S&P affirms ratings of KazTransGas and Intergas Central Asia, outlook negative
OREANDA-NEWS. Standard & Poor's
Ratings Services affirmed its 'BB+' long-term corporate credit ratings on Kazakh
gas utility company KazTransGas (KTG) and its 100% owned gas pipeline
operator Intergas Central Asia JSC (ICA). The outlook is negative.
We also affirmed the 'BB+' rating on the senior unsecured debt of ICA.
The rating action reflects our view that KTG has a stand-alone credit profile
(SACP) of 'bb', has a moderately strategic status in the KazMunayGas (KMG)
group, and enjoys a "moderately high" likelihood of timely and sufficient
extraordinary government support from the government of Kazakhstan.
We assume, however, that in case of financial stress, any extraordinary support
to KTG would likely come directly from the government. Therefore, we base the
corporate credit rating on KTG on its SACP plus uplift for potential government
support, capped at the rating level of the parent company.
In accordance with our criteria for government-related entities (GREs), our view
of a "moderately high" likelihood of extraordinary government support is based
on our assessment of KTG's:
- "Important" role for Kazakhstan, given its strategic importance as the
monopoly gas supplier in the service area, and ICA's status as the
national trunk gas pipeline operator; and
- "Strong" link with the government via full ownership of KTG by its
parent,100% state-owned oil and gas champion KMG.
We equalize the ratings on ICA with those on KTG, reflecting the overall
creditworthiness of the KTG group. The consolidated approach reflects the
companies' close integration, KTG's 100% ownership of ICA and other major
subsidiaries, financial guarantees on much of the group's debt issued by ICA and
KTG, large intragroup cash flows, and an absence of effective subsidiary ring
fencing.
We base our view of KTG's SACP as 'bb' on its "fair" business risk profile,
"intermediate" financial risk profile, and "negative" financial policy.
KTG's "fair" business risk profile is supported by the stable and regulated
nature of the gas transportation business and ship-or-pay terms until the end
of 2015 in the gas transportation contract with Russian energy major Gazprom.
It is constrained by the company's exposure to high country risk, heavy
dependence on Gazprom in its gas transportation and sales activities, an aged
asset base, potential competition from alternative gas export pipelines
transporting Central Asian gas, and untransparent retail gas tariff regulation
in Kazakhstan.
KTG's financial risk profile is "intermediate," in our view, supported by
moderate debt levels and resulting in the ratio of debt to EBITDA not higher
than 3x and funds from operations (FFO) to debt of at least 30% in our
base-case projections for 2015-2016. It is constrained by continued ambitious
planned investments in gas transmission and distribution, rising cash flow
volatility, and exposure to foreign currency risk. However, the foreign
currency risk is mitigated to some extent because much of KTG's revenues are
U.S. dollar denominated. We assign a "negative" financial policy modifier
because we think the financial policy framework allows KTG to take a more
leveraged position than we currently expect, primarily on the back of higher
investment needs.
The negative outlook mirrors that on KTG's immediate parent, KMG. In
accordance with our group rating methodology, we currently cap the rating on
KTG by the rating on KMG, so a negative rating action on the parent would
leadto a similar rating action on KTG, all else being equal.
We think pressure on KTG's credit profile also could result from a more
aggressive financial profile than we currently anticipate. That would include
weakened credit ratios (notably debt to EBITDA rising above 3x) due to any
unexpected financial underperformance, extensive reliance on short-term
funding, or KTG's increased capital expenditures requiring significant external
borrowing and leading to leverage above our expectations. For instance, this
might occur if KTG increased capital expenditures because of a greater need to
invest in gas distribution assets or start new large investment projects. The
ratings could also come under pressure as a result of any indications of
negative interference from KMG, including, but not limited to, inducement to
pay excessive dividends.
If we revised down our assessment of KTG's SACP by one notch, it would lead
us to lower the long-term rating to 'BB', provided that the sovereign long-term
local currency rating and the likelihood of extraordinary financial government
support remained the same.
If we saw signs of weakening state support, we might consider revising down the
likelihood of extraordinary government support for KTG. Under our criteria for
GREs, we would have to revise the likelihood of extraordinary government
support down to "moderate" from the current "moderately high" to result in a
downgrade of KTG. This might be a result of increased substantial privatization
risk, negative interference track record, or reshuffling of government
priorities in its support initiatives.
Ratings upside is currently limited by the ratings on the parent. We could revise the outlook to stable only if we revise the outlook on KMG to stable.
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