S&P affirms KEGOC long-term credit rating at "BВ+"; outlook "Stable"

/Standard & Poor's, Moscow, November 18, 15, heading by KASE/ – Standard & Poor's Ratings Services said today that it had affirmed its 'BB+' long-term corporate credit rating on Kazakhstan Electricity Grid Operating Co. (JSC) (KEGOC). The outlook remains negative. At the same time, we affirmed our 'BB+' issue rating on KEGOC's senior unsecured bank loan. The affirmation reflects our assessment of KEGOC's stand-alone credit profile (SACP) at 'b+' and our view of a "very high" likelihood that KEGOC would receive timely and sufficient extraordinary support from Kazakhstan's government, if needed. In accordance with our criteria for government-related entities (GREs), our view of a "very high" likelihood of extraordinary government support is based on our assessment of KEGOC's: - "Very important" role for Kazakhstan's government, given the company's strategic importance as the monopoly provider of essential electricity infrastructure; and - "Very strong" link with the government, which owns 90% plus one share in KEGOC, currently guarantees about 44% of KEGOC's debt (and possibly any new debt), and has a history of injecting equity to cover the company's liquidity shortfalls. We currently don't expect the likelihood of extraordinary government support for KEGOC to weaken following the partial so-called people's IPO that took place in December 2014. We note that only a minor stake (10% less one share) in KEGOC was placed, and the government is likely to retain incentives and instruments to financially support KEGOC if needed. We now assess KEGOC's SACP at 'b+' compared with 'b' previously. This reflects our view of the company's "weak" business risk profile, the improvement of its financial risk profile to "significant," and a negative adjustment for the capital structure. Our reassessment of the company's financial risk profile to "significant" from "aggressive" reflects our view of more predictable revenues and operating cash flows. The regulator has approved tariffs for the five-year period starting 2016, whereas, previously, the tariff horizon was limited to one year. We therefore consider future operating cash flows to be less volatile and believe that tariff increases partly offset the effect of the tenge's devaluation. This should allow KEGOC to maintain cash flow and leverage metrics in line with a "significant" financial risk profile, according to our criteria. The ratings are constrained by Kazakhstan's cost-plus-based tariff system, which lacks predictability and transparency; by high country risk; as well as by KEGOC's high financial leverage, with all its debt denominated in euros or U.S. dollars, and large investment program. Positive factors include the strong ongoing support KEGOC receives from the state; KEGOC's monopoly position in the stable electricity transmission business, which we consider to have fairly low operating risk because of its regulated earnings profile; and its long-dated debt maturity profile. The negative outlook on KEGOC reflects that on Kazakhstan. In accordance with our criteria for rating GREs, if we lower the long-term rating on Kazakhstan by one more notch, this will likely will result in a similar rating action on KEGOC, all else being equal. We might also lower the ratings on KEGOC if, in our view, the likelihood of extraordinary state support had reduced to "high" from "very high." This could occur if, for instance, the government intervenes, with a negative effect on KEGOC; has a lower incentive to support the company; or required much larger dividends. Likewise, pressure on the ratings might arise if KEGOC's SACP deteriorates to 'b-', even if our assessment of the likelihood of state support remains "very high" and the sovereign rating remains at 'BBB'. The SACP might deteriorate as a result of weakened liquidity, covenant breaches, or an unexpected increase in Standard & Poor's-adjusted debt to EBITDA beyond 5x, for instance, due to higher capital expenditures or dividends than in our base case. We would likely revise our outlook on KEGOC to stable following a similar outlook revision on the sovereign rating. Primary Credit Analyst: Sergei Gorin, Moscow (7) 495-783-4132; sergei.gorin@standardandpoors.com Secondary Contact: Anna Brusinets, Moscow +7 (495) 7834060; anna.brusinets@standardandpoors.com Additional Contact: Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com [2015-11-19]