Fitch affirms Kazakh KEGOC at ‘BBB+’; outlook stable

Nov. 25. Trend. Astana

By Elena Kosolapova

Fitch affirms Kazakh KEGOC at 'BBB+'; outlook stableInternational Rating Agency Fitch Ratings has affirmed Kazakhstan Electricity Grid Operating Company’s (KEGOC) Long-term Issuer Default Rating (IDR) at ‘BBB+’, the agency reported on Nov. 25. The Outlook is Stable.

Long-term local currency IDR affirmed at ‘A-‘; Stable Outlook

Short-term foreign currency IDR affirmed at ‘F2’

“The affirmation reflects KEGOC’s continued strong links with the Republic of Kazakhstan (BBB+/Stable),” Fitch said.

KEGOC’s ratings are aligned with those of the Republic of Kazakhstan (BBB+/Stable), reflecting its strong legal, strategic and operational ties with the Kazakhstan state. The ties are based on the company’s 100 -percent indirect state ownership, direct government guarantees and the strategic importance of the national electricity transmission grid.

Kazakhstan’s National Welfare Fund Samruk-Kazyna, the immediate parent company of KEGOC, continues to support KEGOC; it provided the company with 2 billion tenge (180.87 tenge = $1) over 2011-nine months of 2013 to implement the Ossakarovka Transmission Rehabilitation Project.

Strong legal ties are underpinned primarily by debt guarantees provided by the state, which at end the third quarter of 2014 covered 42 percent of total debt, as well as by favourable regulation policy. Samruk-Kazyna is offering a 10-percent stake in KEGOC to the Kazakh public at end-2014. Fitch expects that following the IPO, Samruk-Kazyna 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 40 percent of total debt on a sustained basis and/or if links with the government weaken.

The strength of strategic links is underpinned by KEGOC’s monopoly position in electricity transmission and technical dispatching and by its role as a dominant market player in power balancing. The company owns and operates about 24,000 kilometers of transmission lines and 74 electric power substations throughout Kazakhstan.

KEGOC’s standalone profile is significantly weaker than its government-supported IDR and is commensurate with a weak ‘BB’ rating, Fitch said. The main constraints on its credit profile are its exposure to foreign exchange and interest rate risks as well as its fairly high leverage. At end-2013, 70 percent of KEGOC’s debt was denominated in US dollars and 30 percent in euros at variable interest rates. Fitch estimates that the share of guaranteed loans may over the next few years decrease to around 30 percent of total debt from 42 percent at end of the third quarter of 2014, which may result in the rating being notched down from the sovereign.

Fitch noted that the regulatory bodies of Kazakhstan have approved high tariffs starting from November-2014, as the government wants KEGOC to operate in a “market environment” and eventually to pay dividends to shareholders. The approved tariffs envision a growth rate of 30-50 percent relative to the previous years.

Future developments that may, individually or collectively, lead to a positive rating action include:

-A positive change to Kazakhstan’s ratings provided the links between KEGOC and the sovereign do not weaken

-Enhancement of the business or financial profile, possibly as a result of stronger regulation and higher equity funding, which would be positive for the unguaranteed debt profile of KEGOC

Future developments that may, individually or collectively, lead to a negative rating action include:

-A negative change to the Kazakhstan’s ratings

-Evidence of weakening state support, due to, for example, proportion of state-guaranteed debt falling below 40 percent of total debt on a sustained basis

Fitch views KEGOC’s liquidity as adequate, based on its balanced debt maturity profile (annual scheduled maturities were around 11 billion tenge at end-2013), its cash position of 7 billion as of end of the third quarter of 2014, along with short-term deposits of 20 billion tenge and available credit lines of 2.8 billion tenge. However, the latter are restricted for use in 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 risk, Fitch says.