S&P affirmed GAMMA score for National Company KazMunaiGas at GAMMA-4+ and withdrew due to GAMMA business closure

/Standard & Poor's, Moscow, August 23, 11, Standard & Poor's English translation, KASE headline/ - Standard & Poor's Governance Services said today it affirmed and subsequently withdrew its Governance, Accountability, Management Metrics and Analysis (GAMMA) score assigned to JSC NC KazMunaiGas (NC KMG) at 'GAMMA 4+' (according to a 1 to 10 scale with 1 being the lowest and 10 the highest). NC KMG is an integrated oil and gas company wholly owned by Samruk-Kazyna National Welfare Fund of Kazakhstan. The withdrawal of the GAMMA score is made at Standard & Poor's initiative. It reflects our decision to cease providing stand-alone governance scores, while continuing to incorporate governance analysis in our global and local scale credit ratings. "We appreciate that the executives and the board of NC KMG seek to overcome several governance issues that constrained the GAMMA score. These constraints include, primarily, the limited autonomy for NC KMG in determining strategy and lack of clarity regarding the social functions that the company might be required to perform in the future," said Standard & Poor's governance analyst Oleg Shvyrkov. "It may take some time before these initiatives produce concrete results and improve the overall governance situation at the company, however." NC KMG's overall GAMMA score of NC KMG was the result of four component scores of 1 (low) to 10 (high). - Shareholder influence: '4+' - Shareholder rights: '5' - Transparency, audit and ERM: '5+' (raised from '5') - Board effectiveness, strategic process and incentives: '4+' The strengths of corporate governance practices at NC KMG, according to Standard & Poor's Governance Services, include the following: - In our view, representatives of the shareholder and independent directors are highly competent and knowledgeable of the industry. They provide close management oversight, and decision-making is mostly consensus-based. The independent directors form a majority on all board-level committees. - The overall level of transparency is good, and the timing of disclosure has improved markedly in 2011. Annual IFRS statements are audited by a widely known international auditor, Ernst & Young. - The main elements of enterprise-wide risk management are in place and gaining experience. The internal audit department uses a risk-based approach and reports to the audit committee of the board. - NC KMG is the most valuable asset of Samruk-Kazyna, the sovereign wealth fund of Kazakhstan. Samruk-Kazyna and the government have been pushing for governance improvements at companies under its control. This includes the appointment of experienced independent directors, encouraging transparency and risk management procedures. Standard & Poor's analysis has, however, identified several weaknesses in the company's governance system, including the following: - According to our analysis, there is a risk that the government of Kazakhstan may influence NC KMG to invest in projects of national importance that may lie outside its core area of expertise or otherwise not meet its investment criteria. As a consequence of such influence in the past, NC KMG holds a significant number of noncore assets which may stretch the resources of management and distort performance metrics. - NC KMG often serves as a government policy tool for insuring domestic supplies of affordable oil products, and its domestic downstream operations have a strong social focus. NC KMG does not have autonomy in executive compensation policies. - NC KMG has limited autonomy in strategy-setting and at the same time, Samruk-Kazyna and the government are not always able to formulate their strategic guidelines for the company. This severely handicaps strategic planning at the company, in our view. - Independent directors are in the minority on the board and do not have any specific veto powers. In 2010 and 2011 they attended most board and committee meetings via telephone conferencing, which in our view constrained their influence. - Several gaps in disclosure remain, and the investor relations function is only starting to be developed. Analysts: Oleg Shvyrkov, Moscow, 7 (495) 783-40-45 oleg_shvyrkov@standardandpoors.com Ekaterina Marushevich, Moscow, 7 (495) 783-40-44 Ekaterina_Marushkevich@standardandpoors.com Governance@standardandpoors.com [2011-08-24]