Moody’s Affirms Kazakhstan Electricity Grid Operating Company’s Baa3 Long-term Issuer Rating And Changes Outlook To Stable From Negative
London, 28 July 2017 — Moody’s Investors Service (Moody’s) has today affirmed Kazakhstan Electricity Grid Operating Company (KEGOC)’s Baa3 long-term issuer rating, and changed the rating outlook to stable from negative.
This action follows Moody’s affirmation of the Baa3 issuer and senior unsecured ratings of the Government of Kazakhstan and the change of the rating outlook to stable from negative on 26 July 2017. For additional information, please refer to the related announcement: https://www.moodys.com/research/–PR_370462
KEGOC’s long-term issuer rating of Baa3 is predominantly determined by the credit rating of the Government of Kazakhstan, which controls the company through the Sovereign Wealth Fund Samruk-Kazyna JSC. KEGOC’s final rating incorporates three notches of rating uplift from the company’s standalone credit quality expressed as a baseline credit assessment (BCA) of ba3. The level of ratings support is evaluated under our Methodology for Government-Related Issuers and is based on our assessment of (1) a “Very High” default dependence between KEGOC and the Government of Kazakhstan; (2) a “High” probability of support from the company’s ultimate shareholder, in the event of financial distress; and (3) the Kazakhstan Government’s Baa3 local currency rating with stable outlook. The Government of Kazakhstan remains involved in KEGOC’s strategic direction and some of the investment projects of the company are included in the national development programmes. Further, the Government guaranteed around 40% of the company’s debt as at end-2016.
KEGOC’s standalone credit quality of ba3 continues to reflect (1) the company’s monopoly position as owner and operator of essential national infrastructure such as the high-voltage electricity transmission grid; and (2) Moody’s view that the company will retain sufficient financial flexibility over the medium term. KEGOC’s financial profile has remained strong, despite the challenges in Kazakhstan’s economy and devaluation of the local currency, mainly supported by tariff increases (since May 2014 the company’s transmission tariffs were raised by around 50% and are expected to be further increased by, on average, 8.5% annually through to 2020), as well as the delay of several capital expenditure projects and cost savings under the company’s cost optimization programme.
Moody’s expects KEGOC to consume some of its current financial flexibility as investments increase over the medium term. However, cash flow metrics will remain solid with Funds From Operations (FFO) /net debt above 30%, as we expect KEGOC to manage its financial profile in compliance with existing debt covenants. As a further positive, KEGOC also made progress towards decreasing its foreign currency exposure through a local currency bond issuance of KZT47.5 billion in 2016, although this still remains high.
KEGOC’s BCA remains constrained by (1) its high exposure to interest rate and foreign currency risks as the share of its debt denominated in euros or U.S. dollars remains significant at around 70% as of end-2016; (2) Kazakhstan’s regulation of natural monopolies, including KEGOC, which lacks predictability and transparency; (3) the large capital expenditure needs to upgrade the aged asset base; and (4) the challenging operating environment expected for Kazakhstan’s companies in a low oil price environment.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook of KEGOC’s rating mirrors the stable outlook on Kazakhstan’s sovereign rating and reflects the fact that KEGOC’s rating incorporates a significant element of extraordinary government support.
WHAT COULD CHANGE THE RATINGS UP/DOWN
KEGOC would not be rated higher than the Government of Kazakhstan. However, an upgrade of the rating of the Government of Kazakhstan could create upwards pressure on KEGOC’s rating.
Moody’s would downgrade KEGOC’s rating if there were a downgrade of the Government of Kazakhstan’s rating or if the company’s financial and liquidity profile were to materially deteriorate, creating the potential for a breach of its financial covenants or concerns over its ability to meet debt repayments on a timely basis.
The methodologies used in this rating were Regulated Electric and Gas Networks published in March 2017, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Headquartered in Astana, Kazakhstan, Kazakhstan Electricity Grid Operating Company is the state-controlled regulated business which owns and operates the majority of the national electricity transmission grid of the Republic of Kazakhstan. In 2016 KEGOC’s revenues amounted to KZT130 billion (around $390 million).
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.