S&P affirms 'BB' ratings on Kazakh gas utility company

Standard & Poor's Ratings Services 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).

The outlook is negative, S&P said.

The agency also affirmed the 'BB' rating on ICA's senior unsecured debt.

According to the statement, KTG's financial risk profile has weakened as a result of further tenge devaluation in 2015 because of the substantial proportion of U.S. dollar-denominated debt (about 85 percent) in the company's portfolio. However, the foreign currency risk is mitigated to some extent because much of KTG's revenues are in U.S. dollars: 54 percent of its 2015 revenues were denominated in U.S. dollar.

"Additional constraints to KTG's financial risk profile include ambitious planned investments in gas transmission and distribution, although we expect the company to gradually reduce its investment program starting 2017, as well as rising cash flow volatility stemming from the increasing share of unregulated gas sales in the group's revenue composition," the agency said.

According to the agency, KTG's 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 2016 in the gas transportation contract with Russian energy major Gazprom.

"KTG's status as the national gas operator and its solid market position stemming from the favorable location of the group's transit pipelines also bolster the business risk profile," the agency said. "It is constrained by the company's exposure to Kazakhstan country risk, which we think is high, and heavy dependence on Gazprom in regards to its gas transportation and sales activities. Furthermore, it has an aged asset base and faces potential competition from alternative gas export pipelines transporting Central Asian gas."

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% 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.

According to the agency, the negative outlook reflects that on KTG's parent, KMG. If we lowered the rating on Kazakhstan and simultaneously on KMG by one notch, we would most likely take a similar rating action on KTG.

In addition, indications of negative interference from the parent or the state or a significant deterioration of KTG's SACP could lead us to review our assessment of the likelihood of support from the state or parent, and to a downgrade of KTG.

S&P would likely revise the outlook on KTG to stable if we took a similar action on KMG.