ArmInfo.. Moody's Investors Service, ("Moody's") has assigned a Ba2 corporate family rating (CFR) and a Ba2-PD probability of default rating to the Electric Networks of Armenia (ENA). The outlook on the ratings is stable. Assigning such a rating is unprecedented, since it one-notch exceeds the level of the sovereign rating of Armenia (Ba3).
As the press service of ENA told ArmInfo, ENA's Ba2 CFR is supported by the company's (1) monopolistic position in the electricity distribution in Armenia; (2) transparent, albeit relatively new, system of tariff regulation and clear-cut long-term arrangements for recovery of costs and pre-agreed investments, as well as the regulator's structural independence from the government; (3) good visibility of profitability and cash flow generation until 2027, owing to the signed 2016-2027 agreement between the company and the regulator; and (4) its strong financial profile.
The rating is constrained by: (1) ENA's modest scale of operations, naturally constrained by the size of Armenian economy and population; (2) foreign exchange risk arising from the mismatch between the revenue currency -- Armenian dram (AMD) - and the currencies of the majority of ENA's loans -- mainly euros and US dollars; (3) a meaningful investment programme of $726 million to be completed by 2027; and (4) a relatively short track record of the company operating under the new regulatory regime.
Moody's believes that (1) the strength of ENA's financial profile, (2) predictability of its cash flow generation and transparency of its regulatory environment, (3) relative resilience to economic cycles due to its infrastructure business profile, and (4) low reliance on domestic capital markets to a degree insulates the company's financial profile from that of Armenia and justifies one-notch differential between the company's rating and the sovereign rating of its domicile country.
The stable outlook reflects Moody's expectation that ENA's tariff arrangements will support sustained operating and financial performance and liquidity in the next 12-18 months, and that the regulation of the industry will continue to be applied in a transparent and predictable manner.
Moody's considers the upgrade in the sovereign rating of Armenia as the main driver of the rating upgrade. Moody's rating will give the company the opportunity to enter developed international capital markets, where the placement of the company's Eurobonds will attract low-cost and long-term capital aimed at implementing investment programs and increasing their financial efficiency.
The report notes that ENA began to develop rapidly after the acquisition by Tashir Group of Companies. Operational efficiency has been ncreased, financial and economic indicators improved, electricity losses reduced from 13.5 to 7.1%.
ENA's strategic priority is the implementation of a full-scale investment program aimed at deep modernization and re-equipment of the entire property complex of the company. The total investment program for 10 years is about 1 billion US dollars.
According to ArmInfo, funds for the implementation of the investment program will be attracted also from institutional investors, including the European Bank for Reconstruction and Development (EBRD) (80 million euros), the Asian Development Bank (ADB) ($ 80 million), the Eurasian Bank Development (EDB) - ($ 20 million) and other sources.
To recall, the Tashir Group of Companies, headed by a prominent Russian businessman of Armenian origin Samvel Karapetyan and Inter RAO, signed an agreement on the acquisition of electric power assets of a Russian energy holding in the Republic of Armenia - Electric Networks of Armenia CJSC and Hrazdan TPP on September 30, 2015.
Electric Networks of Armenia CJSC was established in May 2002 as a result of the merger of four state- owned regional distribution companies: Yerevan Electric Networks, Northern Electric Networks, Southern Electric Networks and Central Electric Networks. The main activity of the company is the regulated distribution and sale of electricity. The total length of the networks is 36 thousand km. The company serves about 985,000 consumers. Electric Networks of Armenia CJSC has an exclusive license for transmission and distribution of electricity in the Republic of Armenia at guaranteed tariffs, calculated based on the costs of the company and the regulated rate of return on invested capital.
