Fitch Upgrades Uzbekhydroenergo to ‘BB-’; Outlook Stable
18/10/2021 14:14
Fitch Upgrades Uzbekhydroenergo to ‘BB-’; Outlook Stable
18/10/2021 14:14
Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has upgraded Uzbekistan-based hydro power generation monopoly Uzbekhydroenergo JSC’s (UGE) Long-Term Issuer Default Rating (IDR) to ‘BB-’ from ‘B+’. The Outlook is Stable.
The upgrade follows the state’s continuing guarantee for 100% of UGE’s debt and no plans to place non-guaranteed Eurobonds in the near future. We have therefore equalised its ratings with those of sovereign, as the guarantee acts as an overriding single factor under Fitch’s "Government-Related Entities Rating Criteria" (GRE). State-guaranteed debt falling below 75% of UGE’s total debt would lead to a rating differential with the sovereign rating of one notch.
In absence of the overriding factor, Fitch would rate UGE using a top-down minus one notch approach from the rating of Uzbekistan (BB-/Stable) under GRE. This reflects our assessment of links with its ultimate shareholder, Uzbekistan, and the company’s Standalone Credit Profile (SCP), which we assess at ‘b’.
State-Guaranteed Debt Above 75%: UGE plans to continue financing its intensive capex of around USD2 billion (UZS21 trillion) over 2020-2030, largely with loans primarily from international financial institutions instead of non-guaranteed bond placement, contrary to our previous expectations. The government would continue to provide guarantees for UGE’s large hydro power plants (HPPs) construction, including Pskemskaya (400MW, signed President decree on 4 October 2021) and Mullalakskaya HPPs (150MW) construction to be commissioned in 2025-2026. Management expects the share of state-guaranteed debt to remain above 90% over 2021-2026.
Strong Links with State: Since 2020 UGE is 100% state-owned via Ministry of Finance of Uzbekistan. We assess status ownership and control as ‘Strong’, largely due to the government’s full ownership, UGE’s inclusion in the list of strategically important enterprises for the government, and record of support as ‘Very Strong’, due to the 100% debt guarantee from the state. State support also includes tax exemption until 2022.
‘Moderate’ Socio-Political and Financial Implications: We view the socio-political impact of a UGE default as ‘Moderate’, as UGE has only a 10% market share in Uzbekistan, and its services may be substituted with only temporary disruption, while its development projects can be delayed. The financial implications of a default are also ‘Moderate’ because it should not have a material impact on the availability and cost of funding for the government and other state-owned companies, given its size and undiversified funding base.
Evolving Regulation: We expect tariffs to increase on average by double digits over 2021-2024. However, tariff growth may be limited by social considerations, as happened in 2021 with no tariff indexation as a Covid-19 measure from the state. Management also expects a smooth transition to liberalised prices from 2025, which is not included in our rating case.
‘b’ SCP: UGE’s ‘b’ SCP reflects the company’s medium scale and low-cost position as well as an evolving regulatory environment in Uzbekistan and limitations of the general domestic operating environment. The SCP also captures the likely deterioration of UGE’s financial profile due to expected debt-funded capex increase.
Capex-Driven Leverage Increase: We expect UGE’s aggressive investment programme, which will largely be funded by debt, to lead to material deterioration of the company’s credit metrics. Fitch expects funds from operations (FFO) gross leverage to deteriorate to an average 4.7x over 2021-2024 (from 2.9x in 2020), under the agency’s conservative assumptions. However, UGE has some capex flexibility and may delay some projects if there is a lack of funding or risk of leverage deterioration beyond acceptable levels.
Solid Business Profile: UGE is a fully state-owned hydro electricity producer with priority in the merit order over thermal generators and lower volume risk. Production volumes are dependent on river water levels, which were low in 1H20-2021, both seasonally and compared with the multi-year average. We expect UGE’s production volumes to gradually normalise from 2021.
UGE operates in a weaker operating environment than other Fitch-rated EMEA utilities. Tariffs are exposed to an evolving regulatory environment with a limited record in Uzbekistan, making UGE’s earnings less predictable than those of other CIS utilities peers as Russia’s RusHydro PJSC (BBB/Stable, SCP ‘bb+’), EN+ Group PJSC (B+/Stable), and Kazakhstan’s JSC Samruk-Energy (BB/Positive, SCP ‘b+’), which operate under a regulatory regime with a longer record and have better asset quality.
UGE’s rating is supported by the company’s monopoly position in hydroelectric generation in Uzbekistan. While UGE’s financial metrics for 2019-2020 were strong relative to peers’, the company’s ‘b’ SCP reflects potential pressure on credit metrics from capex increase. UGE’s financial profile is weaker than that of Samruk-Energy, KUS and RusHydro.
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