ADB: Capital of Azerbaijan’s Azerishiq OJSC to increase by 100M manats annually by 2025

The Asian Development Bank (ADB) is ready to continue supporting reforms in Azerishiq OJSC (100 percent state energy distribution company), Report informs referring to the ADB.

This should entail Azerishiq’s participation in a political dialogue with the government of Azerbaijan to sustainably improve the financial performance of the enterprise.

According to ADB forecasts on the financial situation in Azerishiq until 2025, with the existing tariffs, Azerishiq’s operating profit and net profit will continue to deteriorate. The company’s operating loss from 61.8 million manats in 2020 will increase to 77.7 million manats in 2021, 93.5 million manats in 2022, 116.1 million manats in 2023, 139.8 million manats in 2024 and 165.9 million manats in 2025.

At the same time, Azerishiq’s net loss from 78.9 million manats in 2020, according to the bank’s forecasts, will increase to 92.7 million manats in 2021, 103.9 million manats in 2022, 132.8 million manats in 2023, 162.2 million manats in 2024 and 197.2 million manats in 2025.

“Azerishiq might be able to maintain a degree of liquidity until about 2023, when cash shortfalls will either trigger short-term borrowing requirements or require government support beyond the investment assumptions.

Azerishiq will probably not meet ADB loan covenant requirements in 2021, during which debt service coverage falls below the requirement. Therefore, it appears that a tariff increase is necessary immediately - about 1 percent, assuming that the existing year-to-date numbers for 2020 are accurate and that the power purchase tariff remains unchanged,” the ADB noted.

The current retail tariff and power purchase tariffs are maintained at existing levels.

“Required capital expenditures in 2021 are set at the 6-year average 2015–2020 and assumed to grow with sales and inflation; capital investment funding from government sources in the form of paid-in capital will continue to 2023 at AZN100 million per year (as per present plans), after which it will continue at about 30% of investment requirements. However, capital investments must continue and the above assumptions are consistent with the current short-term plan,” reads the report.

“Azerishiq’s retail tariffs are not sustainable. Small tariff increases may be sufficient to meet ADB loan covenants, but the profits required to maintain self-financing ability do not exist. Ongoing capital infusions from the government would be instrumental in keeping Azerishiq afloat. In every year since its inception in 2015, Azerishiq has not been a sustainable enterprise without these infusions, as the few years of profitability in 2017 and 2018 yielded returns on net fixed assets that did not exceed 3 percent,” the ADB said.

This government support will need to continue as long as tariffs remain below cost recovery levels. It is estimated that a tariff increase in the order of 25 percent would be required to earn a return on net fixed assets of 10 percent, which may be interpreted as an approximate estimate of financial viability without government support, according to the report.

According to ADB forecasts, Azerishiq’s capital will increase from 2.11 billion manats in 2020 to 2.41 billion manats in 2023, 2.514 billion manats in 2024 and 2.624 billion manats in 2025.

The total revenues of the company in 2020 were at 1.234 billion manats, in 2021 it is projected at 1.236 billion manats, in 2022 at 1.256 billion manats, in 2023 at 1.27 billion manats, in 2025 at 1.285 billion manats, and in 2025 at 1.299 billion manats.