July 25 (Reuters) - (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.
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 KTG’s ratings.
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 lower-than-expected tariffs.
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 due.
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.
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+’