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Moody's confirms Ba3 corporate family rating of Naftogaz

February 05, 2007 | Cbonds

Frankfurt, February 05, 2007 -- Moody's has today confirmed the Ba3 Corporate Family Rating as well as the Ba2 rating for the USD 500 million senior unsecured Loan Participation notes of NJSC Naftogaz of Ukraine ("Naftogaz"). The rating outlook is stable. At the same time, Moody's has lowered the Baseline Credit Assessment ("BCA") to 17 from 16, which however has no impact on the ratings given ongoing strong expected support and low dependence.

This rating action concludes the review for possible downgrade for Naftogaz initiated on August 09, 2007.

The downgrade of the BCA reflects Naftogaz's weakened financial profile as a result of increased gas prices that it needs to pay its key supplier, Gazprom (rated A3), and ongoing uncertainty to what extent the political and regulatory framework will allow Naftogaz to compensate this cost push with domestic price increases both to wholesale and retail customers.

The resolution of the gas dispute between Gazprom and Ukraine in 2005 and 2006 about adequate pricing levels for gas which was supplied both for transit and domestic purposes had resulted in a significant increase of the gas price. The impact on Naftogaz was further exacerbated by its inability to increase supplies from other providers such as Turkmenistan.

During this period, Naftogaz faced political resistance in its domestic market to increase tariffs sufficiently to cover its increased cost base. Despite only a moderate capex programme below its depreciation levels, this inability to offset rising input costs with price increases, combined with cash flow pressures from increasing working capital needs resulted in Naftogaz incurring negative free cash flows and increasing debt levels to fund its cash needs.

However, the BCA of "17" also incorporates that in 2006 the Ukrainian government approved some initial tariff increases, which from 2007 on should be based on economic principles. If successfully implemented, this should mitigate some of the margin pressure, result in high-single digit operating margins in 2007 (from low single digit levels between 1 and 2% expected for FYE 2006) and a positive free cash flow (from a significant extected cash burn in 2006), thereby restoring some stability to the weak financial profile of Naftogaz.

The other elements of Naftogaz's rating, high support and low dependence, remain unaffected by this change in the BCA and support the stable outlook.

Company: Naftogaz

Full company namePJSC "Naftogaz of Ukraine"
Country of riskUkraine
Country of registrationUkraine
IndustryOil and gas


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