Fitch upgrades ratings of KEGOC (Kazakhstan); outlook Stable

/Fitch Ratings, London-Moscow, November 22, 12, heading by KASE/ - Fitch Ratings has upgraded Kazakhstan Electricity Grid Operating Company's (KEGOC) Long-term foreign currency Issuer Default Rating (IDR) to 'BBB+' from 'BBB'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is provided below. KEY DRIVERS Sovereign Rating Upgrade - The upgrade reflects Fitch's upgrade of Kazakhstan's long-term foreign and local currency IDRs to 'BBB+' from 'BBB' and to 'A-' from 'BBB+' (see 'Fitch Upgrades Kazakhstan to 'BBB+'' dated 20 November 2012 at www.fitchratings.com . - State Guarantees Underpin Ratings KEGOC's ratings are aligned with those of the Republic of Kazakhstan, due to its 100%-indirect-state-ownership, direct government guarantees for a large part of its debt (about 47% at end-Q312), and the strategic nature of Kazakhstan's national electricity transmission grid. Kazakhstan's National Welfare Fund Samruk-Kazyna (S-K), the immediate parent company of KEGOC, continues supporting KEGOC and provided KZT1.6bn over 2011-2012 to implement the Ossakarovka Transmission Rehabilitation Project. Fitch views KEGOC's standalone business and financial profile as commensurate with a weak position within the 'BB' rating category, largely due to the financial risk stemming from its exposure to foreign exchange and interest rate risks. - "Peoples IPO" However, S-K plans to offer 5%-15% stakes in a number of Kazakh entities including KEGOC to the local public in the 'Peoples IPO' over 2012-2015. Fitch expects that following the Peoples IPO, in which S-K plans to offer a 10% stake in KEGOC to the Kazakh public in H113, S-K will maintain a majority stake in KEGOC and that the government guarantees for part of KEGOC's debt will remain in place. Fitch may review KEGOC's rating alignment with the sovereign rating if the share of government guaranteed debt decreases below the currently anticipated level and if links with the government weaken. - Capex Driven Negative FCF Expected Fitch forecasts KEGOC to report positive operational cash flow in 2012-2015. However, free cash flow (FCF) is likely to remain negative, mainly driven by substantial capex plans. For 2012, Fitch estimates KEGOC's cash flow from operations at about KZT13.9bn, before capex (KZT24bn) and dividends (KZT2.3bn). The agency expects KEGOC to rely on new borrowings to finance the cash shortfall. In 2011 KEGOC reported revenue of KZT54.8bn, a 23.4% year-on-year increase, mainly due to increase of electricity transmission volumes by 18.3%, mainly driven by the increase of transit of Russian electricity, increased consumption of certain customers and thanks to overall increase of electricity consumption in Kazakhstan by about 5% year-on-year. KEGOC mainly derives revenue from electricity transmission and dispatching services that accounted for about 71% and 17% of total revenue in 2011, respectively. - Leverage Below 5x Expected The group's funds from operations (FFO) adjusted leverage for 2011 slightly increased to 3.75x from 3.3x at end-2010. This ratio is expected to remain below 5x in the medium term. FFO interest cover amounted to 7.8x at end-2011. Fitch expects that interest cover will remain in the single-digits. The agency believes that KEGOC's capex will be contained at levels commensurate with available cash flow and available long-term borrowings (KZT38bn at end-Q312 maturing during 2012- 2015). - Financial Risks Remain Financial risks remained at end-H112, stemming from KEGOC's large foreign currency debt (about 72% of debt is denominated in US dollars and 28% in euros) at variable interest rates. Fitch estimates that the share of guaranteed loans may decrease to around 40% of total debt over the next few years. - Increased Dividend Payout Ratio In 2012 S-K increased dividend payout ratio to 30% of net profit and KEGOC paid dividends of KZT2.3bn up from KZT0.9bn paid in 2011 and zero in 2010. However, the Fitch-expected dividend level does not add significant pressure to cash flow. RATING SENSITIVITY ANALYSIS Positive: Future developments that could lead to positive rating actions include: - A positive change in the Kazakhstan's rating would be replicated for KEGOC due to the rating alignment. - Enhancement of business or financial profile (possibly as a result of stronger regulation and higher equity funding) would be positive for KEGOC's standalone profile. Negative: Future developments that could lead to negative rating action include: - A negative change in the Kazakhstan's rating would be replicated for KEGOC due to the rating alignment. - Evidence of weakening state support (e.g. due to the Peoples IPO) or a lower-than- expected proportion of state-guaranteed debt would be negative for the rating. LIQUIDITY & DEBT STRUCTURE - Adequate Liquidity Fitch views KEGOC's liquidity as adequate based on KEGOC's balanced debt maturity profile (annual scheduled maturities are around KZT8bn at end-2011), cash position of KZT5.6bn at end-H112 along with short-term deposits of KZT21.7bn and available credit lines of KZT38bn as of 30 September 2012. However, these are restricted to identified capex projects and may not be drawn for general liquidity purposes. Cash balances are mostly held in local currency with local banks, which is a concern. At end-Q312 loans to KEGOC continue to be provided solely by the European Bank for Reconstruction and Development (EBRD, 'AAA'/Stable; 55%) and the International Bank for Reconstruction and Development (IBRD, 'AAA'/Stable; 45%) in foreign currencies with floating interest rates. FULL LIST OF RATING ACTIONS Long-term foreign currency IDR: upgraded to 'BBB+' from 'BBB', Stable Outlook Long-term local currency IDR: upgraded to 'A-' from 'BBB+', Stable Outlook Short-term foreign currency IDR: upgraded to 'F2' from 'F3'. Contact: Principal Analyst, Oxana Zguralskaya, Associate Director +7 495 956 7099 Supervisory Analyst, Josef Pospisil, Senior Director +44 20 3530 1287 Fitch Ratings Limited 30, North Colonnade, London E14 5GN Committee Chair, Angelina Valavina, Senior Director +44 20 3530 1314 Media contact: Julia Belskaya von Tell, Moscow, tel.: + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2012-11-28]