Fitch: No Immediate Rating Impact from Gazprom's USD7bn Bill to Naftogaz
28 Jan 2013 9:58 AM
Fitch Ratings-London/Moscow-28 January 2013: Fitch Ratings says OAO Gazprom's ('BBB'/Stable) intention to impose a USD7bn fine on NJSC Naftogaz of Ukraine (Naftogaz, 'CCC') for failing to purchase minimal contractual gas volumes in 2012 may either result in Ukraine ('B'/Stable) scrambling to find additional funds to support Naftogaz, or may lead to prolonged litigation. There are no immediate rating implications for Naftogaz at this time.
Naftogaz has confirmed that it received a USD7bn bill from Gazprom for natural gas volumes not taken in 2012 under the 'take-or-pay' clauses contained in the 10-year gas supply agreement signed with Gazprom in 2009. In 2012 Naftogaz reduced its gas purchases from Russia to around 25 billion cubic meters (bcm) from 40bcm in 2011. According to Gazprom, in 2012 Naftogaz's obligation under the 'take-or-pay' contract clause was 42bcm. In 2012, the average price paid by Naftogaz to Gazprom amounted to USD425 per thousand cubic meters (mcm).
So far, Ukraine's attempts to renegotiate the 2009 gas supply agreement, both in terms of price and quantity, have proved unsuccessful. In several instances, Naftogaz announced that it would not meet the required purchase volumes, and that it would pay only for gas volumes actually taken from Gazprom. Fitch believes that Naftogaz is unlikely to pay the entire USD7bn bill without an international arbitration ruling first, which may take a long period of time.
Gazprom might withdraw the USD7bn bill in exchange for closer political and economic cooperation between Russia and Ukraine. Russia has been trying for some time to persuade Ukraine to sign up for a customs union with Russia, Kazakhstan and Belarus. The 'take-or-pay' issue and the reduction of Russian gas transit volumes through Ukraine to Europe, after the launch of Gazprom's North Stream in 2011, seem to strengthen Russia's negotiating position, along with a potential gas discount that may be offered to Ukraine should it join the customs union.
Naftogaz's cash flow generating ability remains extremely poor. Given the current import gas price and domestic gas tariffs, Naftogaz will continue generating negative free cash flow (FCF). The company will also have limited access to debt markets, in Fitch's view. Therefore, Naftogaz might need additional state equity injections to meet the 'take-or-pay' clause of the gas supply agreement.
Support for the loss-making state company is already a burden on the public finances. Support cost the government an average of 1.9% of GDP over 2009-2011 as the gap widened between domestic household gas tariffs and import prices. The burden of supporting Naftogaz makes increasing domestic gas tariffs a major issue in talks due to start with the IMF this week. Ukraine's general government fiscal deficit widened to at least 5.5% of GDP in 2012, and the current account deficit reached more than 7% of GDP. USD7bn equals roughly 4% of the country's GDP.
Fitch may consider a negative rating action for Naftogaz should Naftogaz accept the bill, or should the chances of an unfavorable arbitration ruling against Naftogaz become more likely.
As Ukraine's dominant oil and gas company, Naftogaz operates the national gas transportation system and is engaged in natural gas production, imports and distribution in the country. The company's rating incorporates the support it receives from the state, and a potential rating action on the sovereign may impact the company's rating. Ukraine is currently considering a possible restructuring of the company, including splitting it off into separate entities.
Naftogaz's USD1.5bn Eurobonds maturing in September 2014 and rated at 'B' by Fitch benefit from an unconditional and irrevocable guarantee from Ukraine.
Fitch's recent Full Rating Report on Naftogaz published in January 2013 can be found at www.fitchratings.com.
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