MOODY’S ASSIGNS Ba2 SENIOR IMPLIED AND Ba3 ISSUER RATINGS TO INTERGAS CENTRAL ASIA
Moody’s Investors Service has assigned a Ba2 Senior Implied Rating and a Ba3 Issuer Rating to Intergas Central Asia, the Kazakh gas pipeline company. The rating outlook is stable. This is the first time that Moody’s has rated this company.
Moody’s said that Ba2 Senior Implied Rating of Intergas Central Asia (ICA) is based on the company’s relatively heavy investment needs to maintain and increase the capacity of its ageing gas pipeline system, its dependence on an anticipated material increase in the volume of gas being exported from Turkmenistan via Kazakhstan to Russia, and the need to sustain or raise tariff levels for the transmission of international gas flows through its pipelines. The rating also reflects ICA’s increasing debt burden, its financial support for KazTransGas, its parent company with which it is expected to merge, and significant counterparty concentration risk. At the same time, however, ICA’s Ba2 senior implied rating reflects the company’s strategic importance to the strongly developing Kazakh economy, its monopoly status, its integral relationship with the national oil and gas company, KazMunaiGas, and the implicit support of the Kazakh Government. Also taken into account is ICA’s fortunate geographical position integrated within the former Soviet Union gas network linking a region of increasing gas production in the Eastern Caspian with Russia and the growing gas markets in Europe. The Ba2 senior implied rating anticipates that ICA-KTG’s historically weak financial ratios will strengthen materially over the intermediate term. The Ba3 Issuer rating reflects the fact that all ICA-KTG’s existing debt is secured and would rank senior to any unsecured notes which the company may issue. If, however, ICA were to refinance its banking facilities on a largely unsecured basis with which senior unsecured bonds would rank pari passu, Moody’s would expect the company’s bonds to be rated at the Ba2 level.
As the de facto monopoly gas transmission company of Kazakhstan Intergas Central Asia (ICA) is, in Moody’s view, well-positioned to benefit from increased international gas transit in the region and from growing export opportunities. ICA’s principal activities are the transmission of Russian gas across Kazakh territory, as it forms an integral part of the ex-Soviet pipeline infrastructure, and increasingly of gas into Russia from Turkmenistan. With low domestic gas consumption, the rising production of gas within Kazakhstan is also providing rapidly growing export opportunities for ICA. While these increasing transmission volumes are bringing a considerable hike in ICA’s revenues, they are also demanding a substantial rise in the company’s capex spend only part of which Moody’s would expect to be covered from cash flow. As a result, ICA’s debt will rise in the intermediate term, although Moody’s would not expect debt to rise above the company’s internal maximum parameter of $200 million.
In terms of volume, some two-thirds of gas transported by ICA are Russia-to-Russia as the ex-Gazprom system crosses northwest Kazakhstan. Having declined through the 1990’s due to Russian economic problems and the reduction in domestic consumption associated with that, these volumes, in excess of 70 bcm (billion cubic metres) per annum, have now stabilised and are expected to remain at current levels. The most significant part of the other third of gas volumes transmitted by ICA flow from Turkmenistan across Kazakhstan into Russia. ICA has a particular need to increase spending on this transit pipeline system (now known as SATS) as it has been underinvested for a number of years.
The reasons for the historical underinvestment date back to the demise of the Soviet Union. As domestic demand for gas in Russia fell during the 1990’s Gazprom was able to fulfil its export contracts to Western Europe without maintaining its own reserve development programme and, increasingly, without the need to import gas from Central Asia, above all from Turkmenistan. The transit of Turkmen gas via Kazakhstan dwindled and ultimately ceased in 1997. ICA’s principal pipeline system fell into virtual disuse for several years. It was only when Gazprom’s production difficulties spurred the company to begin repurchasing Turkmen gas in 1999 that meaningful usage of the system restarted. Throughput rose from 9.5bcm in 1999 to 33.2bcm in 2001. Moody’s expects this trend to continue over the medium term as Gazprom seeks to plug the gap between its production and supply commitments to Europe by taking gas supplies from Turkmenistan, while at the same time developing new reserves of its own to sustain its contracts over the longer term. Changes anticipated in the Russian gas market allowing independent gas producers access to domestic gas sales, may also provide Gazprom with greater operating flexibility with regard to exports and reduce the need for it to import from third parties. While, overall, the situation bodes well over the medium term for gas production in Turkmenistan (which currently has few alternative export outlets) and for ICA, Moody’s believes that there is a risk further out that Turkmen gas may again relegated to the role of swing producer for Russia with uncertain consequences for ICA.
ICA has a number of risk concentrations which weigh on its rating. Firstly, the gas shipper from which some 90% of ICA’s revenues in 2003 are expected to be sourced is Gazprom, a very powerful regional player and a potentially difficult counterparty. Secondly, while ICA has no direct financial exposure to gas producers, it will become increasingly beholden, in terms of country risk, to B2-rated Turkmenistan as Gazprom’s gas supplier. Thirdly, ICA is closely tied into the Government of Kazakhstan. This is both a risk concentration and a rating support. On the one hand, ICA has a very sizeable and growing VAT receivable from the Government which may not be recoverable (estimated at up to $40 million at group level), and the Government also has certain rights to receive additional sums in accordance with the Concession Agreement (under which ICA operates the pipeline system) which it could enforce. On the other hand, Moody’s does not expect these to be an issue as the Government, through the Ministry of Energy and Mineral Resources, is generally supportive of ICA.
ICA is part of KazMunaiGas (KMG), the state-owned national oil and gas company of Kazakhstan. In parallel with Ba2-rated KazTransOil (KTO), it is an important strategic part of the country’s rapidly developing economy. While exports of Kazakh gas are as yet relatively low, equating to just 1% of ICA’s total transmission volumes in 2001, they are growing steeply as new reserves are being developed and coming on stream, and could potentially exceed 10% of ICA’s volumes in the long term. Moody’s consequently believes that, while no explicit support is given to the company, the Kazakh Government has a strong interest in allowing ICA to execute its investment programme. This is factored into the rating.
Financially, ICA has a short and unstable track record since its establishment in 1997. Initially afflicted by regional economic problems characterised by high uncollectable receivables and barter transactions, ICA has achieved a rapid growth in its revenues and improvement its cash flows over the past two years, although this is offset by much increased capex and working capital (especially due to the VAT receivable). The company’s own margins and interest coverages are now significantly strengthened. However, ICA’s intermediate holding company, KazTransGas (KTG), with its other gas-related activities, such as gas trading and supply, generating volatile cash flows, is dependent on ICA to collateralise and service its considerable debt: KTG consolidated group debt stood at $114 million at the end of 2001 while ICA’s own portion of that was just $13 million, the remainder being largely the $62 million credit facility that KTG incurred to take over the ICA business from Tractebel. As a result Moody’s views ICA’s credit on the basis of its support of KTG’s debt burden. ICA’s FFO of $31 million covered KTG consolidated gross interest 2.7 times in 2001 and represented some 27% of group debt. This will likely become all the more relevant as KTG appears set to merge with ICA. Last year KTG transferred out its gas trading businesses leaving only is small non-profitmaking gas supply operations in southern Kazakhstan. Going forward ICA will represent substantially all of KTG’s cash flows. Moody’s notes that ICA’s future cash flows will be dependent not only on increasing volumes transported but also on the annual renegotiation of tariffs, these not being regulated. With improvements in the company’s operating performance anticipated in 2002 and going forward based on Moody’s expectation of increased gas volumes, the more predictable cash flows of ICA-KTG should cover group interest and support its increased debt burden with measurements appropriate to the Ba2 senior implied taking account of qualitative factors and at levels similar to those likely to be achieved by KTO.
Currently all of ICA’s debt is secured on gas shipping contracts and / or inventories. On this basis, Moody’s has assigned a Ba3 Issuer Rating to reflect the subordination of any unsecured debt issuance to existing debt. However, Moody’s expects that the debt will be refinanced in 2003-4, and believes that ICA may seek to reduce the amount of secured debt significantly. If this is indeed the case, Moody’s may be able to raise the Issuer Rating to Ba2 should the subordination of potential senior unsecured notes to secured debt no longer be material (i.e. more senior debt should be restricted to 25% or less of total debt), subject to expectations of future changes in relative debt levels and restrictions within a potential bond indenture.
ICA’s Ba2 senior implied rating assumes that the merger with KTG will take place and takes account of ICA’s cash flows servicing the companies’ combined debt. The rating outlook is stable reflecting the expectation that the company will increase gas throughput from third-party transit and export enabling it to bolster cash flows and strengthen debt protection measurements.
Intergas Central Asia, headquartered in Almaty, Kazakhstan, is the state-owned gas transmission company of Kazakhstan. With over 10,000km of trunk pipelines, the company transmitted 112bcm of gas in 2001 and had revenues of over KZT48 billion ($329 million).
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