Kazakh gas pipeline group KTG 'BB' ratings affirmed; outlook stable - S&P

/Standard & Poor's, Moscow, September 8, 06/ - Standard & Poor's Ratings Services said today it affirmed its 'BB' long-term corporate credit ratings on Kazakhstan-based gas pipeline operator Intergas Central Asia (ICA) and its holding company, KazTransGas (KTG). The outlooks on both ratings are stable. "The ratings reflect the group's aggressive growth policy, involving both investments and acquisitions; the opaque regulatory regime under which it operates; and its aged infrastructure," said Standard & Poor's credit analyst Eugene Korovin. The group is also indirectly exposed to central Asian gas producers, and is highly dependent on the operations of OAO Gazprom (BB+/Positive/-). Further rating constraints include the limited profitability of KTG's gas distribution and power production acquisitions, and significant exposure to refinancing risk. These risks are mitigated by the strong profitability of ICA's gas transit operations in the absence of transit tariff regulation; the group's strategic importance to its parent, the Kazakh state-owned KazMunaiGas (KMG) oil and gas group; and the favorable position of its transit gas pipelines between central Asian gas producers and European suppliers. KTG also benefits from strong worldwide gas demand and is protected from downside volume and price risk through a long-term gas transit contract with Gazprom, related to the Central Asia-Center (CAC) pipeline. We expect KTG's financial profile to become increasingly aggressive over the short to medium term, as a result of weaker cash flow generation following the acquisitions of Almaty Power Consolidated and TbilGas's assets, increased debt to fund the CAC pipeline expansion, and increased investment in gas distribution and power. Consolidated funds from operations to debt will likely fall to 15%-20% over the short term. A further weakening of KTG's stand-alone credit quality-due either to a failure to improve distribution and power subsidiary performance or a further increase in debt to finance new acquisitions or investments--could lead us to lower the ratings on both KTG and ICA, in the absence of stronger parental or state support. "The ratings could also be revised to reflect any change in KMG's credit quality," said Mr. Korovin. "They do not factor any potential new gas pipeline projects or acquisitions. Standard & Poor's would not automatically revise the ratings in the event of a rating action on the sovereign." [2006-09-11]