'Fitch Ratings' international rating agency affirmed Azerenergy JSC's Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook and short-term foreign currency IDR at 'F3', Fitch Ratings reported in its statement on Monday.
Azerenergy JSC's ratings and Outlook are aligned with those of the Republic of Azerbaijan (BBB-/Stable/F3), reflecting its strong legal, strategic and operational ties with the Azerbaijan state, the statement says.
According to the statement, the legal ties relate primarily to debt guarantees provided by the state, which covered 89 percent of Azerenergy's total debt (excluding accrued interest) at end-2012. Fitch assumes this ratio will remain relatively stable or increase over the next few years. Fitch does not expect any significant changes in the legal links with the state in the foreseeable future, as there are no plans at present to privatise Azerenergy.
Azerenergy's virtual monopoly in Azerbaijan's electricity generation market, around 55% share in the country's electricity distribution, and monopoly in the transmission segment demonstrate the company's critical importance to Azerbaijan's economy. Azerenergy's top management is nominated directly by the president of Azerbaijan, which underlines the links with its owner. Azerenergy's operations are closely monitored by government agencies, including the review of the company's budget and capex plans.
Strong links with the state are also evident through the significant direct financial support historically received from the company's owner. Government subsidies totalled 700 million manat ($900 million) between 2009 and 2012. In addition, based on government decrees issued in 2010 and 2011, Azerenergy wrote down 1.7 billion of tax and trade payables due to the state treasury and state-controlled State Oil Company of the Azerbaijan Republic (SOCAR; BBB-/Stable/F3) and a corresponding amount of overdue trade receivables.
Concerns about the company's standalone credit profile relate mainly to its financial standing, liquidity and tariff-setting process. "Azerenergy's FFO adjusted net leverage decreased slightly to 5.8x in 2012 from 7.3x in 2011, but remained high compared with its peers. Fitch expects net leverage to remain high, at above 6x in 2013-2014. Azerenergy has a large capex plan of 3 billion - 5 billion for 2013-2017, which the company expects to fund mostly through subsidies/capital injections from the state. Taking into consideration the already high leverage, Fitch would expect Azerenergy to receive state guarantees for any new (currently unplanned) debt in addition to subsidies/equity injections for specific investment projects," the statement says.
Cost-plus electricity tariff-setting mechanisms are generally favourable to energy companies, but the application of this model in Azerbaijan is to a large extent limited by social considerations. Changes to electricity tariffs are infrequent with the last change made in 2007. "Although depreciation is included in the cost base for tariff calculation, recovery of capex spending via tariffs may be difficult for Azerenergy," Fitch believes.
Positive characteristics in Azerenergy's standalone profile, which Fitch views as significantly weaker than the government-supported IDRs, are led by the modern, primarily gas-fired, generation fleet, improvements in the household receivable collection rates and favourable prospects for energy consumption in Azerbaijan and certain markets in the region (such as Turkey and southern Russia).
According to Fitch, future developments that could lead to positive rating actions include sovereign rating upgrade, assuming unchanged strength of the linkage between Azerenergy and the state.
Azerenergy's liquidity is weak and conditional on continued tangible support from the government. This is because the company's liquidity comprising cash of 52 million manat at the end of 2012 was not sufficient to cover short-term debt of 278 million manat. About 42 percent of short-term debt is guaranteed by the state and a further 7 percent was lent by the Ministry of Finance, which mitigates the liquidity risk. At end-2012 Azerenergy had credit lines (related to capex) available for drawing of138 million manat. Although Fitch expects free cash flow to be negative in 2013, this is due to capex that is largely funded from the available credit lines and new equity. Operating cash flow could therefore be partially used for existing debt maturities.
Azerenergy's overdue taxes amounted to 700 million manat at the end of 2012. The necessity to gradually repay tax balances (instead of considered write-off of these items by the government) would require either higher government subsidies or additional debt to be raised, which would be negative for the company's credit profile.
Fitch expects the company's free cash flow to remain negative in 2013-2015 due to significant capex plans. However, a large part of capex is viewed as deferrable depending on the level of available funding from the government. The company's committed capex totalled 900 million at the end of 2012.
The official exchange rate for May 6 is 0.7845 AZN / USD.