Fitch assigns long-term issuer default rating to B. Nurzhanov Ekibastuz GRES-1; outlook Stable
03.12.14 12:12
/Fitch Ratings, Moscow, December 2, 14, heading by KASE/ – Fitch Ratings has
assigned Kazakhstan-based electricity producer Ekibastuz GRES-1 LLP (Ekibastuz
GRES-1) a Long-term foreign currency Issuer Default Rating (IDR) of 'BB+'. The
Outlook is Stable. Fitch has also assigned the proposed domestic senior
unsecured notes of up to KZT20bn a 'BB+(EXP)' expected rating. A full list of
ratings actions is at the end of this comment.
The ratings reflect Ekibastuz GRES-1's strong financial profile and market
position, currently supportive regulatory regime and access to cheap coal
supplies. However, Ekibastuz GRES-1 requires significant capex and the planned
investment programme will likely result in negative free cash flow (FCF) and
funds from operations (FFO) adjusted leverage levels increasing to about 1.4x on
average over 2014-2017 based on Fitch's assumptions.
Ekibastuz GRES-1's ratings also benefit from a one-notch uplift reflecting our
assessment of its links with its 100% shareholder - JSC Samruk-Energy (Samruk-
Energy, BBB-/Stable), which is in turn 100% state-owned via National Welfare
Fund Samruk-Kazyna JSC (Samruk-Kazyna, BBB+/Stable).
KEY RATING DRIVERS
One-Notch Uplift for Parental Support
Fitch considers the strategic, operational and to a lesser extent, the legal
ties between Ekibastuz GRES-1 and its shareholder to be relatively strong and
incorporates a one-notch uplift for parental support into the company's 'BB+'
rating. While there are no guarantees between the company and its parent, we
believe that the cross-default provisions in Samruk-Energy's USD500m Eurobonds
could be triggered by a default on Ekibastuz GRES-1's domestic bonds.
Strategic Importance
The strategic importance of Ekibastuz GRES-1 is underpinned by its integral role
in Samruk-Energy's target of becoming the leading power generation company of
Kazakhstan (BBB+/Stable). Ekibastuz GRES-1 is also the most cash flow
generative (representing over 80% of 9M14 EBITDA) and the largest (about 60%
of electricity output) asset owned by Samruk-Energy, providing the geographic
exposure to northern Kazakhstan, near the border with Russia (BBB/Negative),
an important export market.
Favourable Tariffs At Present
Fitch notes that generation tariffs, which are set to cover fixed and variable
costs and cover majority of capex requirements, are currently approved until
end-2015. The post-2015 electricity generation tariff regime is uncertain.
Existing regulation provides for implementation of a two-tier tariff regime from
2016, with the government setting cap tariffs for energy and capacity component
for a seven-year period with possible annual revisions. Fuel and other cost
inflation will continue to be reflected in energy prices and the capacity
component of the tariff will provide for a return on investments. However,
tariff levels have not been set yet by the authorities. The electricity capacity
market should ensure economically sound returns on investments and provide
incentives for the construction of new generation assets or expanding current
capacity. The company expects that the government will approve tariffs for 2016
and beyond during 1H15.
Cheap Fuel Supports EBITDA
Kazakh coal prices are significantly below international market rates,
reflecting the low calorific content and high ash content of coal used
domestically as well as low transport costs. To protect energy affordability,
the coal price charged to utilities is reflected in tariff caps for electricity.
An unexpected and significant increase in the price of coal above Fitch's
current inflationary estimates of 6%-8% annually would have a negative impact
on EBITDA if not reflected in electricity tariffs, although we consider this
unlikely.
Intensive Capex to Increase Leverage
Fitch expects Ekibastuz GRES-1 to continue generating healthy cash flows from
operations of around KZT43bn on average over 2014-2017. However, FCF is
likely to remain negative at around KZT27bn on average during the same period
due to ambitious investment plans. The total capex plan amounts to KZT248bn
over 2014-2017, and we also assume dividend payments of KZT8bn annually.
We expect capex to be partially debt funded, therefore we anticipate FFO gross
adjusted leverage to increase to about 1.4x on average over the same period from
0.3x at end-2013. The company's investment programme is aimed at renewing
and replacing its existing generation assets. The company intends to increase
its available capacity by 1,000MW by 2017 to 4,000MW. It also expects to
achieve an increased load factor reliability and compliance with environmental
requirements.
Strong Financial Profile
Ekibastuz GRES-1's 'BB' standalone rating is underpinned by its solid credit
metrics. With an EBITDA margin of 65% on average for 2010-2013, double digit
coverage ratios and FFO gross adjusted leverage below 1x in the same period.
Despite some deterioration of the company's financial profile over the next
three years due to the ambitious capex programme, we expect it to remain well
positioned compared with its CIS and international peers. Fitch acknowledges
that Ekibastuz GRES-1's forecast credit metrics are strong for its rating and we
believe that it offsets the risks inherent in the company's operating
environment and business profile, including tariff uncertainty after 2015.
The Largest Power Plant in Kazakhstan
Ekibastuz GRES-1 is one of the largest power plants in CIS and the largest power
plant in Kazakhstan, with 21% share of total installed capacity and 15% in power
supply in the country. The coal-fired power plant with nominal installed
capacity of 4,000MW (8 units by 500MW each) is currently operating 3,000MW.
However, the company's single site operations are constraining its business
profile.
Imminent Refinancing Needs
Fitch views Ekibastuz GRES-1's liquidity as weak. All of the company's debt at
end-9M14 was short-term amounting to KZT23.4bn against cash and cash equivalents
of KZT6.8bn as of 27 November 2014. A substantial part of outstanding debt is
represented by KZT10bn 12% bonds maturing on 29 December 2014 with repayment
according to the bond terms up to 30 days thereafter.
Parent Support Expected
Ekibastuz GRES-1 anticipates refinancing the bond by a new bond issue or a
loan. Failing this, available liquidity may need to be supplemented by
unrestricted cash available at JSC Samruk-Energy (KZT34.7bn as of 27 November
2014). The parent has confirmed to Fitch its ability and willingness to provide
its liquidity to GRES-1 on a timely basis for the bond maturity. The parent
provided temporary working capital funding to the company during 2014.
Ongoing Funding Needs
The expected negative FCF over 2014-2017 will represent a continued external
funding requirement. The company has unused committed credit facilities of
KZT2bn from Sberbank (BBB/Negative). Cash balances are mostly held in local
currency with domestic banks (91% as of 9M14) including Halyk Bank of Kazakhstan
(BB/Stable) and Kazkommertsbank (B/Stable).
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Stronger legal links with the parent.
- Long-term predictability of the regulatory framework and stronger operating
environment.
- More diversified and efficient asset base.
Negative: Future developments that could lead to negative rating action
include:
- Weaker parent support, especially regarding short-term liquidity provision and
refinancing backstop.
- A substantial increase in coal price without a full pass-through to power
price.
- A weaker than expected financial performance and/or financial guarantees for
parent debt, leading to FFO gross adjusted leverage persistently higher than
2x and FFO interest coverage below 4x.
- Committing to capex without sufficient available funding and investment
recovery certainty.
FULL LIST OF RATING ACTIONS
Long-term foreign currency IDR assigned at 'BB+', Outlook Stable
Long-term local currency IDR assigned at 'BB+', Outlook Stable
National Long Term Rating assigned at 'AA-(kaz)', Outlook Stable
Expected local currency senior unsecured rating assigned to the proposed
KZT20bn notes at 'BB+(EXP)'
Expected National senior unsecured rating assigned to the proposed KZT20bn
notes at 'AA-(kaz)(EXP)'.
Contact:
Principal Analyst
Alexey Evstratenkov
Analyst
+7 495 956 9984
Supervisory Analyst
Elina Kulieva
Associate Director
+7 495 956 9975
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054
Committee Chair
Josef Pospisil
Senior Director
+44 20 3530 1287
Contacts for media in Moscow:
Kseniya Ivanova, Moscow, tel. + 7 495 956 6810/9901,
ksenia.ivanova@fitchratings.com
[2014-12-03]