S&P assigned KazMunaiGas Exploration Production (Kazakhstan) "GAMMA-6" corporate management rating

/Standard & Poor's, Moscow, December 22, 09, Standard & Poor's English translation, KASE headline/ - Standard & Poor's Governance Services said today it has replaced its Corporate Governance Score (CGS) on JSC KazMunaiGas Exploration Production (KMG EP) with a Governance, Accountability, Management Metrics and Analysis (GAMMA) score, KMG EP is one of the top three oil and gas producers in Kazakhstan. The majority of its voting rights are held by state-owned parent, JSC National Company KazMunayGas (NC KMG). The GAMMA score replaces Standard & Poor's CGS that was assigned to KMG EP on October 1 2007. In connection with the assignment of a GAMMA score, the CGS on the company will no longer be maintained, rather it was affirmed at CGS- 6 and withdrawn. The GAMMA score is based on an updated CGS methodology and introduces two new elements of governance analysis: the enterprise risk management system (ERM) and the strategic process. The assignment of a GAMMA score to KMG EP follows the invitation by Standard & Poor's Governance Services to replace CGSs with GAMMA scores, which Standard & Poor's believes to be a more comprehensive assessment of governance structures and practices. This invitation was extended to all existing CGS clients. "Governance structures have shown an incremental overall improvement in 2009, with meaningful progress in the areas of internal audit, risk management and strategic planning" said Standard & Poor's governance analyst Oleg Shvyrkov. "The score remains constrained primarily by the conflicts of interest to which the parent company and the Government of Kazakhstan are exposed. The fact that the company is required to hold cash on deposits in fragile domestic banks is currently the most relevant manifestation of these risks." The overall GAMMA score of KMG EP is the result of four component scores of 1 (low) to 10 (high). - Shareholder influence - 5+ - Shareholder rights - 6+ - Transparency, audit and ERM - 6+ - Board effectiveness, strategic process and incentives - 6 The strengths of corporate governance practices at KMG EP include: - The independent directors have a track record of balancing influence of the majority shareholder effectively and performing close management oversight. On several occasions they were able to veto proposals that they believed were not in the interests of investors in KMG EP. Their influence on board decisions is supported by a formalised veto on major board decisions and by their leading positions in board committees. - Mutual obligations with the parent are legislated and transparent. These include, primarily, the parent's commitment to use its pre-emptive right in the acquisition of assets and licences in the interests of KMG EP and the fixed management fee that KMG EP pays to its parent annually. - There is a strong level of transparency, and an active investor relations function is in place. IFRS accounts are published quarterly and timely. - The company employs an internationally acknowledged auditor chosen via an open tender. The audit committee is competent and independent. - Shareholders enjoy a broad measure of rights and shareholder meeting procedures are generally strong. Standard & Poor's analysis, however, identified several weaknesses in the company's governance system, including: - The government of Kazakhstan may be motivated to direct the resources of KMG EP, the largest oil company under its indirect control, to finance projects of national importance, possibly against the interests of KMG EP. The independent directors may not always be able to block such initiatives, as evidenced by the current practice of depositing cash in fragile domestic banks. - There is a considerable volume of related-party transactions with sister companies, most importantly the Trade House KMG, which acts as the main trader for KMG EP. - Representatives of NC KMG on the board are expected to vote in concert. There have been departures from the pre-agreed board meeting schedule, which primarily inconvenienced the non-resident independent directors. - The company does not have total autonomy in executive compensation policies. Market-based compensation principles have not yet become the norm for state-controlled companies in Kazakhstan, which could create obstacles in maintaining competitive executive compensation rates at KMG EP. - The strategic process is in some respects subordinate to that employed by the parent company. - Preferred shareholders do not enjoy the tag-along rights in the event of a change in control. The share buy-back program did not extend to these shares. The opinions expressed are the independent opinions of S&P's Governance Services, a department of Equity Research Services, and do not reflect the opinions of other areas of Standard & Poor's. Standard & Poor's Corporate Governance Scores, GAMMA scores and other analytic services are performed as entirely separate activities in order to preserve the independence and objectivity of each analytic process. Information on corporate governance scores and GAMMA scores, including the related report "KMG EP: GAMMA ", published on December 22, 2009 is available at www.governance.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Moscow (7) 495-783-4000/40. For details: Oleg Shvyrkov, Moscow, 7 (495) 783-40-45 Elena Pastukhova, Moscow (7) 495-783-40-94 Analysts e-mails: oleg_shvyrkov@standardandpoors.com elena_pastoukhova@standardandpoors.com Governance@standardandpoors.com [2009-12-23]