Presentation for Investors February 15, 2010

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Presentation for Investors
February 15, 2010
A4 FORMAT Please don’t change page set up to A3, print to A3 paper and fit to scale
Contents
Business Overview and Strategy
Investment Projects
Financial Profile
Executive summary
Executive summary
We are pleased to welcome investors to this presentation
Purpose of this presentation is to brief you on the latest developments of ICA, provide an update on its financial performance and to discuss business strategy, financial policy and financial projections
100% Government owned through KazMunaiGas and KazTransGas with tangible evidence of government support
Monopoly operator for gas transmission in Kazakhstan with no plans to allow competition or privatization
Only feasible route for gas transit from Central Asian producers to European consumers
Crucial link for Gazprom’s imports from Turkmenistan and Uzbekistan
Long-term concession agreements in low risk business
ICA’s 2009 financial results benefited from increase in international transit tariffs
Notwithstanding the global economic downturn, ICA is continuing to demonstrate strong financial performance and sound financial position
ICA is undertaking certain actions to weather downturn and is accordingly progressing important strategies and initiatives, which include revision of the capex programme, improving ICA’s liquidity management.
Macroeconomic and Sector Overview
Kazakhstan: Strong Market-Oriented Macroeconomic Environment
Source: EIU, CIA
Population 16.2 mm
GDP growth (real) 1.1%
Evolution of Tenge Against US Dollar
Energy Sector Outlook
Oil production 1.5 mln barrels per day
Oil reserves/Production 63 years
With world oil prices rebounding from their early 2009 level due to global downturn, consumers tend to be willing for less expensive natural gas for energy needs. Thus, natural gas is expected to be the fastest growing component of world primary energy consumption
The world energy gas consumption is expected to increases from 104 trillion cubic feet in 2006 to 153 trillion cubic feet in 2030
Global Consumption Growth Rates
Kazakhstan Market 2009
Source: Wood Mackenzie
Average predicted % growth rate until 2025
Natural Gas Demand Drives ICA’s Transmission Volumes
Despite the current weakening of the global demand for energy due to the economic slowdown, in the longer term European demand for gas is expected to increase up to 700 bcm by 2030 from 540bcm in 2005, 480 bcm of which will be European import demand
The gap between Russian company Gazprom’s domestic production and exports commitments will be between 200 and 300bcm in 2010:
200bcm will be sourced by Gazprom internally
Given Gazprom’s low growth of long-term gas production, the additional 100bcm will be sourced from Uzbekistan, Kazakhstan, and Turkmenistan. The 25-year supply contract in 2003 between Russia and Turkmenistan supports this assumption
Gazprom’s demand for gas from Turkmenistan and
Uzbekistan is driven in turn by the demand for gas in Russia,
Ukraine, Poland as well as in Europe
Volumes of domestic Kazakh gas may also significantly
increase over the next 4-5 years (mainly due to exploration
of the Kashagan oil field discovered in 2000)
Transported volumes of gas and demand for transit
capability are expected to increase in the short and
medium terms
ICA will remain the sole route for transportation of gas from Central Asia to European markets irrespectively of who will be operating under gas supply contracts (Gazprom, Ukraine, Kazakh-based gas exporting producers)
Source: World Energy Investment Outlook
Source: World Energy Investment Outlook
Ownership Structure and Group Overview
Ownership Structure and Group Overview
Ownership Structure - 100% (Indirectly) Government Owned
Data as of February 15, 2010
100%
100%
Government stake – 100% capital and 100% control
Consideration towards company’s interests
Control over investment and dividend policy
Implicit government support in negotiations with off-takers, suppliers and transit countries
Unique status of exclusive agent for Kazakh gas exports
It is the Government policy that all new major pipeline projects be led by KazTransGas
Key strategic role of ICA as a sole operator of natural gas pipeline infrastructure in Kazakhstan
Approval of key financial and financing parameters of KazTransGas
History of reinvesting earnings into business development and modest dividends
Government support
JSC “KazTransGas”
JSC “Intergas Central Asia”
Group Structure – An Overview
KazMunaiGas is the National Oil and Gas Company of Kazakhstan, which is wholly-owned by the Sovereign wealth fund JSC («Samruk-Kazyna»), which is in turn 100% owned by the Government
KMG is in charge of all the government’s commercial activities in the oil & gas industry, including prospecting, development, production, transportation, services, holding the monopoly over oil & gas pipelines in Kazakhstan and controls 60% of crude production and 100% of gas transportation
KMG plays an active role in approving strategic decisions and business plans of KazTransGas
KazTransGas (KTG)
KazMunaiGas (KMG)
KazTransGas was established in accordance with the Resolution of the Government of the Republic of Kazakhstan No. 173 dated February 5, 2000
KTG is a 100% subsidiary and one of the three main businesses of the KMG Group
The main goal of KTG is to manage the state’s strategic interests in the gas industry of the country and there are no plans for privatization
50% of revenues relate to the stable and profitable business of gas transmission. The main source of revenues is International Transit, which represents USD 822million, or 90% of gas transmission in 2009
Group Structure – An Overview
Intergas Central Asia, JSC (“ICA”) was incorporated in June 1997 and currently, being a member of KazTransGas group of companies (a subsidiary of the NC KazMunayGas) has the primary responsibility to operate and manage the gas transportation networks of Kazakhstan granted to ICA under the terms of concession.
The principal activities of Intergas Central Asia focus on operation and maintenance of the main gas transportation system securing transmission of natural gas to domestic consumers and international gas transit.
Notably, Intergas Central Asia controls and manages the main gas pipeline transportation system of the Republic of Kazakhstan with the total length of gas pipelines in excess of 11,000 km. Given the on-going reconstruction the throughput capacity of the pipelines has been invariably increasing.
Within Kazakhstan, ICA is responsible for transportation of natural gas through 10 main gas pipelines serviced by 22 compressor stations equipped with 284 gas compressor units of various types and models.
The most important in terms of transmission volumes is the main gas pipeline Central Asia-Center (“CAC”) with the aggregate length of 4,892 km in one-line estimation.
In addition, ICA operates three underground gas storages (“UGS”), the biggest being Bozoi UGS located in Aktobe region. Others are Poltoratskoye UGS located in the Southern-Kazakhstan region and Akyrtobe UGS in Zhambyl region. Underground gas storages are used to smooth the seasonality of gas demand supplying extra natural gas in winter and during the periods with lower gas imports.
Intergas Central Asia
Organisational Structure of KTG
JV KyrKazGas, 50%
JV Asian Pipeline, 50%
JSC KazTransGas Aimak, 100%
JSC KTG-Almaty, 100%
KTG- Tbilisi, 100%
Service companies
JSC KazTransGas LNG, 100%
Center for HR Development, 5.5%
Corporate Governance Overview
KTG has created the following documents which were approved by KMG:
Corporate Governance Code
Statute on Board of Directors (2 out of 5 directors are independent)
Policy on Risk Management
Statute on Risks Committee
Rules of Risk Management Process Organization
ICA has a well-defined five-year business plan (up to 2014) approved by its shareholders
ICA current performance is aligned with long-term strategic goals through strategic scorecards approved by KMG
ICA management performance is expected to be evaluated based on achievement of key performance indicators in 2009
KazTransGas as a parent company conducts a policy of consistent improvement of corporate governance in ICA:
Business Overview and Strategy
Intergas Central Asia – An Overview
Principal business is transportation of natural gas and, to a lesser extent:
management, maintenance and operation of the gas transportation system
storage of natural gas and provision of technical services to third parties
sales of natural gas to related parties
Only route for gas transit between Central Asian producers and European consumers
Robust and consistent cashflow generation
2009 total revenue:
Increased 2009 revenues were mainly driven by international tariff increases with increased volumes of transported gas per kilometre
ICA Overview
By Transportation
By Orientation
By Client
* All conversions assume an exchange rate of 1 USD = 120.3 KZT, which was the closing rate of exchange as at 31 December 2007 on the KASE as reported by the NBK
KZT/USD exchange rate in 2009 assumed to be 150.0
2004
2005
2006
2007
2008
2009
21.40
22.89
32.82
43.72
58.357
66.279
15.07
17.46
17.98
22.35
23.368
17.117
0.23
1.93
14.56
14%
50%
5%
5%
5%
Gas Pipeline System of ICA
KAZAKHSTAN
RUSSIA
CHINA
UZBEKISTAN
KYRGYZSTAN
TURKMENISTAN
RUSSIA
Throughput capacity: 56bcm
Throughput capacity: 27bcm
Length: 424km & 382km
Total transported volume in 2009: 91.1bcm
RUSSIA
Source: ICA
Source: ICA
Source: ICA
Active pipelines
Gas fields
Gas Pipeline System of ICA
Source: ICA
Pipeline System
30 bcm per year
2 bcm per year
1975-1999
2,8 bcm per year
13%
Concession Agreements
20 years (15+5) starting in 1997
Agreement is renewable thereafter with two further 5-year extensions if agreed by parties
Transfer of shares at the end of the concession period
A legally binding framework
Right to use the land related to the assets covered by the concession agreement
New (replaced) equipment becomes ICA’s legally owned asset
Annual payment to the Government
Concession payment of KZT 2.1 bln annually in 2008 up to 2017
Invest USD 30 million per year and not less than USD 450million in aggregate during 1997-2017 in order to maintain and upgrade the transportation system
To date, ICA’s has invested over USD 1billion in total
Contingency of New Investment obligations
Rights
Obligations
ICA carries out its operations on the basis of the concession agreements, pursuant to which ICA has the right to operate the natural gas transportation system of Kazakhstan
Tariffs & ARNM* Methodology
** $1.6 is a tariff for Kyrgyzstan
ICA Tariffs
0,04
0,04
0,04
0,04
0,04
0,04
0,04
Tariffs & ARNM Methodology (Cont’d)
International gas transmission:
Tariffs are not subject to regulation because of the concession agreement but are arrived at through negotiation
Tariffs are set in US dollars and ICA has the ability to negotiate directly with its counterparties
In July 2001, the VAT rate on international transit was reduced to zero from 20% based on intergovernmental agreements
Since the beginning of 2009, the international tariffs have been increased by 21.4% (gas transit to Gazprom) which ensures a sufficient level of profitability. In 2010, Intergas and Gazprom have reached an agreement to keep international transit tariff at the level of 2009 of $1,70 for 1000 3 for 100km.
Domestic gas transportation:
Domestic tariffs are regulated and set with political considerations in mind
The methodology and the approval process for domestic gas transportation tariffs are established by one of Kazakhstan’s main regulatory bodies, ARNM (Agency for Regulation of National Monopolies)
ICA and the rest of the KTG Group benefit from the Government in principal supporting future increases in domestic (regulated) tariffs, although tariffs have not changed since 2003 and have historically been kept at artificially low levels
Only a small portion less than 3% of ICA’s revenues is exposed to regulated tariffs
Main principles of the ARNM tariff methodology:
Cover all economically feasible expenses
Cover all taxes and other payments to the state budget
Ensure minimum rate of return necessary for company’s sustainable operations
Main Counterparties
Gazprom is the main recipient of gas transmitted by KTG/ICA under the Russian, Uzbek and Turkmen gas transit contracts
The contracts for gas transportation are signed by ICA and the owners of the gas. The owner of Russian, Uzbek and Turkmen natural gas is Gazprom
The tariff for gas international transit is set in accordance with the agreement between ICA and Gazprom
The 5-year contracts signed with Gazprom in November 2005 stipulate the following volumes for 2009:
Counterparty regions are becoming stronger
Turkmenistan strongly depends on gas exports and demand for its gas remains strong. Gas exports are the key source of hard currency proceeds, and the Kazakhstani route is the only export route currently available to them
On December 12th, 2009 first thread of the main gas pipeline Kazakhstan-China which transports gas from Turkmenistan to China through Kazakhstan territory has been launched. ICA carries out maintenance service of first thread of the gas pipeline with projected gas transit volume of about 6 bln m3 in 2010. Second thread of the gas pipeline is currently under construction and plans to be launched by the end of 2012 with increased volumes of gas up to 30-40 bln m3.
Transit Volumes Breakdown 2009
TCO 3.540 bcm
Kyrgazgas 0.239 bcm
KazRosGas 6.474 bcm
Gasprom 72.92 bcm
Domestic 7.914 bcm
Gas transportation volumes dynamics
In 2009 ICA transported total volumes of 91.1 bcm of gas
International gas transit volumes accounted for 80% of the all gas transported
In 2010 ICA expects reduction in Central Asian gas transit
In 2010 Gazprom and Turkmenistan agreed to transport gas up to 30 bcm
Despite reduction in gas transportation, Gazprom agreed to stick to take-or-pay condition of 80% transmission volumes specified in contract
Gas transportation volumes (mln m3)
1
2009
2009
2009
2009
2009
2010E
2010E
2010E
2010E
2010E
2011E
2011E
2011E
2011E
2011E
2012E
2012E
2012E
2012E
2012E
2013E
2013E
2013E
2013E
2013E
2014E
2014E
2014E
2014E
2014E
Kyrgyz gas transit
7914
7856
7939
8067
8185
8304
Kyrgyz gas transit
Relationship with Gazprom
Gazprom is an owner of natural gas that is transported by Intergas in accordance with terms of Russian, Turkmen and Uzbek gas transportation contracts
Five year contract with Gazprom was signed in 2005 with take-or-pay condition in respect to 80% of projected volumes. Take-or-pay condition for 80% of projected volumes apply to both Turkmen and Uzbek gas. The contact specifies following volumes: Turkmen gas: 45,2bcm, Uzbek gas: 10,0bcm, Russian gas: 50,6bcm
In 2010, Intergas and Gazprom have reached an agreement to keep international transit tariff in the order $1,70 for 1000 3 for 100km. Previously the tariff was increased in 2009 to $1,70 (+21.4%)
Gazprom is a strategic partner for Kazakhstan in a geopolitical context and an important provider of hard currency
ICA (as a part of the KMG group) and Gazprom are both empowered by Kazakhstan and the Russian Federation to negotiate the contracts
Ultimately, the end consumers of the gas transmitted by ICA under its contract with Gazprom are European customers
Gazprom’s counterparty risk for ICA is minimal:
- Gazprom is more dependant on ICA than ICA on Gazprom, as Gazprom has to meet requirements from its European customers
- Russia’s need for ICA’s gas volumes ensures that if Gazprom were ever to fail, an appropriate replacement would be created and transmission would not be interrupted
Medium-Term Contract with Gazprom will Provide Greater Stability to ICA’s Credit Profile
Transit from Turkmenistan and Uzbekistan to the Russian border
Transmission tariff remained at the level of 2009 USD 1.70 for 1000 bcm per 100 km.
Contract has been signed for 5 years (2006 – 2010)
80% of transmission volumes is guaranteed by “take or pay” condition
Transit through northwest of Kazakhstan
Transmission tariff remained at the level of 2009 USD 1.70 for 1000 bcm per 100 km. Contract has been signed for 5 years (2006 – 2010)
Gazprom’s own production has for years remained stable
Enhancement of throughput capacity of gas transportation system
Throughput of the CAC pipeline is projected to initially increase from current 56 bcm to 60 bcm and then ultimately to 80 bcm
ICA revenues are expected to increase to USD 1bln by 2010
The tariff increase negotiated with Gazprom was specifically to enable ICA to undertake major investment projects that will benefit both companies
Main Conditions of Gazprom’s Contracts
Main Implications
Well Defined Strategy
Strategy:
ICA’s strategy is driven by the government’s aim and goals for the gas industry and for ICA to continue to maintain its unique position as the sole route between Central Asian producers and European customers
Fundamental strategy documents:
Program of Gas Industry Development of Kazakhstan for 2004-2010
5-year rolling business plan updated annually with budgets
Key Goals
Maintain and enhance reliability and performance of existing pipeline;
Increase the throughput capacity of existing pipeline system to support expected growth in export volumes;
Adopt the latest information technologies for management of the pipeline network;
Develop new pipeline systems to diversify customer base
ICA has already invested about USD 1 billion in maintaining reliance;
Direct future investment towards upgrading the transit capacity and evaluating possibilities of new routes;
Feasibility of new transit routes, including a route from CAC pipeline to southern Kazakhstan and China
Business Plan 2010-2014
Major Investment Projects
Major Investment Projects
Goal: upgrade gas pipeline and reduce maintenance costs
Project cost: USD 200-250 mln
Stage: feasibility study was completed, project documentation is at the stage of implementation
Project start date: 2010
Project end date: 2012
Financing: ICA considers options of funding the project either by cash generated from operations or conducting trade financing transaction
Increase of Turbocompressor station # 5 of CAC pipeline-5
Goal: upgrade gas pipeline and reduce maintenance costs
Project cost: approximate USD 400-500 mln
Stage: feasibility study is at the stage of implementation
Project start date: 2011
Completion date: 2014
Financing: ICA considers options of funding the project either by cash generated from operations or conducting trade financing transaction
Financial Profile
Capital Structure and Debt Maturity Profile
ICA has both ordinary and preferred shares, with the latter paying an annual dividend of a minimum 1% of nominal value – a small dividend payment was made in November 2009 of KZT 0,248mln in respect of the preferred shares which has limited impact on cash flow. Dividend payout historically has been low, allowing for the internally generated cash to be used for investments
ICA’s long term debt is mainly for investment projects (increase of throughput capacity for the gas transmission network, the most profit generating asset)
In December 2008 ICA redeemed USD 71mln of its USD Bond 2011 and in February 2009 USD 60mln of its USD Bond 2017. Both repurchases were financed by the company’s cash and were prompted by market conditions and attractive pricing
Source: ICA
ICA’s forecasted long-term debt (all on an unsecured basis):
Outstanding Debt ($ mn)
600.0
540.0
540.0
540.0
TOTAL
924.4
772.0
762.9
574.9
Debt Maturity Profile
Fixed rate 92.6%
Debt breakdown
By currency split, 1H 2009
Floating rate 7.4%
Source: ICA Financials
Scheduled debt repayments spread out across the years, however 2011 and 2017 years are relatively high repayments due to maturity of USD Bond 2011 and 2017
In 2008 ICA established Accumulation Fund for Eurobonds debt repayment in which ICA accumulates free cash as set in debt repayment schedule. Cash is invested in the highly liquid financial instruments such as cash at bank accounts, deposits and considers investing in very low risky securities such as government notes
Significant portion of interest rate on debt is fixed interest rate, which indicates very low exposure to changes in interest rates
Current debt is dominated in USD poising substantial foreign exchange book losses in the case of Tenge devaluation
9
a
b
7.4
92.6
1
a
b
c
2009
69
55
11
6.45
2010
9
2011
187.9
2012
9
2013
566.1
a
b
7.4
92.6
1
2
8424.53
7764
7856
7939
8067
8185
Kyrgyz gas transit
Intergas’ Income Statement*
*Source: Financials & Business Plan of ICA for 2010 - 2014
* KZT/USD Exchange rate is 120.77 for 2008 and 150 for 2009-2010
* 2009 Figures are expected
33.1%
31.9%
38%
31.1%
59%
Intergas’ Balance Sheet and Cash Flows Statements*
Assets
Ratios
* Source: Financials & Business Plan of ICA for 2010 – 2014 (2009 Figures are expected)
* KZT/USD Exchange rate is 120.3 for 2007, 120.77 for 2008 and 150 for 2009
2005
2006
2007
2008
2009
0.80
0.91
0.62
2.10
3.24
Intergas’ Covenant compliance of Bank Facility and KMG
Bank Facility Financial Covenants
* Source: Financials & Business Plan of ICA for 2010 – 2014 (2009 Figures are forecast)
* KZT/USD Exchange rate is 120.3 for 2007, 120.77 for 2008 and 150 for 2009
KMG Financial Covenants
EBITDA/Sales > 40% (x)
0.91
0.62
2.10
3.65
3.24
2.8
3.1
5.06
6.13
7.04
42.9%
43.9%
37.2%
25..5%
26.12%
2.8
3.1
5.06
6.13
7.04
9
5.2
3.1
4.0
5.6
Capital Expenditures
Maintaining and enhancing reliability and performance of existing pipeline while increasing throughput capacity
Further investment dependents on growth of transportation volumes
No pipeline capacity expansion until firm agreements on tariffs and volumes are achieved
Conditional projects
Upgrading the CAC (Central Asia Center) pipeline
Financing from internally generated funds and external sources
USD 30mn of investments per year under the concession agreement and not less than USD 450mn in aggregate
Starting from 2008 operating cash flows were able to fund capex since the significant portion of capex was maintenance capex. In 2009 100% of total capex is maintenance capex. As a result, CFO/Capex ratio was improved
CAPEX Program & Requirements
ICA Maintenance CAPEX - Development
Source: ICA financials and business plan for 2010-2014 (2009 Figures are expected)
6
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
Inflation (% change; end-period)
ROE 14.54% 21.62% 18,9% 17.4% 25%
Operation margin (%)
Transportation services:
678.206
712,471
80.882
91.133
Kazakh gas (to outside of the country) 21.40 22.89 32.82 43.72
58.357
66.279
23.368
17.117
6.03
1.970
846.843
888.970
0.17
2.070
1,852
1.433
3.057
850.516
893.880
USD Bond 2011 250.0 178.9 178.9 0.0
HSBC Plc facility (Hermes) 56.4 43.3 37.5 31.7
Commercial loan of HSBC 18.0 9.8 6.5 3.2
USD Bond 2017 600.0 540.0 540.0 540.0
TOTAL 924.4 772.0 762.9 574.9
168,10
186,31
221,97
211,30
0
50
100
150
200
250
300
350
400
450
500
20052006200720082009
$ mn
437,65
690,54
850,52
893,88
656,90
0
100
200
300
400
500
600
700
800
900
2005 2006 2007 2008 2009
EBITDA Interest Coverage (x) 4.77 10.96 5.27 4.17 7.12
Total Debt/EBITDA (x) 1.78 1.78 2.36 2.09 1.90
Total Debt/Total Capitalization 37.00% 44.48% 50.50% 43.8% 42.11%
Net Debt/Net Total Capitalization 35.28% 42.94% 43.87% 37.2% 26.12%
FFO/avg. total debt 49.01% 58.42% 29.71% 33.93% 48.51%
FFO interest coverage (x) 4.17 8.95 3.04 3.08 6.12
EBITDA/Capex (x) 0.80 0.91 0.62 2.10 3.24
%
77,64
165,80
183,78
148,70
0
50
100
150
200
250
20052006200720082009
$ mn
Bank facility Credit metrics 2006 2007 2008 9M 2009 2009E
1) RBS Bank
Line ($50mln) EBITDA/Sales > 40% (x) 43% 55% 46% 59% 44.5%
EBITDA/Capex > 65% (2006-
EBITDA/Finance Cost > 1,5
(x) - 6.55 2.8 3.62 351%
2) HSBC Bank Kazakhstan & Debt/Equity < 1.5 (x) 0.8 1.02 0.78 0.73 0.73%
Citibank Kazakhstan Credit
Gross Profit/Sales > 15% (x) 53% 53% 42.3% 56.18% 54.2%
932,27
Total Debt/EBITDA < 3.5 (x) 1.78 2.36 2.1 1.55 1.9
Net Debt/Net Capitalization <0.5 (x) 42.9% 43.9% 37.2% 25..5% 26.12%
Current Assets/Current Liabilities > 1 (x) 2.8 3.1 5.06 6.13 7.04
Operational liquidity > 1 (x) 29.1 11.6 16.6 44.6 53
EBIT/Interest > 2 (x) 9 5.2 3.1 4.0 5.6
%
5 parallel pipelines total
4088 km in length
Makat-Northern
1985-1987 370 km 14,5 bcm per year 57%
Uralsk System Soyuz Pipeline 1976 382 km 32,6 bcm per year 99%
Orenburg-Noyopskov
Pipeline
Aktobe System Bukhara-Ural Pipeline 1963-1964
2 parallel pipelines each
Zhanazhol-Oktyabrsk
Kartaly-Rudnyi-Kustanai
Pipeline
Bukhara Gas Tashkent-

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