Azerbaijan, Baku, July 25 / Trend E. Kosolapova/
Fitch Ratings has assigned Kazakh KazTransGas Aimak JSC (KTGA) a Long-term foreign currency Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook, the agency reported on Thursday. Short-term IDR affirmed at 'B'. Company's Long-term local currency IDR assigned at 'BB+' with a Stable Outlook. Unguaranteed senior unsecured rating is 'BB+'.
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. KTGA benefits from the links with the state, which are embedded in KTG's ratings.
Fitch assesses 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 - percent subsidiary operating Kazakhstan's high pressure gas transit pipelines to China and Russia.
KTGA's profitability depends on cost-plus domestic tariffs and regulated gas prices set by Kazakhstan's Agency for Regulation of Natural Monopolies (AREM). Fitch views 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. The agency expects this to continue under its 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.
KTGA's ongoing 86 billion tenge ($562 million at current exchange rates) modernisation programme will be partially debt-funded. Fitch expects 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. Fitch views the company's financial policy as aggressive but commensurate with the 'BB' rating category.
Positive changes in Kazakhstan's regulatory environment for example, long-term tariffs linked to the asset base and KTGA's FFO gross adjusted leverage materially below 3x on a sustained basis may lead individually or collectively to positive rating action in future.
Weakening ties between KTGA and KTG, for example if KTG fails to make agreed equity injections to KTGA, negative rating action on KTG or KTGA's leverage above 6x on a sustained basis, for example due to an increase in capex without a corresponding increase in equity contribution from the state or lower-than-expected tariffs may, individually or collectively, lead to negative rating action.
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