Fitch downgrades SevKazEnergo ratings; outlook Stable
29.07.16 11:26
/Fitch Ratings, Moscow, July 28, 2016, heading by KASE/ – Fitch Ratings has
downgraded Kazakhstan-based Joint Stock Company Sevkazenergo's Long-Term
Foreign Currency Issuer Default Rating (IDR) to 'B+' from 'BB-'. The Outlook is
Stable. A full list of ratings actions is at the end of this commentary.
The downgrade follows the downgrade of Sevkazenergo's sole shareholder, Joint
Stock Company Central-Asian Electric-Power Corporation (CAEPCo, B+/Stable;
see 'Fitch Downgrades CAEPCo to 'B+'; Outlook Stable'). Sevkazenergo's ratings
are aligned with CAEPCo's, reflecting its position as one of two key operating
subsidiaries within the CAEPCo group, contributing 43% of group EBITDA.
The downgrade reflects the expected deterioration of CAEPCO's credit metrics
over 2016-2019 as a result of the Kazakh tenge's devaluation in 2015 and the
company's high exposure to foreign currency fluctuation risks.
The rating also reflects Sevkazenergo's vertical integration, a stable regional
market share and a benign regulatory regime in the distribution segment.
However, the rating is constrained by the company's weak liquidity profile,
unfavourable regulatory environment in the generation segment and significant
capex needs, which are expected to be partially debt funded.
We assess CAEPCo, Sevkazenergo and another 100% subsidiary, Pavlodarenergo, on a
consolidated basis, since there is no ring-fencing, treasury is centrally managed
and debt is located at both holdco and opco levels.
KEY RATING DRIVERS
High FX Exposure Pressures Credit Metrics
The devaluation of the Kazakhstan tenge by more than 90% in 2015 has weakened
Sevkazenergo's credit profiles due to a currency mismatch between the company's
debt and revenues and the absence of hedging to reduce foreign exchange risk
exposure. At end-2015, 40% of company's outstanding debt was US dollar-denominated,
while all revenue was local currency-denominated. We expect this pressure to
continue, even with no further tenge devaluation. The amount ofcash denominated in
US dollars was negligible at end-2015.
Covenants Breach
As a result of the tenge devaluation, Sevkazenergo breached its current ratio
covenant per loan agreements with EBRD in 2015. The company received a
waiver for 2015. We expect Sevkazenergo to breach this covenant in 2016-2019
even with no further tenge depreciation. Failure to obtain a waiver or revise
the covenant may lead to a further downgrade. EBRD indirectly owns 22.6% of
Sevkazenergo.
Significant Capex, Negative FCF Expected
We expect capex to remain high, despite the completion of the mandatory
investment programme, which CAEPCo agreed with the government in 2009-2015
when tariff caps were in place. Fitch expects Sevkazenergo to continue
generating solid cash flow from operations (CFO) of KZT9bn on average over
2016-2019, although free cash flow (FCF) is likely to remain negative at an
average KZT1bn per year over the same period. This will be mainly driven by the
company's significant investment programme of an average KZT9bn annually for
2016-2019 as well as dividend payments of about 50% of net profit over the
medium term. We have adjusted Sevkazenergo's investment programme on
capex/revenue ratio to reflect that most of it has is discretionary. Fitch
expects Sevkazenergo to rely on new borrowings to finance cash shortfalls.
Dividends to Delay Deleveraging
Sevkazenergo's financial policy to pay dividends could delay de-leveraging in
the long term. However, we believe that should the tenge devaluation undermine
the company's credit metrics, To the extent CAEPCo has sufficient funds to
service its debt, Sevkazenergo retains the flexibility to lower dividends to
preserve cash, as demonstrated in 2011 when it cut dividends to offset higher
capex. According to CAEPCo, Sevkazenergo will not pay dividends in 2016, while
in our rating case we assume a 50% payout from 2017. Nevertheless, we expect
FCF to remain negative since funds from operations (FFO) will not be sufficient
to cover still high capex and dividends.
Generation Dominates Despite Integration
Sevkazenergo is one of the CAEPCo's key operating subsidiaries. The company is
integrated across the electricity value chain with the exception of fuel
production and transmission, which gives the company access to markets for its
energy output and limits customer concentration. Sevkazenergo covers
electricity and heat generation, distribution and supply in Petropavlovsk
region, which is responsible for 3.1% of electricity generation in Kazakhstan
as of end-2015. Despite integration, Sevkazenergo's EBITDA is dominated by
generation services.
Strong 1H16 Results
Sevkazenergo demonstrated strong operational and financial results in 2015 and
1H16. Electricity production rose by 2.8% yoy in 2015 compared with a 3.3%
decline in Kazakhstan and continued to increase by 17.4% yoy in 1H16 vs. 0.4%
decline in Kazakhstan. Despite this, we expect Kazakhstan GDP to decline by 1%
and inflation to grow by 14% in 2016. We forecast the company's financial
profiles to remain strong, with an average EBITDA margin of about 37% over
2016-2019, which will support its ratings. This is based on our assumptions of
approved tariff growth for distribution segment, 0% tariff growth rate for
generation segment for 2016-2018.
Regulatory Environment
Following the postponement of the capacity market launch in Kazakhstan until
2019, the regulator decided to freeze generation tariffs and fix them at the
2015 level for 2016-2018. However, in electricity distribution five-year
tariffs were approved on the basis of "cost plus allowable margin" methodology
instead of the previously used "benchmarking". In the heat segment "cost plus
allowable margin" methodology remained unchanged, but tariffs were also
approved for five years. The heat distribution business continues to be
loss-making due to large heat losses and regulated end-user tariffs, which
Fitch assumes are kept low for social reasons (heat generation is reported
within overall generation and is cash flow- accretive).
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Electricity volume growth in line with Fitch GDP forecasts of 2.0% over 2017-
2019
- Tariffs growth as approved by the government for distribution segment with
3% CAGR over 2016-2020 and 0% for generation segment for 2016-2018
- Capex in line with the company's adjusted on capex/revenue ratio
- Inflation-driven cost increase
- No further tenge depreciation
- Dividend payments of 50% of IFRS net income over 2017-2019.
RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action
include:
- Negative rating action on CAEPCo as Sevkazenergo's ratings are aligned
with the parent IDR..
Positive: Future developments that could lead to an upgrade include:
- Positive rating action on CAEPCo.
The sensitivities may change if the links with CAEPCo weaken. For the rating of
CAEPCo, Sevkazenergo's ultimate parent, Fitch outlined the following
sensitivities in its rating action commentary of 27 July 2016:
The sensitivities may change if the links with CAEPCo weaken. For the rating of
CAEPCo, Sevkazenergo's ultimate parent, Fitch outlined the following
sensitivities in its rating action commentary of 27 July 2016:
- Sustained slowdown of the Kazakh economy, further tenge devaluation,
increase in coal prices that is substantially above inflation or tariffs
materially lower than our forecasts, leading to FFO-adjusted gross leverage
persistently higher than 4x and FFO interest coverage below 3.5x.
- Committing to capex without sufficient available funding and worsening overall
liquidity.
Positive: Future developments that could lead to an upgrade include:
- A stronger financial profile than forecast by Fitch supporting FFO adjusted
gross leverage below 3x and FFO interest coverage above 4.5x on a
sustained basis.
LIQUIDITY AND DEBT STRUCTURE
Satisfactory Liquidity
Fitch views Sevkazenergo's liquidity as satisfactory assuming availability of
external funding for the forecast negative FCF over 2016-2019. According to the
management, the CAEPCo group's treasury is co-ordinated centrally for the parent
company and the subsidiaries. At end-1H16, Sevkazenergo's cash and cash
equivalents stood at KZT571m, which together with short-term bank deposits with
a maturity up to one year of KZT160m and unused credit facilities of KZT4.2bn
are sufficient to cover short-term debt maturities of KZT4.1bn. However, any
potential further tenge devaluation and negative FCF over 2016-2019 means
Sevkazenergo will need to raise further debt to finance cash shortfalls.
At end-2015 most of Sevkazenergo's debt was made up of secured bank loans
(KZT18.6bn or about 68%) and unsecured local bonds maturing in 2020
(KZT8.9bn in total or 32%).
Senior Unsecured Debt Aligned Issuer Rating
Sevkazenergo's KZT9bn local senior unsecured bond is rated 'B+', in line with
its IDR, as the bonds are issued at the operating company level, its overall
leverage is not excessive and the level of encumbered assets compared with
senior unsecured debt is low. At end-2015, pledged assets amounted to KZT67bn
(out of KZT92bn).
FULL LIST OF RATING ACTIONS
Long-Term Foreign and Local Currency IDRs downgraded to 'B+' from 'BB-',
Outlook Stable
National Long-term Rating downgraded to 'BBB (kaz)' from 'BBB+(kaz)', Outlook
Stable
Local currency senior unsecured rating downgraded to 'B+' from 'BB-'; Recovery
Rating 'RR4'.
[2016-07-29]