(The following statement was released by the rating agency)
Jan 28 - Fitch Ratings has assigned Gaz Capital S.A.'s (Gaz Capital) proposed loan
participation notes (LPNs) a senior unsecured 'BBB(EXP)' expected rating. The notes will be the
28th and 29th series issued under Gaz Capital's USD30bn debt issuance programme rated 'BBB' by
Fitch. The final rating is contingent upon the receipt of final documentation conforming
materially to information already received and details regarding the amount and tenor.
The LPNs will be issued on a limited recourse basis for the sole purpose of funding a loan
by Gaz Capital to OAO Gazprom ('BBB'/Stable). The proceeds from the loan
are expected to be used for general corporate purposes. The noteholders will rely solely on
Gazprom's credit and financial standing for the payment of obligations under the notes. Gaz
Capital is a special purpose financing vehicle of Gazprom, but is not directly or indirectly a
Strong Operating Profile
Gazprom's ratings reflect its strong operating profile. The company compares favourably with
international oil and gas majors and Russian peers based on its position as the leading gas
producer in the world, accounting for 16% of the world's gas production and 27% of the European
gas market in 2011. Its operations also benefit from low-cost production, high reserves life and
a solid reserves replacement rate. Fitch believes that further geographical diversification
through gas supplies to China and LNG sales would enhance the group's already solid business
profile. According to the Gas Export Law, Gazprom is granted the exclusive right to export
natural gas and/or LNG produced in Russia.
Long-Term Price Arrangement In Europe
Fitch expects that Gazprom will continue to benefit from European gas export sales under
long-term contracts with prices largely linked to oil products prices at least in the medium
term. While Fitch anticipates the pressure on pricing terms under Gazprom's long-term European
contracts to continue in the short to medium term, due to the challenging economic environment,
the agency believes that Gazprom's financial policy and production profile have sufficient
flexibility to accommodate some potential concessions without jeopardising the company's credit
metrics. In Fitch's view, these contracts provide the necessary balance between the large
capital requirements of the gas projects and customers' need for stable and secure gas supplies.
In addition, they become even more important in gas markets with limited liquidity and depth and
concentrated structure of supplies.
The agency notes that Gazprom continues to experience soft demand for gas in Western Europe,
one of its principal markets, where its gas sales in 2012 declined by 7% to 140 billion cubic
meters (bcm) from 150 bcm in 2011. Fitch expects that gas demand in Europe will continue to be
weak in 2013 and may start increasing in 2014 due to an expected decline in eurozone GDP in 2013
by 0.1% and a 1.2% GDP growth in 2014.
Domestic Price Liberalisation Eroded By Higher Taxation
Fitch anticipates that the positive impact of the domestic gas market liberalisation in
Russia on Gazprom's financials is likely to be largely eroded by the introduction of more
punitive taxation for the Russian gas industry. The agency expects the annual domestic gas price
indexation at 15% to continue over 2013 - 2014 with a starting point shifted to 1 July 2012 from
the beginning of the year. At the same time, the mineral extraction tax rate was increased by
61% yoy in 2011, by 115% yoy in 2012 and is expected to further rise by 14% in 2013. Fitch
forecasts a gradual decline of Gazprom's sales volumes on the domestic market due to the
improvement of energy efficiency of the Russian economy and rising competition from independent
In addition, Fitch expects Gazprom's financial profile to be underpinned by the group's
gradual shift to market-based pricing for its FSU gas sales. This should support the company's
cash flow and EBITDA generation in the medium term.
Strong Credit Profile To Be Maintained
Gazprom's ratings are also supported by its strong credit metrics demonstrated by positive
free cash flow generation historically, relatively low leverage ratios and solid coverage
metrics compared to its Russian and international oil and gas peers. Fitch expects the group's
FFO adjusted leverage to fluctuate within a tight range of 1.2x - 1.3x over 2012 - 2015 (1.2x in
2011). At the same time, Fitch expects net adjusted leverage ratios to remain below or on the
edge of 1x over 2012 - 15.
Large Capex To Remain
The group plans to invest around USD31billion-USD35billion annually over 2012 - 2015.The
annual capex for the gas division is earmarked at RUB700billion - RUB900billion over 2012 - 2030
with almost half dedicated to gas transportation projects. Fitch believes that the execution and
cost overrun risks inherent in Gazprom's ambitious investment programme are somewhat mitigated
by a high degree of capex flexibility as the company can delay its expansion projects in
response to market conditions and aims at maintaining at least a neutral FCF position.
According to Fitch's Parent and Subsidiary Rating Linkage, Fitch rates Gazprom on a
standalone basis, as the agency believes that most elements of state influence (both positive
and negative) are already built into the business profile, and therefore form an integral part
of the ratings. According to the Gas Supply Law, at least 50% plus 1 ordinary share of the
company that owns Russia's Unified Gas Supply System (ie, Gazprom) must be owned by the state.
RATING SENSITIVITY ANALYSIS
--Ratings are constrained by the sovereign: Gazprom's Long-term foreign currency IDR and the
Stable Outlook are constrained by the Russian sovereign ratings ('BBB'/Stable). A Russia
sovereign rating upgrade could be positive for Gazprom's ratings.
--Improved sales diversification: Maintenance or further improvement of the financial
profile and/or diversification of the business profile (eg gas sales to China and/or LNG sales)
could be positive for Gazprom's ratings.
--Material deterioration of the credit metrics: Material deterioration of credit metrics on
a sustained basis (eg FFO adjusted leverage well above 2x) due, for example, to the
implementation of the aggressive capex programme, sizable acquisitions and/or shift of all
long-term export contracts to spot prices coinciding with low price levels on the spot markets.
LIQUIDITY AND DEBT STRUCTURE
--Adequate Liquidity: Gazprom's liquidity is adequate for the current ratings. At 30
September 2012, it had cash and cash equivalents of RUB471bn which was adequate to cover
RUB386bn of short-term debt.
--Comfortable Maturity Profile: Gazprom's debt maturity profile is not onerous. At end-11
most of borrowings were due in 2014 -2016. Fitch expects the company to continue to enjoy good
access to international debt capital markets to further term out these maturities.