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RPT-Fitch affirms KazTransGas and subsidiaries at 'BB+'; outlook stable
August 29, 2013 / 2:32 PM / 4 years ago

RPT-Fitch affirms KazTransGas and subsidiaries at 'BB+'; outlook stable

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Aug 29 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed KazTransGas JSC (KTG) and its fully-owned subsidiaries Intergas Central Asia JSC (ICA) and KazTransGas Aimak JSC (KTGA) Long-term Issuer Default Ratings (IDRs) at ‘BB+'. The Outlook is Stable. A full list of rating actions is below.

KTG and its subsidiaries (KTG or the group) are the state-owned monopoly engaged in natural gas transit, transportation and distribution in Kazakhstan (BBB+/Stable). It is the national gas operator and derives most of its profits through the transit of Central Asian gas to Russia. The group’s ratings include a one-notch uplift for its close ties with the state-owned parent JSC National Company KazMunayGas (NC KMG, BBB/Stable), and are constrained by high customer concentration, evolving tariff-setting environment and increasing leverage.

KEY RATING DRIVERS

Kazakh Gas Monopoly

KTG’s ratings reflect its monopoly position as the operator of the Kazakh gas pipeline network, the only transit route for Central Asian gas to Russia and Europe. The group is the national gas operator, which means that it has the pre-emptive right to purchase natural gas produced in Kazakhstan at cost plus and resell it domestically and for export. ICA, which is responsible for trunk pipeline gas transit, generates most profits - in 2012, it accounted for 60% of the group’s consolidated EBITDA. In our rating case, we forecast stable gas transportation volumes and tariffs for the group until at least 2017.

High Customer Concentration

OAO Gazprom (BBB/Stable) is the group’s key customer, accounting for 76% of 2012 transit revenues. In 2011, Gazprom and ICA signed a new five-year contract for 28 billion cubic meters (bcm) of Central Asian gas. “Ship-or-pay” clauses cover 80% of negotiated transit volumes. However, tariffs are agreed annually and may be subject to political pressure. We believe that Gazprom’s purchase volumes of Central Asian gas and transportation tariffs will remain flat over the medium term, which will allow the group to generate stable operating cash flows. High customer concentration is the principal rating constraint for KTG.

Fully Regulated Tariffs

The group’s profitability is driven by cost-plus domestic tariffs and regulated gas prices set by Kazakhstan’s Agency for Regulation of Natural Monopolies (AREM). We view Kazakhstan’s tariff-setting environment as developing. Historically, gas prices and transit tariffs have been sufficient for KTG to maintain adequate profits and finance its moderate maintenance capex. We expect this to continue under our rating case. However, in an economic recession AREM may face political pressure to limit tariff increases, which could force KTG to raise its leverage beyond our expectations.

Manageable Capex

We view as manageable the group’s plans to upgrade the ageing gas network in south Kazakhstan and provide gas to several Kazakh regions, including Almaty. KTG’s 2013-2017 investment programme amounts to KZT235bn and will be partially debt-funded, but we expect the group’s credit metrics to remain commensurate with the current rating. In addition, we do not expect any significant impact on KTG’s credit metrics from the Beineu-Bozoy-Shymkent pipeline and Line C of the Asian Gas Pipeline from Central Asia to China, which are undertaken and financed by KTG’s JVs with China National Petroleum Corporation (CNPC, A+/Stable) and are guaranteed by CNPC and NC KMG.

Moderately Rising Leverage

At end-2012, KTG’s gross funds from operations (FFO) adjusted gross leverage was 1.9x, and we expect it to reach about 2.7x in 2013-2017 due to KTGA’s high capex. We forecast that the group’s FFO interest coverage will deteriorate to 6x, down from 10x at end-2012, which is still adequate for the current ratings.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

Customer diversification - enhancement of the business profile through diversification of the customer base, whilst maintaining solid credit metrics would be positive for KTG’s ratings.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

Lower transit volumes - a large drop in volumes of Central Asian gas transit with a simultaneous failure by Gazprom to honour ship-or-pay obligation would be negative for KTG’s ratings;

Large capex - aggressive capex resulting in significant and sustained deterioration of credit metrics, including FFO gross leverage above 3x, would also be rating negative.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity, Comfortable Repayments

At 30 June 2013, KTG had KZT47bn in cash and cash equivalents, which was sufficient to cover short-term maturities of KZT15bn. Debt repayment is well balanced with a peak in 2017 when ICA’s USD540m Eurobonds fall due.

LIST OF RATING ACTIONS

KazTransGas JSC

Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Local currency Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Short-Term IDR: affirmed at ‘B’

National Long-Term rating: assigned at ‘AA-(kaz), Outlook Stable

Senior unsecured Long-Term rating: assigned at ‘BB+’

Senior unsecured National Long-Term rating: assigned at ‘AA-(kaz)’

Intergas Central Asia JSC

Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Local currency Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Short-Term IDR: affirmed at ‘B’

National Long-Term rating: assigned at ‘AA-(kaz)', Outlook Stable

Senior unsecured Long-Term Rating: affirmed at ‘BB+’

Senior unsecured National Long-Term rating: assigned at ‘AA-(kaz)’

KazTransGas Aimak JSC

Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Local currency Long-Term IDR: affirmed at ‘BB+', Outlook Stable

Short-Term IDR: affirmed at ‘B’

National Long-Term rating: assigned at ‘AA-(kaz), Outlook Stable

Senior unsecured Long-Term Rating: affirmed at ‘BB+’

Senior unsecured National Long-Term rating: assigned at ‘AA-(kaz)'

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