OREANDA-NEWS. Fitch Ratings has affirmed KazTransGas JSC's (KTG) and its fully-owned subsidiaries', Intergas Central Asia JSC's (ICA) and KazTransGas Aimak JSC's (KTGA), Long-term foreign currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlooks are Stable. A full list of rating actions is attached at the end of this commentary.

KTG is the state-owned monopoly engaged in natural gas transit, transportation, distribution and sales in Kazakhstan (BBB+/Stable). The affirmation of KTG and its subsidiaries reflects Fitch's view that KTG's leverage and coverage ratios will return to acceptable levels in 2018, following a temporary weakening in 2016-2017 due to the reduction of PJSC Gazprom's (BBB-/Negative) transit of central Asian gas to Russia and the devaluation of the tenge in 2015. We also expect JSC National Company KazMunayGas (NC KMG, BBB/Stable), KTG's parent, to continue supporting the group when needed.

KEY RATING DRIVERS
Strong Links with the Parent
KTG's ratings are notched down one level from NC KMG's ratings. KTG and ICA qualify as material subsidiaries in NC KMG's Eurobonds and are subject to cross-default provisions, but NC KMG does not guarantee their debt. We believe that the 'national operator' status granted to KTG in 2012, the transfer of trunk gas pipelines from the state to ICA, as well as NC KMG's flexible approach to KTG's dividend payouts underline the strong parent-subsidiary links between KTG and NC KMG.

For example, in 2015, NC KMG provided a USD400m inter-company loan to KTG that used the funds to repay external borrowings, which we view as a sign of parental support. This follows a 10-year KZT14.9bn loan granted in 2014. Additionally, NC KMG transferred its 50% stake in KazRosGas, an entity engaged in sales of gas from Karachaganak field, to KTG for trust management, which will increase KTG's cash flow by NC KMG's share in KazRosGas's dividends. NC KMG also participates in negotiations between Gazprom and KTG on the subsidiary's gas transit contract.

Midstream and Downstream Gas Monopoly
KTG's ratings reflect the company's status as the operator of the Kazakh gas pipeline network, the only transit route for central Asian gas to Russia and Europe, and its role in distribution and sales of natural gas in Kazakhstan domestically and for export. KTG has a pre-emptive right to purchase all produced natural gas from domestic oil & gas companies. ICA, the operator of trunk gas pipelines, generated nearly 79% of the group's consolidated EBITDA in 2015.

We view the intra-group links between KTG, ICA and KTGA as strong and hence align the ratings of the two subsidiaries with KTG's 'BBB-'. The evidence of strong linkage includes KTG's financial guarantees to KTGA, operational interdependence and a common planning and budgeting process between the companies.

Customer/Profitability Concentration Decreases
Historically, Gazprom has been the group's principal customer, accounting for 57% of ICA's 2015 revenues. The contract between Gazprom and ICA for transit of 28 billion cubic meters (bcm) of central Asian gas to Russia, with 80% covered by 'ship-or-pay' clauses, expired in January 2016. However, the payments for the transportation of central Asian gas to Russia were split between 2015 and 2016, and we expect KTG to generate around KZT42.6bn from this segment in 2016. Gazprom and KTG are currently negotiating the gas contract terms and we expect more clarify on transit volumes and tariffs by end-2016.

KTG has been implementing measures to downsize its operations following the drop of central Asian transit volumes. These include mothballing unused trunk pipeline facilities, maintenance staff optimisation and seeking other income sources, such as providing maintenance and technical assistance services to the Asian Gas Pipeline to China.

Fully Regulated Domestic Tariffs
The group's profitability from domestic gas sales is driven by cost-plus domestic tariffs and regulated gas prices set by Kazakhstan's Committee for Regulation of Natural Monopolies (CRNM) of the Ministry of National Economy.

Historically, gas prices have been sufficient for KTG to maintain adequate profits and finance its capex, while domestic transport tariffs have not covered costs. KTGA's gas transportation tariff increased 18% in 2015. ICA has applied to CRNM for domestic tariff increases and expects an increase in 2016. We believe that in the event of a prolonged economic recession, CRNM may face pressure to limit further tariff increases, which could force KTG to raise its leverage beyond our expectations.

Lower Capex from 2017
We expect annual capex to decline to KZT60bn in 2017 and KZT50bn in 2018 thereafter, from KZT70bn in 2016. We do not foresee a significant impact on KTG's creditworthiness from potential investments required for the completion of the Beineu-Bozoy-Shymkent pipeline and Line C of the Asian Gas Pipeline from Central Asia to China, which are financed by KTG's JVs with China National Petroleum Corporation (CNPC, A+/Stable) and guaranteed by CNPC and NC KMG with no recourse to KTG. KTG provided a KZT26bn loan to its JV with CNPC for the construction of the Beineu-Bozoy-Shymkent pipeline in 2015 and an additional KZT36.8bn loan in 2016. KTG expects that the loans will be partially repaid in 2016 after Beineu-Bozoy-Shymkent goes through an additional round of bank funding.

Devaluation, Volumes Drive Leverage
At end-2015, KTG's funds from operations (FFO) adjusted gross leverage was 2.9x. We expect it to temporarily rise in 2016-2017 to average 3.5x before sliding back to under 3x in 2018. We forecast that the group's FFO interest coverage will fluctuate between 6x-6.5x, largely unchanged from 6.7x at end-2015, which remains adequate for the ratings.

KTGA Aligned with KTG
We continue to align KTGA's ratings with those of KTG. First, KTG guarantees all KTA's loans to Development Bank of Kazakhstan (BBB/Stable), which made up 65% of KTGA's total borrowings at end-2015. Equally importantly, as KTGA plays a vital social role in supplying natural gas to households and industrial customers across Kazakhstan it is an essential part of KTG's strategy and operations. KTG also bears the FX risk of KTGA's gas procurement operations, which substantially aids KTGA's income stability and profitability.

LC IDR, National Rating Upgrade
The upgrade of the Long-term local currency (LT LC) IDRs of KTG, ICA and KTGA to 'BBB' is to better reflect the links between KTG and its parent, NC KMG, whose LT LC IDR is one notch higher than its LT foreign currency IDR. National LT rating and National senior unsecured rating of KTG, ICA and KTGA have also been upgraded to 'AA+(kaz)' from 'AA(kaz)' to reflect the upgrade of their LC LT IDR. The Outlooks on LT LC and National LT ratings are Stable.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Average exchange rate of KZT330 for 1 US dollar in 2016-2019.
- 3bcm of central Asian gas transit to Russia annually shipped by ICA from 2016 onward.
- Average tariffs for domestic gas transportation of about KZT2,000 per thousand cubic meters (mcm) per 100km.
- Average domestic gas prices and domestic sales volumes increasing by low single digits annually between 2016 and 2019.
- Export gas prices to move in line with our Brent price deck of USD35/bbl in 2016; USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl in 2019.
- No dividends to NC KMG.
- Annual capex of KZT70bn in 2016, declining to KZT60bn in 2017 and to KZT50bn in 2018-2019.

RATING SENSITIVITIES
KTG:
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on NC KMG.
- Evidence of stronger ties between NC KMG and KTG, eg, parental guarantees for a large part of KTG's debt.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on NC KMG.
- Evidence of weaker ties between NC KMG and KTG, eg, sustained deterioration of KTG's credit profile with FFO adjusted gross leverage consistently above 4x.

KTGA:
Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on KTG.
- Positive changes in Kazakhstan's regulatory environment, eg, long-term tariffs linked to the asset base.

Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on KTG.
- Weakening ties between KTGA and KTG, eg, if KTG fails to make equity injections into KTGA in the future.
- KTGA's leverage above 5x on a sustained basis, eg, due to an capex increase without a corresponding increase in equity contribution from KTG or the state, or due to lower-than-expected tariffs.

LIQUIDITY
Sufficient Liquidity, Related Party Debt
At end-2015, KTG's short-term debt amounted to KZT43.7bn, while its unrestricted cash balance and short-term bank deposits equalled KZT32.1bn. Nearly all of KTG's cash and deposits were held with Kazakh banks as of 31 December 2015. The company's liquidity was supported by undrawn credit lines of KZT21.8bn at end-March 2016. In March 2016, ICA drew USD140m on its short-term credit line and used these funds to prepay USD142m of its Eurobond due 2017 that had an outstanding amount of USD270m at end-2015.

KTG's debt increased 45% to KZT320.8bn at end-2015 from KZT221.1bn at end-2014, mostly driven by the tenge depreciation. In 2015, ICA made an early repayment of its Eurobond to the amount of USD270m using the cash reserves in its accumulation fund, while KTG fully prepaid a USD400m syndicated loan with the funds provided by NC KMG.

In December 2015, KTG received a three-year loan from NC KMG amounting to USD400m, which was provided in tenge but is fully linked to US dollars. This lifted the share of KTG's debt provided by the parent to 53% at end-2015, from 4% at end-2014, providing KTG with more flexibility regarding debt repayment. It also strengthens KTG's ability to repay obligations to external creditors and demonstrates NC KMG's support of KTG.

Tenge Depreciation Neutral
We estimate that depreciation to have a largely neutral impact on the group's leverage ratios in 2016, as higher leverage due to US dollar-denominated debt will be largely offset by additional EBITDA as most of ICA's and KTG's revenues are US dollar-linked while most costs are tenge-linked. At 31 December 2015, around 85% of the group's debt and half of 2015 revenues were effectively US dollar-denominated, while KTG's operating costs and capex are denominated in tenge, except for nearly 50% of natural gas purchases.

FULL LIST OF RATING ACTIONS

KazTransGas JSC
Long-Term foreign currency IDR: affirmed at 'BBB-', Outlook Stable
Long-Term local currency IDR: upgraded to 'BBB' from 'BBB-', Outlook Stable
Short-Term foreign currency IDR: affirmed at 'F3'
National Long-Term rating: upgraded to 'AA+(kaz)' from 'AA(kaz)', Outlook Stable
Senior unsecured long-term rating: affirmed at 'BBB-'
Senior unsecured National long-term rating: upgraded to 'AA+(kaz)' from'AA (kaz)'

Intergas Central Asia JSC
Long-Term foreign currency IDR: affirmed at 'BBB-', Outlook Stable
Long-Term local currency IDR: upgraded to 'BBB' from 'BBB-', Outlook Stable
Short-Term foreign currency IDR: affirmed at 'F3'
National Long-Term rating: upgraded to 'AA+(kaz)' from 'AA(kaz)', Outlook Stable
Senior unsecured long-term rating: affirmed at 'BBB-'
Senior unsecured National long-term rating: upgraded to 'AA+(kaz)' from'AA (kaz)'

KazTransGas Aimak JSC
Long-Term foreign currency IDR: affirmed at 'BBB-', Outlook Stable
Long-Term local currency IDR: upgraded to 'BBB' from 'BBB-', Outlook Stable
Short-Term foreign currency IDR: affirmed at 'F3'
National Long-Term rating: upgraded to 'AA+(kaz)' from 'AA(kaz)', Outlook Stable
Senior unsecured long-term rating: affirmed at 'BBB-'
Senior unsecured National long-term rating: upgraded to 'AA+(kaz)' from'AA (kaz)'