Fitch Ratings has affirmed Beineu-Shymkent Gas Pipeline LLP's (BSGP) Long-Term Issuer Default Rating (IDR) at 'BBB-' and National Long-Term Rating at 'AA+(kaz)'.

The Outlooks are Stable.

RATING RATIONALE

The ratings reflect Fitch's assessment that under its Parent and Subsidiary Linkage Rating Criteria, BSGP's credit profile is the same as its immediate parent, JSC National Company QazaqGaz (NC QG, formerly KazTransGas JSC, BBB-/Stable). Consequently, BSGP is rated on a standalone basis.

BSGP has a strong market position, limited exposure to competition as well as a cost pass-through tariff framework and low maintenance capex requirements for the newly-built pipeline. Under the Fitch rating case (FRC), BSGP's adjusted net debt to EBITDA (leverage) averages 2.2x over the next five years. Counterparty risk stemming from NC QG's role as BSGP's sole shipper of the transported gas caps the rating at 'BBB-'/Stable.

KEY RATING DRIVERS

Limited Competition, Resilient Volume - Revenue Risk (Volume): Midrange

BSGP has a strong position as the only route for Kazakhstan to export gas to China and supply own gas to the southern regions. Kazakhstan's Soviet-era pipeline infrastructure has large gaps. It mostly connects western producing regions to Russia, leaving eastern, central and southern regions disconnected. BSGP's sole shipper and major counterparty is its 50% shareholder, NC QG (national gas pipeline monopoly), resulting in a cap on BSGP's rating.

Gas export volumes are based on the agreement between Kazakhstan and China and the contract between NC QG and PetroChina Company Limited (PetroChina, subsidiary of China National Petroleum Corporation, A+/Stable) for the supply of 5-10 billion cubic metres per year (bcma). Domestic demand is driven by gas consumption in Southern Kazakhstan, which consumes at least 3-4 bcma. The only alternative for this region to receive gas is imports from Uzbekistan. Further demand should come from Central Kazakhstan when the JSC Astana Gas KMG pipeline (BB/Stable) is fully operational and connected to distribution networks.

Regulated Cost-Based Tariff - Revenue Risk (Price): Stronger

BSGP operates under a regulatory framework with five-year regulatory periods and a cost-based tariff for gas transmission, which is designed to recover all operational costs (including debt repayment) and provide a return (equal to weighted average cost of capital) on the regulated asset base. The tariff is uniform (covers internal, export and transit transportation) and in local currency. The tariff for the regulatory period of 2020-2024 was approved at end-2019.

The tariff can be adjusted down once a year, if actual transported volumes are above the plan or costs are lower than expected. Upward revision is unlikely and only possible in limited cases. Factors such as tenge depreciation, reduction in gas transportation volumes and increased costs cannot reasonably initiate tariff revision before the next regulatory period.

The tariff for the 2020-2024 regulatory period is based on conservative projections of gas transportation volumes. If volumes are higher than expected, tariffs will be adjusted down. This approach gives the company flexibility and a buffer in case of low volumes. The regulated asset base return also represents a significant buffer, as it constitutes 50% of allowed revenue due to the high value of the newly-built assets and high weighted-average cost of capital (around 12% for 2020-2024).

Newly-built Pipeline, Low Maintenance - Infrastructure Renewal and Development: Stronger

BSGP is a newly-built operational pipeline with an asset life of over 30 years, which is well beyond the tenor of the debt. The long asset life and modern facilities (most works finished in 2019) reduces the need for major maintenance and repairs in the early life of the assets.

Corporate-like Guaranteed Debt with FX Risk: Debt structure - Midrange

As of November 2022, debt was USD700 million and comprised a single senior unsecured loan, which benefits from an amortising maturity profile and leverage-based covenants set at a reasonable level. BSGP's debt is US dollar-denominated and has a floating rate, exposing the project to FX and interest rate risk. BSGP mitigates FX risk by maintaining a significant US dollar cash balance. As of November 2022, cash was around USD300 million equivalent, of which more than half was held in US dollars.

Financial Profile

Under the FRC, projected Fitch-adjusted net debt to EBITDA (leverage) averages around 2.2x in the next five years with a maximum of 3.0x at the end of 2024. The Fitch base case (FBC) resulted in average leverage of 1.9x with a peak of 2.5x in 2024.

Fitch also ran stress scenarios, which indicated BSGP's resilience to opex stress, with average leverage at 2.1x. BSGP showed higher sensitivity to FX shock and volume stress, with average leverage reaching 3.8x and 4.0x, respectively.

Finance and operating leases are captured as an operating expense, reducing EBITDA.

PEER GROUP

BSGP is not directly comparable with any peer in Fitch's project finance portfolio. However, we considered the ratings of other oil and gas pipelines and EMEA ports and airports.

Astana Gas (AG, BB/Stable), another Kazakhstan gas pipeline which was recently commissioned, is also remunerated based on a fixed tariff. However, due to limited visibility of the revenue framework and its predictability, Fitch does not assign AG a standalone rating. Instead, it is rated under Fitch's Government-Related Entities Criteria with a three-notch differential between AG's rating and that of the sovereign, based on Fitch's combined assessment of the strength of linkage to the government and its incentive to support AG.

Abu Dhabi Crude Oil Pipeline LLC's (AA/Stable) rating relies on the supportive use and operational agreement with the national oil company Abu Dhabi National Oil Company, which underpins the long-term predictability of the project's cash flows. Similarly, BSGP benefits from long-term stable and predictable revenue, but is exposed to tariff revisions every five years and some volatility in volume. BSGP's operating risk is outsourced to NC QG's subsidiary, ICA, on a three-year rolling basis, which is a weaker arrangement than for Abu Dhabi Crude Oil Pipeline LLC.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on NC QG;

Deterioration of the Standalone Credit Profile (SCP) accompanied by weaker parent-subsidiary linkages.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BSGP's SCP is capped by its key counterparty NC QG;

Positive rating action on NC QG, provided that our analysis of parent-subsidiary linkage supports ratings equalisation.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

TRANSACTION SUMMARY

BSGP is a 1,454km long natural gas pipeline with 14 bcma capacity (expected to increase to 15 bcma by 2022), connecting the oil and natural gas fields in the west of Kazakhstan with the south of the country, as well as with the Bukhara gas region, Tashkent-Bishkek-Almaty region, and the Gazli-Shymkent and Central Asia-China Line C gas pipelines.

The pipeline was constructed under an agreement between Kazakhstan and China in 2007 and is 50-50 owned by NC QG and Trans-Asia Gas Pipeline Co Ltd. The construction cost was USD2.8 billion at end-2019, when main construction was completed.

CREDIT UPDATE

During 2021, BSGP transported 12.8bcm, exceeding the initial plan. In 9M22 BSGP's transportation volumes were slightly lower yoy, which was mostly driven by lower production of commercial gas at Kazakhstan's oil fields (most of Kazakhstan's commercial gas is oil associated). Local gas consumption in 2022 increased to 70% from 40% in 2020 of transported volume. The remaining gas is exported.

In September 2022, the company fully refinanced all existing debt with a new USD700 million loan from the same lenders.

FINANCIAL ANALYSIS

The FBC assumes a five-year average gas transportation volume of 13.0bcma with tariffs at the level approved by the regulator for 2020-2024. We also inflate operational expenses by 5% compared with management's case. The FRC assumes a five-year average gas transportation volume of 12.4bcma with tariffs in line with the FBC. We also inflate operational expenses in FRC by 10% compared with management's case. Both the FBC and FRC assume capex in line with management's plan until 2023, afterwards we expect a significant increase in capex amid a potential increase in capacity to 18.0bcma. We assume dividend distributions in 2022 and 2023.

Fitch's stress cases are based on FBC assumptions with the adjustment of one factor. In the FX shock scenario, we employ 50% depreciation of the tenge, while the opex stress case assumes 15% higher costs. In the volume stress case, we assume gas transportation volume of 8.0bcma until 2024 and then increasing to 11.0bcma by 2026, which is the sum of the take-or-pay amount under contract with PetroChina and domestic consumption.

Summary of Financial Adjustments

Finance and operating leases are removed from financial liabilities. Lease expenses are captured as an operating expense, reducing EBITDA.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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