Fitch affirms KazTransOil ratings; outlook Stable

02.09.14 15:00
/Fitch Ratings, Moscow/London, August 28, 14, heading by KASE/ – Fitch Ratings has affirmed Kazakhstan-based JSC KazTransOil's (KTO) Long-term foreign currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. A full list of rating actions is below. KTO's ratings reflect its strong operations and credit profile, which we expect it will maintain at least over the medium term, and its strategic importance to the economy of Kazakhstan (BBB+/Stable). KTO is the national operator of oil pipelines in Kazakhstan. Its ratings are capped by those of its parent, JSC National Company KazMunayGas (NC KMG, BBB/Stable). Excluding the share in transportation volumes of equity accounted subsidiaries, it transported 59.6 tonnes of oil in 2013, equivalent to about 1.1m barrels per day (mmbbl/d). In 2013, KTO generated KZT106bn in EBITDA and KZT94bn in funds from operations (FFO). At 30 June 2014, the company had KZT117bn in cash and no balance-sheet debt, and we expect leverage to remain under 0.5x in 2014- 2018. KEY RATING DRIVERS Kazakhstan Oil Transportation Champion KTO dominates the Kazakh oil transportation sector, which is critical for the national economy. In 2012, KTO received 'national operator' status, which legally protects its monopolistic position. KTO estimates that in 2013 it shipped 57% of crude produced in Kazakhstan, excluding the volumes shipped by its two joint ventures (JVs) with China National Petroleum Corporation (CNPC, A+/Stable), which operate the major parts of the 20m tonne per annum capacity Kazakhstan-China oil pipeline. Ratings Capped by the Parent We cap KTO's ratings at NC KMG's level because the parent exercises significant influence over KTO's free cash flow (FCF) through dividends, which NC KMG needs to service its large standalone debt of KZT1,818bn (USD11.8bn) at end- 2013. We consider that KTO's uncapped ratings are in the low 'A' category, limited by country-specific corporate governance issues and concentration of assets in one country. We also believe that in the event of financial stress, the state would support KTO, either directly through equity contributions or loans from state- owned banks, or indirectly through higher tariffs. Stable Operations In 2013, KTO's crude turnover (excluding JVs) reached 37 billion tonne- kilometres, up 7% yoy; in 1H14 the turnover was down 2% on 1H13. We expect that KTO's volumes and turnover will decline gradually over the medium term, reflecting maturing production at Kazakhstan's key oilfields. In 2014, Russia and Kazakhstan agreed to ship up to 10 million tonnes of Russian crude to China at a specified tariff. However we do not incorporate any impact on KTO at this time. Tariffs Increases Mitigate Devaluation KTO's tariffs are regulated by Kazakhstan's Agency for Regulation of Natural Monopolies (AREM), which periodically reviews them. AREM has increased KTO's export tariffs twice this year in January and in April, by 23% in total, and domestic tariffs in January by 50%. We view timely tariff indexation as essential for KTO's sound financial performance. Solid Credit Despite Significant Capex We expect that KTO's annual capex may exceed KZT50bn in 2014-2018, compared with KZT33bn in 2013, as it is undertaking two significant projects: construction of the second line of the Kazakhstan-China pipeline to boost its capacity to 20 million tonnes per annum and upgrades of the Karazhanbas-Aktau and Uzen-Aktau pipelines. We expect KTO to report negative FCF until 2018 due to higher capex, but FFO adjusted net leverage should remain under 0.5x in the medium term. Non-Recourse JV Debt Excluded We continue to treat the indebtedness of Kazakhstan-China Pipeline LLP (KCP), KTO's 50% JV with CNPC, as non-recourse to KTO. These borrowings include a USD288m (residual amount) bank loan due in 2019 and a USD733m bank loan due in 2018 that was guaranteed by CPNC until 31 December 2013. KCP had a solid financial position at end-2013. Fitch estimates that its net debt/EBITDA stood at 2.8x and in 2013 its FCF reached KZT15bn. We believe that the JV will be able to service its debts without any help from KTO. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Positive rating action on NC KMG's ratings would likely lead to positive rating action on KTO. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Negative rating action on KMG NC would likely be replicated on KTO. - KTO's aggressive capex and/or dividend payments exceeding our expectations resulting in a significant and sustained deterioration of its credit metrics, including FFO gross adjusted leverage above 2x. LIQUIDITY AND DEBT STRUCTURE Solid Liquidity, No Debt At 30 June 2014, KTO had KZT117bn in cash and deposits mainly with local banks eg, Halyk Bank of Kazakhstan (BB/Stable) held nearly 50% of KTO's funds at that time and Kazkommertsbank (B/Stable) held another 38%. KTO had no financial debt at 30 June 2014. The rating actions are as follows: Long-Term IDR: affirmed at 'BBB', Outlook Stable Local currency Long-Term IDR: affirmed at 'BBB', Outlook Stable Short-Term IDR: affirmed at 'F3' National Long-Term Rating: affirmed at 'AA+(kaz)', Outlook Stable Senior unsecured rating: affirmed at 'BBB' National senior unsecured rating: affirmed at 'AA+(kaz)'. Contact: Dmitry Marinchenko Associate Director +44 20 3530 1056 Supervisory Analyst Maxim Edelson Senior Director +7 495 956 9901 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Committee Chair Alex Griffiths Managing Director +44 20 3530 1709 Media Relations: Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2014-09-02]