KazTransOil NOTC CJSC (Kazakhstan): brief description of risks

/KASE, Oct 20, 00/ - Following is the brief description of KazTransOil risks that company may incur (and will incur) during its operations. The description was based on the conclusion of Kazakhstan Stock Exchange (KASE) Listing Commission. The characteristics are published due to the entrance of the company's bonds into KASE official list of securities under category "A". Government regulation. The government holds 100% shares of the company. Company's tariffs are regulated by Price and Antimonopoly Committee of the Agency for Strategic Reforms and Planning of the Republic of Kazakhstan. On March 16, 2000 the Committee approved the company's decision to raise tariffs by 58%. Quoting. Presently, money receipts largely depend on size of quotes Russia sets on oil and oil products transit. Market risks. The company's operations are significantly affected by of the oil market conditions. Technical risk. The main factor of technical risk is high degree of depreciation noted at some segments. This may badly undermine the company's efficiency and quality of the services. The main portion of pipe- line network was constructed in 70th (more than 60% of the Western branch) and 80th (Aktubinsk branch and 75% of pipe-lines in Eastern branch). Useful life of the pipe-lines is 30 years. By the end of 2000, share of pipe-lines that have operated more than 20 years will be 34%, more than 30 years - 21%. The company annually increase investments into fixed assets. For instance, in 1999, the volume of major repairs totaled KZT2.2 bln, including repair of linear pipe-line portions - KZT1.1 bln. In first six month 2000, fixed assets major repairs totaled KZT1.3 bln. For year 2000 the planned value of such repairs is KZT3.6 bln. In 1999, the value of capital construction amounted KZT5.6 bln. Planned volume of investments for year 2000 equal KZT10.1 bln. Caspian Pipe-line Consortium (CPC). Completion of CPC by the mid year 2001 and its launching will link Tengiz and Karachaganak oil fields with international markets. The major client of the KazTransOil Tengizchevroil JV LLP takes now 35-37% of total oil transportation volume. This loss would be compensated by lunching new facilities, developing new transporting opportunities including operations on sea and real road transport. The company will also provide operating services to owners of other pipe-line systems (mainly from Russia). Ecological risks. There are several types of ecological risks for KazTransOil. Among them: risks associated with extra-normative land occupation and its mechanical distortions incurred during construction. The same applies to water area when constructing currents and water terminals. Ecological risks associated with pipe-lines exploitation, their failures and emergencies such as fires, explosions, leakage and emission of oil, oil products and other substances into water, air, etc. Ecological risks of oil transportation using carriers include collisions of trains, tankers, their explosion due to different reasons. At present, KazTransOil does not have provisions for risks associated with transportation. In case of emergency, the company will have to use its current funds. In year 2000, the company signed contract with Aon Kazakhstan CJSC - the branch establishment of Aon Group limited (London). The Aon Kazakhstan will develop risk management program for KazTransOil including ownership, business, operational and ecological risks insurance. The program will be enacted in 2001. The KazTransOil and its financial consultants have not previously conducted financial evaluation of ecological risks consequences for the company's activity. Financial condition of the company. The shareholders equity of the KazTransOil rose from KZT25.1 bln to KZT102.9 bln due to revaluation of the company's fixed assets made by American Appraisal Inc. in March 2000. Nevertheless, these changes in the financial statements were audited. The impact of this revaluation on results of company's activity in year 2000 could be hardly assessed. Till the end of this year, KazTransOil NOTC CJSC must pay off $18.2 mln in debts for credits (only principal amount).