Fitch rates KazTransGas Aimak’s upcoming domestic bond ‘BB+(EXP)’
Nov 27. Reuters
Fitch Ratings has assigned JSC KazTransGas Aimak’s (KTGA) upcoming KZT-denominated bond an expected local currency senior unsecured ‘BB+(EXP)’ rating and National senior unsecured ‘AA-(kaz)(EXP)’ rating. A full list of KTGA’s ratings is provided below.
The upcoming bond is the first issue under KTGA’s KZT50bn programme. It is rated in line with KTGA’s senior unsecured rating of ‘BB+’ as it will represent a senior unsecured obligation of KTGA. The assignment of the final rating is contingent upon the receipt of final documentation. We expect that KTGA will use the issue proceeds to fund its capex programme.
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 and Kazakhstan’s national gas operator KazTransGas JSC (KTG, BB+/Stable) and reflect the company’s dominant market position and its strong strategic and operational ties with KTG.
KEY RATING DRIVERS
Near-Monopoly in Domestic Gas
KTGA, a 100% subsidiary of KTG, operates natural gas distribution and supply in nine out of 10 Kazakh regions and serves households and industrial consumers. KTGA directly operates all but one remaining gas distribution 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 related KazRosGas LLP.
Full Ratings Alignment
We align KTGA’s and KTG’s ratings, as per Fitch’s Parent and Subsidiary Rating Linkage criteria. 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 the 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 marketable natural gas. KTGA benefits from its links with the State, which Fitch has factored into KTGA’s ratings.
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 and foreign producers and sells 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 KZT92.5bn (USD600m) 2013-2018 capex programme will be partially debt-funded. We expect the company’s funds from operations (FFO) gross adjusted leverage to increase to above 5x by 2015 from 1.3x 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 into 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 due to lower-than-expected tariffs
LIQUIDITY AND DEBT STRUCTURE
At 30 September 2013 KTGA had KZT1.7bn in cash and cash equivalents plus KZT13.9bn in short-term deposits, which almost fully covered its KZT17.3bn short-term debt. We expect the company to be able 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 KZT50bn in 2014 or 2015.
FULL LIST OF RATINGS
Long-Term foreign currency IDR: ‘BB+’, Outlook Stable
Long-Term local currency IDR: ‘BB+’, Outlook Stable
Short-Term foreign currency IDR: ‘B’
National Long-Term rating: ‘AA-(kaz)’, Outlook Stable
Senior unsecured rating: ‘BB+’
National senior unsecured rating: ‘AA-(kaz)’
Upcoming KZT-denominated domestic bond: senior unsecured ‘BB+(EXP)’ rating/National senior unsecured ‘AA-(kaz)(EXP)’