S&P affirms long-term credit rating of KEGOC at level "BB+"; outlook "Positive"

/Standard & Poor's, Moscow, November 7, 14, heading by KASE/ – Standard & Poor's Ratings Services said today that it has revised its outlook on Kazakhstan- based state-owned electricity transmission monopoly Kazakhstan Electricity Grid Operating Co. (JSC) (KEGOC) to positive from stable. At the same time, we affirmed our 'BB+' long-term corporate credit rating. We also affirmed the 'BB+' rating on KEGOC's senior unsecured bank loan from the European Bank For Reconstruction And Development (EBRD). The recovery rating is unchanged at '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default. The outlook change reflects our view that KEGOC's credit ratios might strengthen in the next 12 months following a tariff uplift in November 2014. As we understand, the government has approved a beneficial tariff uplift for KEGOC's services, including a 50% rise for transmission services. We think that this will result in boosted cash flow generation and stronger leverage ratios, which could lead us to positively reassess the company's financial risk profile, putting it in the "significant" category. We also note that there is a possibility of a parallel rise in capital expenditure or a requirement to pay a superdividend to its parent, 100% state-owned national welfare fund Samruk-Kazyna, which would cancel the benefits of improved cash flow generation and hinder positive development of the financial profile. KEGOC's ratings are constrained by its short-term (one year) cost-plus-based tariff system, which lacks predictability and transparency and does not guarantee either full or timely cost recovery, as well as its aged asset portfolio, high country risk, high financial leverage with 100% of debt denominated in euros or U.S. dollars, and large investment program. Supportive factors include strong ongoing support from the state, a monopoly position in the stable electricity transmission business, which we consider to have fairly low operating risk because of its regulated earnings profile, as well as minimal dividend pressure and a long-term maturity profile. We regard KEGOC as a government-related entity (GRE). Our rating on KEGOC incorporates our assessment of a "very high" likelihood of timely and sufficient extraordinary government support for the company, based on our assessment of KEGOC's: - "Very important" role for Kazakhstan's government, given the company's strategic importance as a monopoly provider of essential electricity infrastructure; and - "Very strong" link with the government, which fully owns KEGOC, currently guarantees about 42% 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 any deterioration in the likelihood of extraordinary government support for KEGOC following the partial IPO planned for December 2014. We assume that only a minor stake (10%-15%) will be placed, and the government will retain incentives and instruments to financially support KEGOC in case of need. The positive outlook reflects our expectation that positive tariff adjustments will boost KEGOC's cash flow generation. This could lead us to reassess the company's financial risk profile to "significant," raising its stand-alone credit profile (SACP) to 'b+', if we believed that KEGOC's main credit metrics would improve on a sustainable basis. In accordance with our criteria for GREs, a revision of the SACP to 'b+' would result in a one-notch upgrade, all else being equal. We could raise the ratings within the next 12 months if we believe that KEGOC's financial metrics will improve to a level we consider in line with a “significant” financial risk profile for the company, including debt to EBITDA below 4.0x and FFO to debt above 20% on a sustainable basis. An upgrade would also rely on KEGOC maintaining an “adequate” liquidity position, and no downward changes in our assessment of a “very high” likelihood of extraordinary state support for KEGOC or our sovereign rating on Kazakhstan. We could revise the outlook to stable if KEGOC fails to achieve stronger cash flow generation and leverage ratios, or if a higher level of capex or excessive dividends mitigate the positive developments in tariffs. A downgrade of Kazakhstan by one notch or the likelihood of support falling to "high" would also eliminate the positives stemming from the strengthening of the financial risk profile. Primary Credit Analyst: Sergei Gorin, Moscow (7) 495-783-4132; sergei.gorin@standardandpoors.com Secondary Contact: Alf Stenqvist, Stockholm (46) 8-440-5925; alf.stenqvist@standardandpoors.com Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com [2014-11-11]