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Fitch Ratings has affirmed Kazakhstan Electricity Grid Operating Company's (KEGOC) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable.

Fitch views the linkage of KEGOC with the sovereign as strong since the group is majority state owned (90 percent), and the government approves the company's strategy and capex through the board of directors.

“From 2019, KEGOC, via one of its subsidiary, will be a single buyer of the capacity and will collect capacity payments from electricity consumers and redirecting them to generators. This will be a pass-through item for KEGOC, although it will increase its revenue and costs by the same amount of roughly 250-270 billion tenges annually over 2019-2022, based on our estimates.”

The cost of single buyers' service will be included in capacity tariff, but it will compensate only the company's administrative costs. Therefore, this should not affect the company's EBITDA. “We believe the new capacity market scheme may increase KEGOC's business risks since the credit risk of non-payments will be borne by the company's wholly owned subsidiary. At present it remains unclear how the new payment scheme will work, but we expect the company to receive support from the government in case of emergency.”

KEGOC continues to profit from favourable long-term tariffs for electricity transmission, dispatching and balancing, which are set until 2020. Tariffs increase is linked to the implementation of a certain capex programme, but the company has some flexibility in shifting capex spending between years. From 2021, KEGOC expects tariffs to be approved for the second five-year regulatory period with some downward pressure on tariffs.

“We estimate that the company will continue to generate healthy cash flow from operations of about 60 billion tenges on average over 2018-2022 under Fitch's assumptions. However, its free cash flow (FCF) is likely to remain mostly negative over 2018-2022, driven by expected average investments of about 37 billion tenges, and 80 percent dividend pay-out ratio over the same period, which may add to funding requirements.”

KEGOC was established in accordance with decree of the government of Kazakhstan dated 28 September 1996 'On some measures to restructure power system management in Kazakhstan'.

KEGOC’s mission is to ensure reliable operation and efficient development of Kazakhstan UPS in line with the up-to-date technical, economic, environmental, occupational health and safety requirements.

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