S&P: Kazakh Gas Transporter KazTransGas Outlook revised to Stable after Similar Action on Parent; 'BB' Rating Affirmed
Standard & Poor's Ratings Services said today that it had revised its outlook on Kazakh energy holding KazTransGas (KTG) and its 100% owned gas pipeline operator JSC Intergas Central Asia (ICA)--which we equalize with that on KTG--to stable from negative. At the same time, the 'BB' long-term corporate credit ratings on KTG and ICA were affirmed.
The outlook revision follows the outlook revision on the sovereign and on KTG's 100% parent, state-owned JSC NC KazMunaiGas (KMG; BBB-/Stable/--) to stable from negative.
"The ratings on KTG and ICA incorporate support from KMG," said Standard & Poor's credit analyst Sergei Gorin. "The ratings on both KTG and ICA are two notches below those on KMG, using our top-down approach."
KTG has a weak stand-alone credit quality, given its ambitious investments in gas transmission and distribution; a weak financial profile; heavy dependence on Russian energy giant OAO Gazprom (BBB/Negative/--); gas transit volume risk after 2011, when the gas transit contract with Gazprom expires; potential competition from alternative gas export pipelines transporting Central Asian gas; and opaque retail gas tariff regulation in Kazakhstan and Georgia.
These weaknesses are mitigated to some degree by the favorable location of ICA's transit gas pipelines between Central Asian gas producers and the European market, strong gas demand in Europe, KTG's monopoly gas supplier position in the service area, and a ship-or-pay transit contract with Gazprom until 2011.
KTG has a positive track record of receiving support from KMG, including interest-free loans, compensation for loss-making operations, sourcing of gas for distribution operations at a favorable price under a swap agreement between KMG and KTG's gas suppliers, and a supportive dividend policy. KTG's strategic importance to KMG and the Kazakhstan government could justify extraordinary support in a stress scenario, which helps alleviate KTG's weaknesses somewhat. At the same time, timely support is not formally guaranteed.
The ratings on KTG and ICA are equalized. The consolidated approach reflects the companies' close integration, KTG's 100% ownership of ICA and other major subsidiaries, financial guarantees on a major part of the group's debt issued by ICA and KTG, large intragroup cash flows, and the absence of effective subsidiary ring fencing.
On March 31, 2009, according to management information, KTG's liquidity reserves, equivalent to $280 million, covered debt maturities of $159 million for the next 12 months, with large maturities in September-December 2009.
"The stable outlook reflects that on the parent," said Mr. Gorin.
The ratings could be threatened if the debt financing for KTG's potential gas pipeline investments leads to a more aggressive financial profile, with the funds from operations-to-debt ratio falling to less than 15%.
Should the liquidity position deteriorate due to KTG's failure to refinance its significant debt maturities in 2009, or if KTG significantly increases its investment plan for 2009-2010, the ratings could be lowered.
Strong parental or government support for financing new projects, through equity increases, debt guarantees, or increased transit tariffs with Gazprom, could mitigate the negative impact on KTG's creditworthiness, Standard & Poor's reports.