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

The affirmation reflects the state’s continuing guarantee for nearly all of UGE’s debt and our expectations that the share of guaranteed debt will be above 75% for 2024-2027, leading to UGE’s rating being equalised with Uzbekistan’s, under Fitch’s Government-Related Entities (GRE) Rating Criteria.

UGE’s ‘b+’ Standalone Credit Profile (SCP) reflects its gradual increase in scale, monopoly position in hydro generation in Uzbekistan and high operating profitability. Low tariff visibility, mounting trade receivables stock, limitations in the operating environment and our expectation of capex-driven re-leveraging up to its negative sensitivity of 4.0x remain key constraints. The agency expects UGE to maintain some financial headroom in 2024 on the back of strong operating performance before it is exhausted towards end-2027 by the acceleration of its investment plan.

All of UGE’s debt is guaranteed by the government and Fitch forecasts the share of state-guaranteed debt to remain above 75% over 2024-2027, justifying the rating equalisation under our GRE Criteria. UGE expects to continue financing its intensive capex for new construction and modernisation with a mix of 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.

Under our updated GRE Criteria, Fitch assesses both decision-making and oversight and precedents of support as ‘Very Strong’. The state has strong influence on UGE’s strategy and operations by approving its investment plans and setting tariffs. Its guarantees on nearly all of UGE’s debt result not only in ‘Very Strong’ precedents of support, but also in rating equalisation. Our assessment of ‘Not Strong Enough’ for incentive to support reflects UGE’s moderate market share of 10%, small absolute amount of debt (USD0.3 billion at end-2023) and lack of publicly traded debt instruments..

In absence of the overriding factor of state-guaranteed debt under our criteria, Fitch would rate UGE using a bottom-up plus one approach, which would have resulted in the same IDR.

Fitch has revised up average annual investments to UZS3.3 trillion, from UZS2.1 trillion in our last review, due to modernisation of plants and new capacity to be commissioned over 2026-2028. However, this is still materially below management’s capex guidance for the period. The investment plan remains aligned with UGE’s strategic objectives of modernising existing power plants and increasing capacity until 2030, in our view. UGE also has a more extensive pipeline of potential projects, subject to available funding and sufficient leverage headroom, under its internal financial policy.

UGE reported UZS1.9 trillion (USD166 million) EBITDA in 2023, a 30% increase versus 2022, which represents a material overperformance of our forecasts. The agency expects the strong results to continue in 2024 due to growing installed capacity, healthy hydro resources and higher tariffs. The higher EBITDA will partially finance the increase in capex for 2024-2027.

Leverage Headroom to Decrease: Funds from operations (FFO) leverage remained below 2.5x for 2022 and 2023 due to operating overperformance but The agency expects headroom to be gradually exhausted over the next three years as UGE ramps up investment. While The agency expects UGE to remain under-leveraged in 2024, under our rating case, FFO leverage will average 3.8x over 2025-2028, just below our negative sensitivity of 4.0x. The agency expects management to monitor leverage closely and adjust investments accordingly to protect credit metrics.

The tariff-setting process remains opaque, in our view, which is negative for UGE’s credit profile. The Uzbek regulatory framework remains a key rating constraint for UGE, despite recent positive developments. In November 2023, the Uzbek government created the Energy Market Development and Regulation Agency of the Republic of Uzbekistan, which is responsible for developing competitive wholesale and retail energy markets. While the agency sees this as a positive development, revenue visibility has yet to improve.

In July 2024, all energy purchase and selling obligations were transferred from National Electric Grid of Uzbekistan to Uzenergosotish JSC, a newly created entity wholly-owned by the government. However, cash collections for UGE remain dependent on other parties of the electricity value chain that are outside of UGE’s control. Trade receivables increased to UZS1.2 trillion in 2023 from UZS0.8 trillion in 2022. This is mitigated by UGE’s high EBITDA margin driven by a lack of fuel costs, but remains a constraint on its SCP.

UGE’s asset base is concentrated by the number of assets, geography and technology. Its largest hydro power plant (HPP) cascade accounts for close to 40% of its installed capacity and UGE’s generation is exposed to Uzbekistan’s hydro resources. This concentration is partially mitigated by UGE’s efficient operations and very low marginal generation costs.

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/Stable). All three companies benefit from high EBITDA margins, but the 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, Turkey and Spain, benefits from a stronger operating and regulatory environment than UGE, and from integration into networks resulting in higher debt capacity than UGE’s.

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 foreign-exchange (FX) mismatch between revenue and debt. Its financial profile is similar to that of ENERGO-PRO, but stronger than Aydem’s and Zorlu’s.

Similar to Thermal Power Plants Joint Stock Company (BB-/Stable, SCP: ccc) and Regional Electrical Power Networks JSC (BB-/Stable, SCP: b-), UGE benefits from almost all its debt being guaranteed by the state or provided by the state via the Ministry of Economy and Finance, which justifies its ratings being equalised with Uzbekistan’s. Among other GREs, JSC Almalyk Mining and Metallurgical Complex (BB-/Stable, SCP: b+) is also equalised with the sovereign’s due to ‘Very Likely’ support.