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S&P not expects increase in tariffs for electricity in Azerbaijan

16 February 2018 16:26 (UTC+04:00)
S&P not expects increase in tariffs for electricity in Azerbaijan

By Sara Israfilbayova

Standard & Poor's does not anticipate new electricity tariff revisions, at least in the next two years.

The updated rating of Azerenerji JSC (Azerbaijani energy operator), published on the S&P website says that 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.

“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 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.”

“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.”

Azerenerji JSC is the largest electrical power producer in Azerbaijan. It also maintains the largest distribution network in the country, although the regional power networks are being privatized.

Azerenerji was recreated as a state-owned joint stock company in 1996. The company generates, transmits, distributes, and supplies electric and heat energy by using thermal and hydro resources in Azerbaijan.

Azerenerji operates the following hydroelectric plants: Mingechevir Hydro Power Plant in Mingachevir on the Kura River, Varvara Hydro Power Plant at Varvara on the Kura River, Shamkir Hydro Power Plant, Yenikand Hydro Power Plant; Araz Hydro Power Plant, and Vaykhir.

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