July 25 (The following statement was released by the rating agency)
Fitch Ratings has assigned KazTransGas Aimak JSC
(KTGA) a Long-term foreign currency Issuer Default Rating (IDR) of 'BB+' with a
Stable Outlook. A full list of KTGA's ratings is at the end of this release.
KTGA is Kazakhstan's state-owned near-monopoly engaged in domestic natural gas
transportation and distribution. Its ratings are aligned with that of its
immediate parent, KazTransGas JSC (KTG, BB+/Stable) and reflect the company's
dominant position and strong strategic and operational ties with KTG,
Kazakhstan's national gas operator. KTGA is an essential part of KTG's strategy,
and has a socially important function of providing natural gas to domestic
consumers. Its overall strategy is approved by its ultimate parent, JSC National
Company KazMunayGas (BBB/Stable). KTGA is presently expanding and upgrading the
domestic gas network. We also factor in KTGA's increasing leverage and customer
payment risks, as well as a developing regulatory framework, in its ratings.
KEY RATING DRIVERS
Domestic Gas Near-Monopoly
KTGA, a 100% subsidiary of KTG, operates natural gas distribution and supply in
eight out of nine Kazakh regions and serves households and industrial consumers,
including heat and power utilities. KTGA owns nearly all domestic gas
distribution assets eg, high-, medium- and low-pressure gas pipelines. KTGA
directly owns all but one remaining network in the Almaty region, which may be
merged with the company pending the state's approval. In 2012, KTGA sold 8.2
billion cubic meters of natural gas, which accounted for 87% of Kazakhstan's
domestic consumption. Its Fitch-adjusted revenue reached KZT88.3bn (USD597m),
excluding a one-off gas sale to a related KazRosGas LLP.
Full Ratings Alignment
We align KTGA and KTG's ratings, per Fitch's Parent and Subsidiary Rating
Linkage dated August 2012. This reflects our assessment of strong operational
and strategic, and moderate legal ties between KTGA and KTG. KTG, Kazakhstan's
national gas operator, maintains and develops country's domestic and transit gas
pipelines and sells natural gas domestically and for export. KTGA is responsible
for KTG's domestic operations including domestic gas transportation and sales of
natural gas. KTGA benefits from the links with the state, which are embedded in
Moderate Legal Ties
We assess the legal ties between KTG and KTGA as moderate. Although KTG
currently guarantees all KTGA's loans, this may not be the case in the future
when KTGA materially increases its leverage, according to our expectations.
Also, KTGA's loans do not qualify under the cross-default clauses contained in
JSC Intergas Central Asia's (BB+/Stable) Eurobonds, KTG's 100% subsidiary
operating Kazakhstan's high pressure gas transit pipelines to China and Russia.
Regulated Tariffs, High Receivables
KTGA's profitability depends on 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 KTGA to maintain adequate
profits and finance its moderate maintenance capex. We expect this to continue
under our rating case scenario. However, this may not be the case in an economic
recession, as AREM may face political pressure to limit tariff increases.
KTGA purchases natural gas from domestic producers and resells it to domestic
consumers. In 2012, its receivables collection period was 56 days, which is
significantly longer than that of its local peers. While KTGA claims that the
current payment discipline is strong, this might change in the event of an
economic downturn, affecting its operating cash flows.
Capex Drives Leverage Up
KTGA's ongoing KZT86bn (USD562m at current exchange rates) modernisation
programme will be partially debt-funded. We expect the company's funds from
operations (FFO) gross adjusted leverage to increase from 1.3x in 2012 to 5x on
average in 2013-2017 and FFO interest coverage to be in the 3x range over the
same period, down from 12x in 2012. The capex covers the modernisation and
extension of existing gas pipelines, and will have a moderately positive effect
on the company's EBITDA through higher transportation and sales volumes and
lower gas losses. We view the company's financial policy as aggressive but
commensurate with the 'BB' rating category.
Future developments that may, individually or collectively, lead to positive
rating action include:
- Positive changes in Kazakhstan's regulatory environment eg, long-term tariffs
linked to the asset base.
- KTGA's FFO gross adjusted leverage materially below 3x on a sustained basis.
Future developments that may, individually or collectively, lead to negative
rating action include:
- Weakening ties between KTGA and KTG, eg, if KTG fails to make agreed equity
injections to KTGA.
- Negative rating action on KTG.
- KTGA's leverage above 6x on a sustained basis, eg, due to an increase in capex
without a corresponding increase in equity contribution from the state or
LIQUIDITY AND DEBT STRUCTURE
Short-term Debt, Insufficient Liquidity
At end-2012, KTGA's debt amounted to KZT9.8bn, made up of unsecured
KZT-denominated bank loans, from Citibank Kazakhstan (nearly KZT7.5bn) and
Development Bank of Kazakhstan (BBB/Stable), all guaranteed by KTG. KZT7.7bn or
79% of the company's loans are short-term.
At 31 December 2012, KTGA had KZT2.4bn in cash and cash equivalents plus
KZT3.3bn in short-term KZT and USD deposits with, among others, Halyk Bank of
Kazakhstan (BB-/Rating Watch Evolving) and Kazakh's Subsidiary Bank Sberbank of
Russia OJSC (BBB-/Stable), which was insufficient to cover its short-term debt
at that time. We expect the company to refinance its bank loans when they become
KTGA aims to raise long-term funds to finance its ambitious capex. We estimate
that its gross debt could reach KZT45bn-50bn by 2014-2015.
FULL LIST OF RATINGS
Long-term foreign currency IDR of 'BB+'; Stable Outlook
Short-term IDR of 'B'
Long-term local currency IDR of 'BB+' with a Stable Outlook
Unguaranteed senior unsecured rating of 'BB+'