Baku, Azerbaijan, Apr. 24
By Elena Kosolapova – Trend:
Standard & Poor's Ratings Services has affirmed its 'BB+' long-term corporate credit ratings on Kazakh gas utility company KazTransGas (KTG) and its 100 percent owned gas pipeline operator Intergas Central Asia JSC (ICA), said the message of the rating agency Apr.24.
The outlook is negative.
The agency has 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,” said the message.
S&P assumes, however, that in case of financial stress, any extraordinary support to KTG would likely come directly from the government. Therefore, the company’s corporate credit rating on KTG on its SACP plus uplift for potential government support, capped at the rating level of the parent company.
S&P equalizes 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 percent 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.
The agency’s 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 the company’s 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 percent 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 US dollar denominated. The agency assigns a "negative" financial policy modifier because it thinks the financial policy framework allows KTG to take a more leveraged position than it currently expects, primarily on the back of higher investment needs.
The negative outlook mirrors that on KTG's immediate parent, KMG. In accordance with the company’s group rating methodology, S&P currently caps the rating on KTG by the rating on KMG, so a negative rating action on the parent would lead to a similar rating action on KTG, all else being equal.
S&P thinks pressure on KTG's credit profile also could result from a more aggressive financial profile than it currently anticipates. 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 the agency’s 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,” said the agency.
“If we saw signs of weakening state support, we might consider revising down the likelihood of extraordinary government support for KTG,” according to the S&P. “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. The agency could revise the outlook to stable only if it revises the outlook on KMG to stable.
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