25.12.2015, 15:53
Fitch affirms long-term default rating of Ekibastuz Bolat Nurzhanov GRES-1; outlook "Stable"
OREANDA-NEWS. Fitch Ratings has affirmed Kazakhstan-based electricity power plant Ekibastuz GRES-1 LLP's (Ekibastuz GRES-1) Long-term foreign currency Issuer Default Rating (IDR) at 'BB+'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.
The ratings reflect the risks inherent in Ekibastuz GRES-1 business profile, including uncertainty in regulated tariffs after 2015. They also reflect significant capex in 2016-2018, which will result in negative free cash flow (FCF) and gradual deterioration of funds from operation (FFO) adjusted leverage to 1.9x in 2018 from 0.2x in 2014, based on Fitch's conservative assumptions.
Positively, the ratings factor in the strong market position of Ekibastuz GRES-1, its strategic importance for the Kazakh state (BBB+/Stable), its high profitability and its solid credit metrics. While Ekibastuz GRES-1's forecast credit metrics are strong for its rating, these are offset by the business risk profile.
Ekibastuz GRES-1's ratings also benefit from a one-notch uplift for support from 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
Tariff Uncertainty after 2015
The introduction of the capacity market in Kazakhstan, initially planned for 2016, was postponed until 2019 at the request of industrial producers who appealed to the inadmissibility of high tariff growth during economic slowdown.
The final impact on Ekibastuz GRES-1's operational and financial profile is unclear at present since a potential decrease in the company's approved tariffs would be compensated by larger sales volumes due to increased competitiveness. Nevertheless, tariff uncertainty for 2016 and beyond is reducing the company's cash flow visibility.
Fitch conservatively assumes 0% tariff growth for 2016-2018 and postponement of part of the company's capex to 2018-2019. This would result in Fitch's negative rating guidelines not being breached until 2019.
Intensive Capex to Weaken Leverage
Fitch expects Ekibastuz GRES-1's extensive investment programme of KZT125bn over 2016-2019 (including development and maintenance projects) to be extensively debt-funded. We estimate the company will continue generating healthy cash flows from operations of KZT34bn on average over 2016-2019.
However, FCF is likely to remain negative due to ambitious investment plans and dividend payments of KZT8bn annually. Fitch forecasts, under its conservative assumptions, that Ekibastuz GRES-1's FFO adjusted gross leverage will deteriorate to 1.9x in 2018 from 0.2x at end-2014. However, our negative rating guidelines are not expected to be breached until 2019 when substantial amounts of capex postponed from 2016-2018 are expected to be spent.
Weak Results for 2015 Expected
We estimate EBITDA for 2015 to have declined 19%, due to the lack of electricity exports to Russia and economic slowdown in Kazakhstan. Electricity exports to Russia, which accounted for 10% of the company's sales last year, ceased since November 2014, mostly due to adverse RUB/KZT fluctuations.
Further Ekibastuz GRES-1 has borne the brunt of the economic slowdown and declining electricity demand in Kazakhstan since it has one of the largest approved tariffs in the country. Despite significant tenge depreciation vs. USD in 2H15, Fitch does not expect exports to Russia to resume.
Financial Profile Remains Strong
Ekibastuz GRES-1's 'BB' standalone rating is underpinned by solid credit metrics and high profitability (EBITDA margin of 61% in 1H15), double-digit FFO interest coverage and low FFO adjusted grow leverage (below 1x in 2014-2015). Fitch expects some deterioration of the company's financial profile over the next three years due to ambitious capex programme. Nevertheless, FFO adjusted gross leverage is expected to remain below 2.0x over 2016-2018, placing the company favourably against similarly rated CIS counterparts and on a par with certain higher rated international peers.
One-Notch Uplift for Parent Support
We continue to consider strategic, operational and legal ties between Ekibastuz GRES-1 and its parent Samruk-Energy to be fairly strong and incorporate a one- notch uplift for parental support into the company's 'BB+' rating. While there are no debt 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.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Zero tariff growth in 2016-2018
- Electricity production to increase below GDP growth
- Inflation-driven cost increase (including coal)
- Dividends of KZT8bn per year for 2016-2018
- Part of capex postponed to 2018-2019 from 2016-2017, while maintaining total amount in line with management guidance.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Stronger parental support;
- Long-term predictability of the regulatory framework after 2015;
- A more diversified and efficient asset base.
Negative: Future developments that could lead to negative rating action include:
- Weaker parental support, especially regarding short-term liquidity provision and refinancing backstop. Inability to refinance existing loans and to raise new debt to cover cash shortfall in 2016;
- FFO-adjusted gross leverage persistently higher than 2x and FFO interest coverage below 4x, for instance, due to a substantially above-inflation increase in coal price and/or tariffs materially lower than our forecasts;
- A substantial increase in coal price without a full pass-through to power price;
- Committing to capex without sufficient available funding, worsening overall liquidity position.
LIQUIDITY AND DEBT STRUCTURE
Fitch views Ekibastuz GRES-1's liquidity as weak but manageable. At end-9M15 Ekibastuz GRES-1 had cash and cash equivalents of KZT1.1bn vs. short-term debt of KZT35bn. Outstanding debt is represented by a KZT23bn loan from Sberbank (BBB-/Negative) and a KZT12bn loan from Halyk Bank of Kazakhstan (BB/Stable) carrying a 14% interest rate.
All debt facilities are due in April-May 2016, creating refinancing risks for the company. Ekibastuz GRES-1 anticipates refinancing these loans with a bond issue or a loan. The parent has confirmed to Fitch its ability and willingness to provide liquidity to Ekibastuz GRES-1 on a timely basis for the subsidiary's debt maturities.
FULL LIST OF RATING ACTIONS
Long-term foreign currency IDR affirmed at 'BB+', Outlook Stable Long-term local currency IDR affirmed at 'BB+', Outlook Stable National Long-term Rating affirmed at 'AA-(kaz)', Outlook Stable Expected local currency senior unsecured rating on the proposed KZT20bn notes affirmed at 'BB+(EXP)' Expected National senior unsecured rating assigned on the proposed KZT20bn notes affirmed at 'AA-(kaz) (EXP)".
The ratings reflect the risks inherent in Ekibastuz GRES-1 business profile, including uncertainty in regulated tariffs after 2015. They also reflect significant capex in 2016-2018, which will result in negative free cash flow (FCF) and gradual deterioration of funds from operation (FFO) adjusted leverage to 1.9x in 2018 from 0.2x in 2014, based on Fitch's conservative assumptions.
Positively, the ratings factor in the strong market position of Ekibastuz GRES-1, its strategic importance for the Kazakh state (BBB+/Stable), its high profitability and its solid credit metrics. While Ekibastuz GRES-1's forecast credit metrics are strong for its rating, these are offset by the business risk profile.
Ekibastuz GRES-1's ratings also benefit from a one-notch uplift for support from 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
Tariff Uncertainty after 2015
The introduction of the capacity market in Kazakhstan, initially planned for 2016, was postponed until 2019 at the request of industrial producers who appealed to the inadmissibility of high tariff growth during economic slowdown.
The final impact on Ekibastuz GRES-1's operational and financial profile is unclear at present since a potential decrease in the company's approved tariffs would be compensated by larger sales volumes due to increased competitiveness. Nevertheless, tariff uncertainty for 2016 and beyond is reducing the company's cash flow visibility.
Fitch conservatively assumes 0% tariff growth for 2016-2018 and postponement of part of the company's capex to 2018-2019. This would result in Fitch's negative rating guidelines not being breached until 2019.
Intensive Capex to Weaken Leverage
Fitch expects Ekibastuz GRES-1's extensive investment programme of KZT125bn over 2016-2019 (including development and maintenance projects) to be extensively debt-funded. We estimate the company will continue generating healthy cash flows from operations of KZT34bn on average over 2016-2019.
However, FCF is likely to remain negative due to ambitious investment plans and dividend payments of KZT8bn annually. Fitch forecasts, under its conservative assumptions, that Ekibastuz GRES-1's FFO adjusted gross leverage will deteriorate to 1.9x in 2018 from 0.2x at end-2014. However, our negative rating guidelines are not expected to be breached until 2019 when substantial amounts of capex postponed from 2016-2018 are expected to be spent.
Weak Results for 2015 Expected
We estimate EBITDA for 2015 to have declined 19%, due to the lack of electricity exports to Russia and economic slowdown in Kazakhstan. Electricity exports to Russia, which accounted for 10% of the company's sales last year, ceased since November 2014, mostly due to adverse RUB/KZT fluctuations.
Further Ekibastuz GRES-1 has borne the brunt of the economic slowdown and declining electricity demand in Kazakhstan since it has one of the largest approved tariffs in the country. Despite significant tenge depreciation vs. USD in 2H15, Fitch does not expect exports to Russia to resume.
Financial Profile Remains Strong
Ekibastuz GRES-1's 'BB' standalone rating is underpinned by solid credit metrics and high profitability (EBITDA margin of 61% in 1H15), double-digit FFO interest coverage and low FFO adjusted grow leverage (below 1x in 2014-2015). Fitch expects some deterioration of the company's financial profile over the next three years due to ambitious capex programme. Nevertheless, FFO adjusted gross leverage is expected to remain below 2.0x over 2016-2018, placing the company favourably against similarly rated CIS counterparts and on a par with certain higher rated international peers.
One-Notch Uplift for Parent Support
We continue to consider strategic, operational and legal ties between Ekibastuz GRES-1 and its parent Samruk-Energy to be fairly strong and incorporate a one- notch uplift for parental support into the company's 'BB+' rating. While there are no debt 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.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Zero tariff growth in 2016-2018
- Electricity production to increase below GDP growth
- Inflation-driven cost increase (including coal)
- Dividends of KZT8bn per year for 2016-2018
- Part of capex postponed to 2018-2019 from 2016-2017, while maintaining total amount in line with management guidance.
RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Stronger parental support;
- Long-term predictability of the regulatory framework after 2015;
- A more diversified and efficient asset base.
Negative: Future developments that could lead to negative rating action include:
- Weaker parental support, especially regarding short-term liquidity provision and refinancing backstop. Inability to refinance existing loans and to raise new debt to cover cash shortfall in 2016;
- FFO-adjusted gross leverage persistently higher than 2x and FFO interest coverage below 4x, for instance, due to a substantially above-inflation increase in coal price and/or tariffs materially lower than our forecasts;
- A substantial increase in coal price without a full pass-through to power price;
- Committing to capex without sufficient available funding, worsening overall liquidity position.
LIQUIDITY AND DEBT STRUCTURE
Fitch views Ekibastuz GRES-1's liquidity as weak but manageable. At end-9M15 Ekibastuz GRES-1 had cash and cash equivalents of KZT1.1bn vs. short-term debt of KZT35bn. Outstanding debt is represented by a KZT23bn loan from Sberbank (BBB-/Negative) and a KZT12bn loan from Halyk Bank of Kazakhstan (BB/Stable) carrying a 14% interest rate.
All debt facilities are due in April-May 2016, creating refinancing risks for the company. Ekibastuz GRES-1 anticipates refinancing these loans with a bond issue or a loan. The parent has confirmed to Fitch its ability and willingness to provide liquidity to Ekibastuz GRES-1 on a timely basis for the subsidiary's debt maturities.
FULL LIST OF RATING ACTIONS
Long-term foreign currency IDR affirmed at 'BB+', Outlook Stable Long-term local currency IDR affirmed at 'BB+', Outlook Stable National Long-term Rating affirmed at 'AA-(kaz)', Outlook Stable Expected local currency senior unsecured rating on the proposed KZT20bn notes affirmed at 'BB+(EXP)' Expected National senior unsecured rating assigned on the proposed KZT20bn notes affirmed at 'AA-(kaz) (EXP)".
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