Baku, Azerbaijan, April 17
Fitch Ratings has upgraded KazTransGas JSC's (KTG) and its fully-owned subsidiaries, Intergas Central Asia JSC's (ICA) and KazTransGas Aimak JSC's (KTGA), Long-term Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+'. The Outlook is Stable.
Short-Term IDR of KazTransGas JSC: upgraded to 'F3' from 'B';National Long-Term rating: upgraded to 'AA(kaz)' from 'AA-(kaz)', Outlook Stable; Senior unsecured long-term rating: upgraded to 'BBB-' from 'BB+'; Senior unsecured National long-term rating: upgraded to 'AA(kaz)' from 'AA-(kaz)'.
The upgrade of KTG and its subsidiaries (KTG or the group) reflects Fitch's reassessment of the group's linkage with its state-owned parent JSC National Company KazMunayGas (NC KMG, BBB/Stable), according to the Fitch report.
"We believe that the 'national operator' status granted to KTG in 2012, the ongoing transfer of trunk gas pipelines from the state to ICA, as well as NC KMG's flexible approach to KTG's dividend payouts underline stronger parent-subsidiary links between KTG and NC KMG than what was reflected in the previous ratings, " the report said.
The group's ratings are now notched down by one level from that of its parent, reflecting their close linkage, but also limited legal ties between the two. KTG qualifies as a material subsidiary in NC KMG's eurobond documentation and is subject to cross-default provisions, but NC KMG does not guarantee KTG's debt.
KTG is the state-owned monopoly engaged in natural gas transit, transportation and distribution in Kazakhstan (BBB+/Stable). It continues to derive most profits from the transit of central Asian gas to Russia.
KTG's ratings reflect its position as the operator of the Kazakh gas pipeline network, the only transit route for central Asian gas to Russia and Europe, according to the Fitch analysts. As the national gas company, it has a pre-emptive right to purchase natural gas from local oil & gas companies and resell it domestically and for export. ICA, the operator of trunk gas pipelines, generated 60% of the group's consolidated EBITDA in 2013.
OAO Gazprom (BBB/Negative) remains the group's principal customer, accounting for 71% of ICA's 2013 revenues, down from 76% in 2012. In January 2011, Gazprom and ICA signed a five-year contract for transit of 28 billion cubic meters (bcm) of central Asian gas, of which 80% are covered by 'ship-or-pay' clauses. In 2012 and 2013 despite significantly lower transportation volumes ICA's profits did not suffer, due to Gazprom honouring its 'ship-or-pay' obligation, the Fitch`s report said.
In Fitch rating case, it is forecasted stable gas revenues until January 2016 when the contract with Gazprom expires, as we believe that Gazprom's purchases of central Asian gas and hence ICA's transit revenues may decline to reflect current purchase volumes.
"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 environment as developing. Historically, gas prices and transit tariffs have been sufficient for KTG to maintain adequate profits and finance its capex, which we expect to continue under our rating case. However, in an event of a prolonged economic recession AREM may face pressure to limit further tariff increases, which could force KTG to raise its leverage beyond our expectations," the report said.
The agency considers as manageable the group's KZT140bn investment programme in 2014-2016, which will be partially debt-funded, and expect its credit metrics to remain commensurate with the current ratings. After KTG completes most of its development projects in 2014, annual capex should fall to under KZT40bn per year in 2015 and 2016, from about KZT70bn per year in 2013 and 2014.
The agency does not foresee any significant impact on KTG's creditworthiness from the construction of the Beineu-Bozoy-Shymkent pipeline and Line C of the Asian Gas Pipeline from Central Asia to China, which are financed by KTG's JVs with China National Petroleum Corporation (CNPC, A+/Stable) and are guaranteed by CNPC and NC KMG with no recourse to KTG.
At end-2013, KTG's funds from operations (FFO) adjusted gross leverage was 1.8x, and we expect it to reach 2.3x in 2016. Fitch forecasts that the group's FFO interest coverage will deteriorate to 7.7x in 2017, from 10.5x at end-2013, which remains adequate for the current ratings.
At end-2013, KTG's short-term debt of KZT33.7bn was fully covered by cash and short-term bank deposits of KZT22bn and undrawn credit lines of KZT38.3bn. There are no major debt repayments in 2014-2016, and nearly 90% of KTG's maturities fall on 2017 when ICA's USD540m eurobond is due. KTG intends to borrow up to KZT50bn in 2014 to finance capex.
In February 2014, Kazakhstan devalued the tenge to USD/KZT185 or by 17% from the end-2013 level, which followed the depreciation of the Russian rouble by 13%.
"We expect this to have no material impact on the group's leverage, as losses on its USD-denominated debt will largely be offset by gains from ICA's USD-denominated revenues," the agency's analysts said.