Fitch rates Kazakh MEDNC’s Notes ‘BBB-(EXP)’

April 3. Trend

By A. Badalova

Fitch rates Kazakh MEDNC's Notes 'BBB-(EXP)'Fitch Ratings has assigned Kazakh Mangistau Electricity Distribution Company JSC’s (MEDNC) KZT1,700 million 8 percent domestic bond due 2023 an expected local currency senior unsecured ‘BBB-(EXP)’ rating, Fitch reported on Wednesday.

According to the report, the rating is in line with MEDNC’s Long-term local currency Issuer Default Rating (IDR) of ‘BBB-‘, which has a Stable Outlook, as the bond will be direct and unsecured obligations of the company. The proceeds of the bond issue will be used by the company for financing its investment programme for 2013-2015.

Fitch stressed that MEDNC’s ratings are linked to those of Kazakhstan (Long-term foreign and local currency IDRs of ‘BBB+’/Stable and ‘A-‘/Stable, respectively), and notched down by three levels to reflect that little indication has been given by MEDNC’s state-owned parent, JSC Samruk-Energy (S-E, BBB/Stable), 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 to S-E from MEDNC was set back to 50 percent of net profit (or KZT83 million) for 2011 from 100 percent of net income (or KZT64 million) for 2010, which management expects to remain the case over the medium term. Fitch 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 does not view MEDNC as a strategic investment but is not actively pursuing a reduction of its stake in MEDNC. The ratings are based on Fitch’s assumption that S-E will retain at least majority ownership of MEDNC over the medium term.

According to the report, 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 oil & gas and transportation, and a cost-plus-based tariff mechanism under which MEDNC operates. The company also benefits from limited foreign exchange exposure and absence of interest rate risks, the report said.

Fitch said that the ratings are constrained by MEDNC’s small scale 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 percent 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 by prepayment terms under sales agreements.

Fitch expects MEDNC to continue generating solid and stable cash flow from operation over 2012-15. Free cash flows are likely to have remained positive in 2012, but may turn negative in 2013, due to substantial capex plans. For 2012, Fitch estimates MEDNC’s cash flow from operations at about KZT1.5 billion, before capex (KZT570 million) and dividends (KZT88 million).