S&P affirmed KazMunaiGas EP' GAMMA corporate governance rating at GAMMA-6

/Standard & Poor's, Moscow, November 15, 10, KASE headline/ - Standard & Poor's Governance Services said today it has affirmed Governance, Accountability, Management Metrics and Analysis (GAMMA) score on JSC KazMunaiGas Exploration Production (KMG EP). In terms of consolidated production, KMG EP is the second largest oil and gas producer in Kazakhstan. The majority of its voting rights are held by state-owned parent, JSC National Company KazMunayGas (NC KMG). "There were several favorable developments regarding governance practices at KMG EP. The company took several steps to strengthen the financial rights of preferred shareholders and effectively put the two types of shares on the same footing in financial terms. Furthermore, the board of KMG EP adopted a new treasury policy, which addressed several cash management issues of concern. The board also ensured that the terms of the bond purchase from NC KMG contain several clauses thoroughly protecting the interests of minority shareholders in KMG EP. These outcomes bear witness to the board's effectiveness in our view." said Standard & Poor's governance analyst Oleg Shvyrkov. "The fact that the parent company currently delays the adoption of the new strategy of KMG EP is the most immediate constraint on the GAMMA score. The strategic objectives announced earlier have effectively been reached; We believe that it is important for KMG EP to be able communicate its strategic priorities for the coming years". 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 - 7 (raised from 6+) - Transparency, audit and ERM - 7 (raised from 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 the influence of the majority shareholder effectively and performing close management oversight. In 2010, they played a key role in negotiating the terms of a bond acquisition from the parent company, which allowed KMG EP to reduce cash exposure to fragile domestic banks and formalize an updated treasury policy. - Mutual obligations with the parent are legislated and transparent. The parent's commitments to use its pre-emptive rights in the acquisition of assets and licences in the interests of KMG EP were fully met in recent years. - There is a strong level of transparency, and an active investor relations function is in place. IFRS accounts are published quarterly and in a timely fashion. - The company employs an internationally acknowledged auditor chosen via an open tender process. The audit committee is competent and independent. The internal audit group is competent and resourceful. - Enterprise risk management procedures have gained momentum and are based on strong principles. - Shareholders enjoy a broad measure of rights and shareholder meeting procedures are generally strong. The listing of preferred shares, and the launch of a buy-back program for these shares in 2010 significantly remedied the historically disadvantaged position of preferred shareholders. 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. In some cases, the independent directors may not always be able to counter such initiatives. - Samruk-Kazyna and NC KMG require all subsidiaries to comply with certain group-wide operating policies, some of which are constraining for KMG EP. The company's independent directors are not always able to negotiate waivers from such policies. This particularly affects the strategy-making and executive compensation policies. - There is a considerable volume of related-party transactions with sister companies. - There is room for improvement in terms of disclosure, particularly with regards to social and environmental performance. The report is available on Standard & Poor's web site www.governance.standardandpoors.com, and on the Russian-language web site www.standardandpoors.ru. Information on Corporate Governance Scores and GAMMA scores is available at www.governance.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Moscow (7) 495-783-4000/40. This document does not constitute an offer of services in jurisdictions where Standard & Poor's or its affiliates do not have the necessary licenses. All information provided by Standard & Poor's is impersonal and not tailored to the needs of any person, entity or group of persons. Standard & Poor's makes no warranties, express or implied, as to results to be obtained from use of information provided by Standard & Poor's and used in this service, and Standard & Poor's expressly disclaims all warranties of suitability with respect thereto. 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. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. 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. Standard & Poor's and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address. Media Contact: Oleg Shvyrkov, Moscow, 7 (495) 783-40-45 Elena Pastoukhova, Moscow, 7 (495) 783-40-94 Analysts' e-mails: elena_pastoukhova@standardandpoors.com oleg_shvyrkov@standardandpoors.com Governance@standardandpoors.com [2010-11-17]