Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based hydro power generation monopoly Uzbekhydroenergo JSC’s (UGE) Long-Term Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook.

The affirmation reflects the state’s continuing guarantee for all of UGE’s debt and our expectations that the share of guaranteed debt will be above 75% over the next four years, leading to UGE’s rating being equalised with that of the sovereign, under Fitch’s Government-Related Entities Rating Criteria (GRE).

We have revised UGE’s Standalone Credit Profile (SCP) to ‘b+’ from ‘b’, reflecting less significant re-leveraging compared with our previous expectations. This is driven by lower expansion capex over 2023-2026 than previous estimates as the company optimises its project pipeline and slower Uzbek som depreciation.

KEY RATING DRIVERS

Rating Equalised with Sovereign: All of UGE’s debt is guaranteed by the government. UGE expects to continue financing its intensive capex for new construction and modernisation of more than USD1 billion (UZS12 trillion) over 2020-2026 with state-guaranteed loans from development banks and international financial institutions, as well as with own funds. UGE may start attracting non-guaranteed loans once the regulatory environment matures and allows the company to rely less on state support. We forecast the share of state-guaranteed debt to remain above 75% over 2023-2026, justifying the rating equalisation.

Lower-than-Expected Releveraging: UGE’s upwardly revised SCP to ‘b+’ reflects less significant re-leveraging than previously expected, following the transfer of Mullalakskaya 140MW HPP construction to a third party and slower depreciation of the Uzbek som. The SCP is supported by UGE’s monopoly in hydro electricity generation in Uzbekistan with priority in the merit order over thermal plants, low off-take risk and high EBITDA margins. The key constraints are limited revenue visibility due to short-term tariffs, evolving regulation, limitations of the operating environment, and foreign-exchange (FX) mismatch between revenue and debt.

Capex Optimisation: The transfer of Mullalakskaya HPP construction with a project cost around USD200 million to a third party and postponement of some modernisation projects will lead to less significant re-leveraging than we had forecast, with funds from operations (FFO) leverage remaining below 4x over 2023-2026. Should UGE tariffs increase more than it currently anticipates, UGE is likely to accelerate its investments. The company is maintaining its plans to increase installed capacity to around 3GW by 2030, and the investment programme will largely be debt-funded.

High Counterparty Risk: UGE’s trade receivables from National Electric Grid of Uzbekistan, to which it sells generated electricity, increased in 2022 due to the latter’s weak standalone financial profile and volatile payments. This is partially mitigated by UGE’s high EBITDA margin driven by a lack of fuel costs. Although cash collections improved in 1Q23, they are dependent on tariff decisions for other parties of the electricity value chain and outside of UGE’s control.

Green Certificates Credit-Positive: We expect UGE to become the key beneficiary of the implementation of green certificates in Uzbekistan. It will enable renewable generators, such as UGE, to sell certificates to corporate customers confirming their clean source of energy. According to UGE, the system will be launched in 2023 and the positive impact in the first year is around 5% of 2022 EBITDA. This is not yet part of our rating case due to a lack of record and insufficient visibility of the new market.

Strong Links with State: We assess status ownership and control as ‘Strong’, due largely to the government’s full ownership and broad control of UGE’s operations, the company’s inclusion on the list of strategically important enterprises and lack of short-term plans for privatisation. We assess the support track record as ‘Very Strong’, due to the 100% debt guarantee from the state, a generally favourable tariff framework and negligible dividend payments.

Moderate Incentive to Support: We view the socio-political impact of a UGE default as ‘Moderate’, as the company’s market share in Uzbekistan is only around 10%, its services may be substituted with only temporary disruption, and 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 the company’s limited scale and small amount of debt compared with other GREs’.

DERIVATION SUMMARY

UGE has a slightly weaker business profile than Turkish renewable energy producers Zorlu Yenilenebilir Enerji Anonim Sirketi (B-/Stable) and Aydem Yenilenebilir Enerji Anonim Sirketi (B/Negative). All three companies benefit from high EBITDA margins, but Turkish peers have better asset quality and higher revenue visibility as they sell electricity on the free market or under a support mechanism, which provides fixed US dollar-denominated feed-in tariffs for 10 years. The local operating environment is a weakness for all three companies.

ENERGO-PRO a.s. (BB-/Stable), a utility operating in Bulgaria, Georgia and Turkey, benefits from a stronger operating and regulatory environment than UGE, and from integration into networks.

UGE’s ‘b+’ SCP considers a gradual increase in leverage and expected negative free cash flow (FCF) as the company progresses with its investment programme, and FX mismatch between revenue and debt. Its financial profile is similar to that of ENERGO-PRO, but stronger than Aydem’s and Zorlu’s.

UGE’s support score under Fitch’s GRE Criteria is lower than that of Thermal Power Plants Joint Stock Company (BB-/Stable, SCP: b-), JSC Uzbekneftegaz (BB-/Stable, SCP: b+) and JSC Almalyk Mining and Metallurgical Complex (BB-/Stable, SCP: b+). This is mainly due to the peers’ larger operations and higher amount of capital market debt, resulting in a higher assessment of financial implications of default. All companies benefit from a ‘Very Strong’ support track record.