Fitch has also withdrawn the senior unsecured rating for the notes issued by Intergas Finance B.V., a Netherlands incorporated special purpose entity that redeemed its US $250m 6.875% notes in 2011 and substituted the issuer of its US $600m 6.375% notes due 2017 to ICA on 11 November 2011.

Fitch rates KTG and ICA, which are ultimately fully state-owned via the JSC Sovereign Wealth Fund Samruk-Kazyna, on a standalone basis as it views the linkage between KTG/ICA and their intermediate parent, KazMunaiGaz National Company (NC KMG, BBB-/Positive) as moderate, in accordance with Fitch’s Parent and Subsidiary Rating Linkage criteria dated 8 August 2012.

The ratings of KTG and its 100% subsidiary ICA reflect ICA’s position as the monopoly operator of the 11,000 km gas pipeline network in Kazakhstan, which currently remains the only transit route for Central Asian gas to Russia and further to Europe. In July 2012, KTG became Kazakhstan’s national gas operator, which Fitch views as credit enhancing. KTG purchases natural and associated gas from Kazakh producers at cost plus and re-sells it domestically and for export, at about 8 bcm (billion of m³) and 3 bcm, respectively, in 2011. In 2011, gas sales accounted for 61% of KTG’s revenues, up from 48% in 2010. Over the medium term, Fitch forecasts fairly stable gas sales volumes and prices for KTG.

OAO Gazprom (Gazprom, BBB/Stable) is KTG’s principal customer, accounting for 64% of its consolidated revenue in 2011, down from 75% in 2010. In 2011, Gazprom and ICA signed a new five-year contract with lower natural gas transit volumes from Central Asia at 28 bcm, down from 55 bcm previously. Ship-or-pay clauses cover 80% of negotiated transit volumes. Lower European gas demand was the reason for the reduction in transit volumes from Central Asia. In 2011, Gazprom purchased 22 bcm of gas from Turkmenistan and Uzbekistan, down from 24.5 bcm in 2010, resulting in a 48% drop in Central Asian gas transit revenues for KTG and ICA in 2011. In the past, Gazprom honoured its ship-or-pay obligations under the Central Asian gas transit contract.

In H112, KTG’s consolidated revenues reached KZT137bn, an 8% increase on H111. Sales of gas accounted for 65% of KTG’s total revenues for this period. In H112, ICA transported 51 bcm of natural gas through its main gas pipelines, essentially flat yoy. Fitch believes that Gazprom’s purchases of Central Asian and Kazakh gas will remain relatively unchanged over the medium term, given the soft European gas markets, leading to near-flat gas transit and sales volumes for KTG and ICA over the medium term.

Fitch views as manageable the planned KTG/ICA capex plans to upgrade the existing ageing gas network and provide gas to several Kazakh regions. Over the past three years, KTG and ICA covered their investment needs from own cash flows. KTG is also involved with two pipeline projects – the 10 bcm Beineu-Bozoy-Shymkent pipeline and the Line C of the Asian Gas Pipeline from Central Asia to China to upgrade capacity to 55 bcm, up from 30 bcm that the already commissioned Lines A and B provide. Fitch does not expect any material impact on KTG’s credit metrics from these projects, which are undertaken and financed by its JVs with China National Petroleum Corporation (CNPC, A+/Stable) and guaranteed by CNPC and/or NC KMG.

KTG’s and ICA’s credit metrics benefit from solid cash flow generation, positive free cash flow and improved leverage ratios in 2010-2011. KTG’s total lease-adjusted debt declined to KZT103.4bn at year-end 2011, or 1.3× EBITDAR and net adjusted debt stood at 0.2× of EBITDAR at 31 December 2011. ICA’s gross and net lease-adjusted debt was 1.9× and 1.3× EBITDAR respectively.

Fitch forecasts that ICA/KTG’s financial profile will be stable over the medium term, with KTG’s FFO gross adjusted leverage remaining in the 1.5×-1.7× range in 2012-2015 and ICA’s FFO gross adjusted leverage around 2.2× over the same period. The group effectively mitigates FX risk as it matches its US$-denominated revenues from gas transit and export gas sales with US$-denominated borrowings.

Fitch views KTG/ICA’s liquidity as adequate. Debt repayment schedules are well balanced with a repayment peak in 2017 when ICA’s remaining US $540m Eurobonds fall due. At 30 June 2012, KTG had KZT65.5bn in cash and cash equivalents and KZT12.3bn in short-term deposits that were more than sufficient to cover short-term debt maturities of KZT9bn.

What could trigger a rating action?

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

• Customer diversification – enhancement of the business profile through diversification of the customer base, whilst maintaining solid credit metrics would be positive for the ratings.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

• Lower transit volumes – a large drop in volumes of Central Asian gas transit with a simultaneous failure by Gazprom to honour ship-or-pay obligation would be negative for the ratings.
• Large capex – aggressive capex resulting in significant and sustained deterioration of credit metrics would also be negative.