Fitch raised rating of Kaztransgas to BB+

Fitch raised rating of Kaztransgas to BB+

The agency has simultaneously affirmed JSC Intergas Central Asia's (ICA) Long-term foreign and local currency IDRs at 'BB+', its senior unsecured rating at 'BB+' and its Short-term IDR at 'B', Reuters reported.

The Outlooks for the Long-term IDRs are Stable. Intergas Finance B.V.'s senior unsecured issues have also been affirmed at 'BB+'.

The upgrade of KTG's ratings reflects its diminishing structural subordination through diversification of the group's operations into gas sales as well as an improvement of its financial profile, which became stronger than that of its 100%-owned subsidiary - ICA in 2010. Fitch expects KTG's business profile to be enhanced by the government's plans to transform it into the national gas operator, enabling the company to purchase gas from domestic gas producers and sell it on the local market and for export and thus to capitalise on attractive economics of export sales.

Gas sales accounted for 61.9% of KTG's H111 revenue (47.8% in 2010) whereas the share of gas transportation services dropped to 36% (51.5% in 2010). Fitch expects this composition of the company's revenue to prevail in the medium term.

KTG and ICA's ratings incorporate the companies' solid credit metrics, which were underpinned in 2009-2010 by the fact that OAO Gazprom ('BBB'/Positive), ICA's main counterparty, honoured its ship-or-pay obligations under the Central Asian gas transit contract, despite a drop in actual volumes of gas transit. The companies benefited from solid cash flow generation, positive free cash flow and improvement in leverage-related ratios in 2009-2010.

Fitch forecasts some deterioration of ICA/KTG's financial profile in 2011-2012 due to the terms of the new five-year agreement with OAO Gazprom for Turkmen gas transit, which retains a ship-or-pay provision covering 80% of contracted volumes but stipulates lower volumes of Turkmen gas transit compared to the previous contract. However, Fitch expects KTG's financial profile to remain stronge than ICA's given the business diversification of the former and anticipates that the financials of both companies will remain commensurate with their rating level.

The agency forecasts KTG's FFO adjusted leverage to slightly increase to about 1.3x-1.4x in 2011-2012 (1.26x in 2010) but anticipates a more sizable increase of ICA's FFO adjusted leverage to above 2x in 2011-2012 (1.6x in 2010).

Fitch views KTG/ICA's liquidity position as adequate. Debt repayment schedules are well balanced with a repayment peak in 2011 as ICA's Eurobonds for USD178.9m fall due in November 2011. Both companies' cash positions at end-2010 and at end-H111 were sufficient to cover their short-term obligations.

Fitch believes that the planned capex programmes of both companies are manageable. KTG and ICA were able to cover their investment needs from internally generated cash flows during the past three years. Fitch does not expect any material impact on the group's credit metrics from the execution of two pipeline projects (eg the West-South gas pipeline and the Kazakhstan-China gas pipeline), which are being undertaken by the JVs between KTG and a Chinese counterparty, due to their planned financing arrangements at the JV level.

In addition, the ratings of KTG, ultimately state-owned, and ICA reflect ICA's position as the monopoly operator of the gas pipeline network in Kazakhstan, which remains the only feasible route for transit of Central Asian gas to Russia and further to Europe.

Fitch rates KTG and ICA on a standalone basis in accordance with Fitch's Parent and Subsidiary Rating Linkage methodology.

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