Fitch affirms Azerenerji's rating as stable
By Aynur Jafarova
International Rating Agency Fitch Ratings has affirmed Azerbaijan's 100 percent state-owned national energy operator's long-term issuer default rating (IDR) at 'BBB-' with a stable outlook and its short-term foreign currency IDR at 'F3'.
Fitch said it continues to align Azerenerji Joint Stock Company's ratings with those of Azerbaijan (BBB-/Stable), the sole shareholder, to reflect strong legal, operational and strategic ties between the company and the state, as per the agency's Parent and Subsidiary Rating Linkage methodology.
In particular, the rating alignment reflects state guarantees for the majority of Azerenerji's outstanding debt, the company's strategic importance to the Azerbaijani economy and strong operational links, including tariff and capex approval by the government, and track record of direct state support.
Fitch assesses legal ties between Azerenerji and the state as strong given that the state continues to provide guarantees for a substantial part of Azerenerji's outstanding debt.
"Fitch assumes this ratio will remain fairly stable over 2014-2017 and we do not expect any significant changes in the legal links with the state in the foreseeable future, as there are no plans at present to privatize Azerenerji," the agency said. "The strength of strategic ties is underpinned by Azerenerji's virtual monopoly in Azerbaijan's electricity generation market and transmission segment as well as a 55 percent market share in the country's electricity distribution. This demonstrates the company's importance to Azerbaijan's economy, despite a fairly low contribution to the country's GDP."
In addition to state-guaranteed debt, Azerenerji received interest-free loans from the Finance Ministry that accounted for another 6 percent of total outstanding debt excluding accrued interest at end-2013.
"The state also continued to provide equity injections of 818 million manats over 2009-2013 to partially fund its investment program," Fitch said.
During five months of 2014, the government provided 15.7 million manats and the company expects to receive 22 million manats by end-2014 and another four billion manats over 2015 to 2017, covering around 97 percent of the investment needs for the respective periods.
Fitch expects Azerenerji to continue generating solid cash flow from operations of around 200 million manats on average over 2014-2017.
However, free cash flow is likely to remain negative over the same period due to significant capital investment plans, Fitch noted.
"A large part of the investment program is discretionary, depending on the level of available funding from the government. Azerenerji's committed capex totaled 0.8 billion manats at end-2013. Additionally, we do not expect Azerenerji to pay dividends in the medium term," Fitch said.
Azerenerji's funds from operations (FFO) adjusted net leverage decreased slightly to 5.76x at end-2013 from 5.84x at end-2012, but remained high compared with its peers.
Fitch expects net leverage to remain high, averaging above 6x over 2014-2017, mainly due to gas tariff hikes from December 2013 while electricity tariffs remained unchanged.
Given the already high leverage, Fitch would expect Azerenerji to receive state guarantees for any new (currently unplanned) debt in addition to equity injections for specific investment projects.
Azerenerji is the main producer of electricity in Azerbaijan, having on its balance sheet more than 200 substations, with a capacity of 500, 330, 220 and 110 kilovolt amperes, and eight water power plants and 13 thermal power plants.