significant renewal and. Fitch expects the planned investment programme to
result in negative free cash flow (FCF) in 2015-2016, and weaker average funds
from operations (FFO) gross adjusted leverage of about 2.9x, based on Fitch's
conservative assumptions.
Generation Dominates Despite Integration
CAEPCo is one of the largest privately-owned electricity generators in the
highly fragmented Kazakh market, responsible for only 6.4% of electricity
generation in 2014. Consequently, it is somewhat smaller than its rated CIS
peers. It is vertically integrated across electricity generation, supply and
distribution, which gives the company access to markets for its energy output
and limits customer concentration. CAEPCo covers electricity and heat
generation, distribution and supply in the Pavlodar and Petropavlovsk regions
through its 100% subsidiaries Pavlodarenergo JSC and Sevkazenergo JSC, and
electricity transmission and supply in Akmola region through AEDC and AESbyt.
Electricity and heat generation services dominate CAEPCo's EBITDA, accounting
for about 75% and 94% in 2014, respectively.
Cheap Fuel Supports EBITDA
Kazakh coal prices are significantly below international market rates,
reflecting their regulated nature and low transport costs. An unexpected and
significant increase in the price of coal above Fitch's current inflationary
driven estimates of 7%-9% annually would have a negative impact on EBITDA,
although we consider this unlikely. Fuel cost is reflected in power tariff caps
to protect energy affordability and the coal price charged to utilities is
regulated annually, limiting price exposure.
Solid CFO, Negative FCF Expected
Fitch expects CAEPCo to continue generating solid cash flow from operations
(CFO) of around KZT21bn on average over 2015-2018, although FCF is likely to
remain negative at around KZT8bn on average over 2015-2016 but may turn
positive in 2017. The negative FCF will be mainly driven by the company's
ambitious investment plans of about KZT57bn over 2015-2016 as well as
dividend payments of about 30% of net profit in the medium term. Fitch expects
CAEPCo to rely on new borrowings to finance cash shortfalls.
Higher Leverage Likely
We expect CAEPCo's intensive investment programme to require partial debt
funding. We expect FFO gross adjusted leverage to peak at just below 3x on in
2015-2016, declining thereafter in line with our expectation of capex. However,
we note that CAEPCO's investment programme has some flexibility until 2016
and afterwards will depend on the approved tariffs. The company expects
maintenance capex of around KZT8.5bn on average over 2015-2019. CAEPCo's
group committed capex for 2015 is KZT21bn.
The company aims to modernise over 60% of CAEPCo's ageing 1960s and 1970s
generation capacity by 2017 and upgrade its distribution network. Capacity
expansion will be moderate at around 16% by 2019, but additional benefits are
likely to accrue from improved efficiency in production and distribution of heat
and electricity.
Loss Making Heat Business
The heat distribution business is loss-making due to high heat losses and
regulated end-user tariffs, which Fitch assumes are kept low for social reasons
(heat generation is reported within overall generation and cash flow accretive),
a situation that we assume will persist but with gradual improvement.
Regulatory Uncertainty
The Kazakh authorities are currently considering draft legislation on the
implementation of an electricity capacity market. When fully implemented, the
capacity market should ensure an economically sound return on investment and
should provide incentives for construction of new generation assets or for
expanding current capacity. An effective launch of the capacity market should
provide a stable revenue stream to fund utilities' capital investment
programmes. A successfully functioning capacity market is likely to support
credit profiles of power generators. However, no final decision regarding a
capacity market has been made.
Fitch expects that tariffs for generators will continue to reflect fuel and
other costs inflation while capacity payments will cover capex needs. State
approval of maximum tariff caps for a seven-year period with possible annual
revisions are under discussion.
Electricity transmission tariffs could switch from the 'benchmarking'
methodology introduced in 2013 to long-term tariffs (five years) approval based
on 'cost plus allowable profit margin' methodology. Long-term (five years) heat
generation, distribution and sales tariffs based on 'cost plus allowable profit
margin' methodology are also under consideration, to replace the present annual
approval practice. Fitch views positively the potential switch to long-term
tariff approval, but we note that there are still uncertainties in the
regulatory regime post 2015.
No Parent Uplift or Constraint
Unlike most Fitch-rated utilities in CIS, CAEPCo is privately owned and
therefore not affected by sovereign linkage. The company is run as a standalone
enterprise with two foreign institutional shareholders and as such we do not
assume any impact on the ratings based on the credit profile of the controlling
parent, Central-Asian Power-Energy Company JSC (CAPEC). The ratings therefore
reflect CAEPCo's standalone credit profile.
Dividends to Delay Debt Reduction
CAEPCo's financial policy is to pay dividends and this could delay de-leveraging
in the long term. However, we believe that should tariffs and volumes
underperform CAEPCo retains the flexibility to lower dividends to preserve cash,
as demonstrated in 2011 when the dividend payout ratio decreased to about 15%
for CAEPCo to offset higher capex. CAEPCo is currently considering widening its
dividend payout policy to 15%-50% of net profit from 30%-50%. The company
expects to pay about 25%-30% of net profit in the medium term.
Potential IPO
CAEPCo is considering undertaking an IPO in 2016-2017. It anticipates selling
35%-40% of current shares. The shareholdings of the current shareholders will
be proportionally decreased.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action
include:
- A stronger financial profile than forecast by Fitch due to, among other
things, higher than expected growth in electric and heat tariffs and/or
generation electricity supporting FFO gross adjusted leverage below 2x and
FFO interest coverage above 7x on a sustained basis would be positive for the
ratings.
- Increased certainty regarding the post-2015 regulatory framework could also
be supportive of the ratings.
Negative: Future developments that could lead to negative rating action include:
- A substantially above inflation increase in coal price and/or tariffs
materially lower than our forecasts, leading to FFO gross adjusted leverage
persistently higher than 3x and FFO interest coverage below 4.5x would be
negative for the ratings.
- Committing to capex without sufficient available funding, worsening overall
liquidity position may also be rating negative.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity
Fitch views CAEPCo's liquidity as adequate. At end-2014, cash and cash
equivalents stood at KZT2.8bn, which together with short-term bank deposits with
a maturity up to one year of KZT9.8bn and unused credit facilities of KZT7.6bn
are sufficient to cover short-term debt maturities of KZT14.3bn. However,
negative FCF over 2015-2016 driven by the expected investment programme of
KZT57bn will require additional debt-raising by CAEPCo to finance cash
shortfalls. CAEPCo is currently considering placing local bonds (at the CAEPCo
and Sevkazenergo level) of up to KZT6.8bn in 2015. Fitch notes that CAEPCo has
some flexibility in dividend payments as well as in capex, as committed capex
for 2015 amounts to about 62% of total forecast capex.
At end-2014 the majority of CAEPCo's debt was secured bank loans (KZT30bn or
about 50%) and three unsecured local bonds maturing in 2017, 2020 and 2023
(KZT16bn in total or 27%). All current debt facilities (both secured and
unsecured) are largely at the operating company level.
CAEPCO's Senior Unsecured Notched Down
Fitch rates the KZT2bn notes one notch below CAEPCo's local currency IDR of
'BB-' as the notes are issued at the holding company level (CAEPCo). They do
not benefit from upstream guarantees from the operating subsidiaries, have no
security over operating assets and no cross defaults with other facilities. At
end- 2014 pledged assets amounted to KZT92bn.
Foreign Currency Exposure
CAEPCO is subject to foreign currency fluctuation risks as about 41% of its debt
at end-2014 were denominated in US-dollars. Fitch notes that the company does
not have hedging policies in place, but it maintains a portion of cash in US
dollars. At end-2014 CAEPCo had KZT1.4bn (out of KZT2.8bn) of cash and
KZT1.1bn (of KZT9.8bn) of deposits with maturity over three months in US
dollars. CAEPCO is exposed to interest rate risk since about half of its
outstanding loans are drawn under floating interest rates.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Electricity volume growth in line with Fitch forecasted GDP of 2.5%-3.5% over
2015-2019.
- Tariffs growth as approved by the government for 2015 and in line with
inflation, which Fitch forecasts at about 6%-8% in 2016-2019.
- Capex as expected by the company.
- Inflation-driven cost increase.
FULL LIST OF RATING ACTIONS
Long-term foreign currency IDR affirmed at 'BB-', Outlook Stable
Long-term local currency IDR affirmed at 'BB-', Outlook Stable
National Long-term Rating affirmed at 'BBB+(kaz)', Outlook Stable
Short Term foreign currency IDR affirmed at 'B'
Local currency senior unsecured rating affirmed at 'B+'
National senior unsecured rating affirmed at 'BBB-(kaz)'
Contact:
Principal Analyst
Elina Kulieva
Associate Director
+7 495 956 99 01
Supervisory Analyst
Oxana Zguralskaya
Director
+7 495 956 70 99
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054
Committee Chairperson
Josef Pospisil
Senior Director
+44 20 35301287
Media Relations: Julia Belskaya von Tell, Moscow,
tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com
[2015-06-04]