Kazakh gas pipeline operator KazTransGas outlook revised to positive; BB' rating affirmed

/Standard & Poor's, Moscow, March 13, 07/ - Standard & Poor's Ratings Services said today that it revised its outlook on Kazakhstan-based gas pipeline operator (ICA) and its holding company, KazTransGas (KTG), to positive from stable. The revision reflects a reassessment of the credit quality of parent, government-controlled KazMunaiGas oil and gas group (KMG; not rated), and of KTG's role in the group. At the same time, the 'BB' long-term corporate credit rating was affirmed. "We believe that KTG's credit quality depends heavily on the overall credit quality of the KMG group, given KTG's nascent role of national gas industry champion," said Standard & Poor's credit analyst Eugene Korovin. Our rating on KTG is based on a top-down approach and is somewhat below our assessment of KMG's credit quality. We estimate KTG's stand-alone credit quality to be three notches below its current rating. The rating is constrained by KTG's largely debt-financed, aggressive growth strategy; the company's aged infrastructure; Kazakhstan's opaque electricity and gas tariff regulatory regime; the low profitability of KTG's gas distribution and power utilities; and the company's significant exposure to refinancing risk. The transit of Central Asian gas to Ukraine remains one of KTG's key business segments, meaning that KTG is indirectly exposed to Central Asian gas producers, and is highly dependent on Russian gas company OAO Gazprom (BBB/Stable/-). Volume risk exposure is mitigated by KTG's long- term take-or-pay gas transit contract with Gazprom for 2006-2010, with fixed payments representing 80% of the transit tariffs. This contract, however, does not fully offset the volume risk resulting from Turkmenistan's political regime, and the complicated political relationship among Russia, Kazakhstan, Ukraine, and Turkmenistan. These weaknesses are mitigated by KTG's strategic importance to KMG, which is likely to ensure extraordinary support in a stress scenario; the strong profitability of ICA's gas transit operations; the favorable position of ICA's transit gas pipelines between Central Asian gas producers and European suppliers; and strong gas demand. At Sept. 30, 2006, KTG's toal debt was Kazakhstani tenge 76.1 billion. "We expect KTG to enjoy direct or indirect parental support in financing the construction of new projects, either through equity contributions or assistance in creating favorable financial structures," added Mr. Korovin. An improvement in KTG's credit quality and the company's growing strategic importance to KMG and the government could translate into stronger support to KTG. This could help to reduce the gap between KTG's and KMG's credit quality. For details: Primary Credit Analyst: Eugene Korovin Secondary Credit Analyst: Elena Anankina Additional Contact: GroupE-MailAddress@standardandpoors.com [2007-03-14]