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Standard & Poor's Ratings Services placed its 'BBB-' long-term and 'A-3' short-term corporate credit ratings on vertically integrated Azerbaijan-based electricity utility Azerenerji JSC on CreditWatch with negative implications, Standard & Poor's reported on January 12.

As, Azerbaijan removed its currency peg, S&P notes that about 81 percent of Azerenerji's debt is exposed to foreign exchange risk.

In S&P view, Azerenerji benefits from an almost certain likelihood that Azerbaijan would provide timely and sufficient extraordinary support to Azerenerji in the event of financial distress.

S&P does not expect the government to increase Azerenerji's tariffs, given its previous reluctance to do so due to social concerns, but S&P assumes the state might provide support by other means, such as paying Azerenerji's debt.

S&P base case for 2015-2016 assumes:

• A 4%-5% increase in revenues on the back of power volume growth;
• Annual capital expenditures of about 100 million-120 million manat

Based on these assumptions, S&P expects the following credit measures:

• EBITDA of 220 million-240 million manat;
• Funds from operations (FFO) of about 150 million-170 million manat;

The negative CreditWatch placement reflects that S&P could lower the ratings if the agency reassesses the likelihood of extraordinary financial state support for Azerenerji.

S&P expects to resolve the CreditWatch within the next 90 days, during which time the agency expects to gain a clearer view of the government's intentions and administrative capacity to provide support to Azerenerji.

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