S&P does not anticipate new electricity tariff revisions in Azerbaijan (UPDATE)

Details added (first version posted on 18:49)

Baku, Azerbaijan, Feb. 15

By Anvar Mammadov – Trend:

Standard & Poor's does not anticipate new electricity tariff revisions, at least in the next two years, according to the updated rating of Azerenerji JSC (Azerbaijani energy operator), published on the S&P website.

“Since December 2016, the Tariff Council has increased Azerenerji's tariffs by about 33 percent in order to compensate for the increase in prices of gas and fuel oil,” S&P said. “We do not anticipate new tariff revisions, at least in the next two years, given the economic and social sensitivity of such moves.”

S&P Global Ratings today affirmed its 'BB/B' long- and short-term issuer credit ratings on Azerbaijan-based electricity utility Azerenerji. The outlook remains negative.

S&P analysts think that Azerenerji plays a critical role for the government as the sole transmission system operator and the state's largest electric utility.

“The affirmation reflects our view that the likelihood that Azerenerji will receive government support, if needed, continues to be almost certain,” S&P said. “At the same time, we see high uncertainty about the funding of Azerenerji's enlarged investment program, sustainability of cash collection from distribution grids operator Azerishiq, and general government's tolerance to relatively high debt at Azerenerji. Any indications of weakening ongoing and extraordinary government support could make us reassess the uplift we currently incorporate in our rating on Azerenerji and potentially lead to a multi-notch downgrade.”

“We observe the government so far has been able and willing to cover Azerenerji's liquidity shortages, including the maturing debt and interest payments,” S&P said. “Under our base case, we expect this to continue. The government guarantees most of the company's debt as of the end of 2017 and, in line with the Cabinet of Ministers' decision, will provide equity injections to

Azerenerji to support repayments of foreign currency loans over 2018-2025.”

“We believe that the Ministry of Finance closely monitors Azerenerji's debt payments and that Azerenerji, similar to other government-related entities (GREs) in the country, cannot incur any new borrowings without the government's approval,” S&P said.

“Still, we continue to see uncertainty about the government's commitment to the company in the longer term,” S&P said. “Although the government provides financial support to cover the company's ongoing debt payments and monitors cash collection, it still tolerates high debt at Azerenerji, and funding of enlarged capex remains uncertain. We don't rule out that eventually the government could reduce monitoring of stand-alone performance and liquidity, if the SACP further improves.”

“Therefore, we do not equalize the ratings on Azerenerji with those on Azerbaijan (BB+/Stable/B),” S&P said. “Instead, we continue to apply a one-notch downward adjustment from the sovereign rating to arrive at our issuer credit rating on Azerenerji.”

“In our base case, we expect the company's structure and current asset composition will remain unchanged in the near term and stand-alone credit quality will remain weak, with a significant debt portfolio and material investment program at least in the next two to three years,” S&P said.

“We would likely revise our outlook on Azerenerji to stable if we observed substantial government steps supporting the company,” S&P said. “In particular, a stable outlook would require the new capex program to be funded with equity or government-guaranteed debt, continuing government support to cover any liquidity shortages, and sustainable stand-alone performance, with tariffs covering any cost increases and robust cash collection pattern.”

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