OREANDA-NEWS. November 29, 2011. Fitch Ratings has affirmed Mangistau Electricity Distribution Company JSC's (MEDNC) Long-term foreign currency Issuer Default Rating (IDR) at 'BB', Short-term foreign currency IDR at 'B', Long-term local currency IDR at 'BB+' and National Long-term Rating at 'AA-(kaz)'. The Outlook on the Long-term IDRs and on the National Long-term rating has been revised to Positive from Stable. The agency also affirmed MEDNC's senior unsecured foreign currency and local currency ratings at 'BB' and 'BB+', respectively, reported the press-centre of KASE.

The rating action follows the periodic rating review of MEDNC and also reflects the agency's upgrade of Kazakhstan's Long-term foreign and local currency IDRs to BBB' from 'BBB-' and 'BBB+' from 'BBB', respectively. 

The agency has maintained the Positive Outlooks on Kazakhstan's Long-term IDRs (see "Fitch Upgrades Kazakhstan to 'BBB'; Outlook Positive", at www.fitchratings.com).

MEDNC's ratings are linked to those of Kazakhstan, but notched down by three notches to reflect that little indication has been given by MEDNC's parent, JSC Samruk-Energo (S-E), that it will provide timely financial assistance to MEDNC in case of need. Fitch views MEDNC's standalone business and financial profile as commensurate with a weak 'BB-' rating. The Positive Outlook on MEDNC's National scale rating reflects the agency's recalibration of Kazakhstan's National ratings scale following the sovereign ratings upgrade.

The increased notching between the sovereign ratings and MEDNC's ratings reflect the fact that S-E did not provide tangible financial assistance to MEDNC in the past two years. Additionally, MEDNC's dividend payout for 2010 increased to 100% of net income from 50% in prior years, despite the company's significant capex requirement.

S-E is not actively pursuing the reduction in its stake in MEDNC. However, MEDNC is not viewed as strategic. The ratings are based on the assumption that S-E will retain at least majority ownership of MEDNC over the rating horizon.

MEDNC's credit profile is supported by its near-monopoly position in electricity transmission and distribution in the Region of Mangistau ('BB+'/Stable), 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 both oil & gas and transportation, the cost-plus-based tariff mechanism under which it operates and its expected decrease of leverage as its domestic bonds are due  to mature by 2014. MEDNC also benefits from limited foreign exchange and interest rate risks.

The ratings are constrained by MEDNC's small scale of operations limiting its cash flow generation capacity, high exposure to a single industry (oil & gas) and, within that, high customer concentration (the top three customers represented over 60% of FY10 revenue). The latter is mitigated by solid credit quality and the customers' state ownership.

In 2010 MEDNC discontinued direct electricity sales. The agency views this as credit neutral because the contribution to revenues was marginal.

MEDNC's liquidity is adequate for the next 18 months, comprising solely cash (the company does not have any available credit lines). As of 30 September 2011, its cash balance stood at KZT1,943m. Most of MEDNC's debt was represented by four unsecured fixed-rate bonds (for a total of KZT2.8bn).

The bonds mature at the rate of one each year between 2011 and 2014. The rest of the debt is epresented by 25-year interest-free loans provided by MEDNC's customers to co-finance new network connections. However, such customers' contributions were cancelled starting from 1 January 2009. Fitch forecasts positive free cash flow for 2011.