Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based electricity generation company Thermal Power Plants Joint Stock Company’s (TPP) Long-Term Issuer Default Rating (IDR) at ‘BB-’ with a Stable Outlook.

TPP’s rating is equalised with its parent Uzbekistan’s (BB-/Stable), reflecting that almost all of TPP’s debt is secured by government guarantees or provided by the state.

We have revised TPP’s Standalone Credit Profile (SCP) to ‘ccc’ from ‘b-’, mainly following the government’s decision to transfer four large power plants (representing around 60% of TPP’s electricity generation), via a sale to or management by foreign investors, without a fair compensation for TPP. This will result in a weaker business profile and higher-than-expected leverage.

Positively, the SCP reflects TPP’s still large market share compared with other market participants’, reasonable electricity tariffs and Fitch-expected tariff growth and efficiency improvements.

State-Guaranteed Debt Above 75%: Eighty-four per cent of TPP’s debt at end-2022 (versus 89% at end-2021) was secured by state guarantees or provided by the state via the Ministry of Finance, which on-lends funds from international financial institutions to the company, or by Uzbekistan’s Fund for Reconstruction and Development. The remaining debt mostly comes from Uzbek state-owned banks. State-guaranteed debt falling below 75% of total debt would lead Fitch to notch down TPP’s IDR from the sovereign ratings under its Government-Related Entities (GRE) Criteria.

Reduced Scale and Market Share: TPP’s scale and market share will shrink following the government’s decision to transfer three TPP large power plants to a foreign investor’s management without a cash compensation for TPP, and to sell TPP’s Talimarjan thermal power plant (1.7GW) to two UAE investors. Divested assets comprise around 60% of TPP’s installed capacity and electricity generation. As a result, TPP’s market share in Uzbekistan will fall to around 20%-30% in 2024 from around 70% in 2022.

New Assets to be Added: TPP will see new assets being contributed by the government, including the coal-fired Angren thermal power plant (0.4GW) that is to be consolidated into its IFRS accounts from 2023. In the past this plant did not generate material EBITDA. In 2024 TPP expects to consolidate one more power plant, but the government is yet to decide on the timing of consolidation. The Angren plant, with its history of immaterial EBITDA generation, together with new assets to be potentially contributed to TPP, are in our view insufficient to compensate the loss of the four power plants sold or transferred to foreign investors.

‘ccc’ SCP: TPP’s revised SCP reflects our expectations that funds from operations (FFO) leverage will materially exceed its negative sensitivity of 7.5x over 2023-2026; its smaller scale and asset base; weaker asset quality and increased uncertainty over the company’s strategy in the medium term after asset deconsolidation.

The business profile is constrained by an opaque regulatory framework and short-term tariffs leading to weak revenue visibility, poor cash collections, and limitations of the operating environment in Uzbekistan. TPP’s financial profile is weak due to high projected leverage, and large foreign-exchange (FX) mismatch between revenue and debt, while funding is directly or indirectly reliant on sovereign support.

Weaker Incentives to Support: We have revised financial implications of a default to ‘Moderate’ from ‘Strong’ due to TPP’s reduced scale and lower amount of outstanding debt from 2024, which implies lower contagion risk. We forecast that after asset deconsolidation, TPP’s debt will amount to approximately USD1 billion, while before deconsolidation TPP was of the largest corporate borrowers in Uzbekistan, holding around USD3 billion of debt. We continue to assess the status, ownership and control factor as ‘Strong’, the support track record ‘Very Strong’, and the socio-political impact of a TPP default as ‘Moderate’.

Regulatory Decisions Drive Financials: Tariffs for natural gas, TPP’s key cost, increased 50% from October 2023, and were followed by a 50% increase in electricity tariffs from November 2023. All of TPP’s revenue and around 80% of costs are regulated, underlining the considerable influence on its financials of the regulator’s decision on tariffs. Regulated costs include the purchase of gas and fuel oil from other state-owned enterprises, and almost all regulated revenue comes from the sale of electricity to a single buyer, JSC National Electric Grid of Uzbekistan.

High Counterparty Risk: TPP’s cash collections from National Electric Grid of Uzbekistan are low, due to the latter’s weak standalone financial profile and weak payment discipline. TPP reported EBITDA margins of 19%-27% in 2020-2022, but large and increasing trade receivables led to a low cash flow from operations (CFO) margin of just 1%-5% for the same period. As partial compensation for weak cash collections, the state’s tariff commission allows TPP to defer payments for purchased gas. Although TPP’s tariffs are reasonable, improvement in cash collections is outside management’s control.

Single Buyer and Liberalisation Credit-Positive: Uzbekistan plans to launch a single buyer of electricity in 2025, which will be responsible for the centralised purchase of electricity from generation companies and export/import operations. The country also plans to start market liberalisation and switch to market-based pricing. TPP expects that in the process of establishing the single buyer all accounts receivables from the National Grid will be repaid also using state subsidy. This, together with higher liberalised electricity prices, would represent an upside to our rating case.

TPP’s strength of ties with the government under Fitch’s GRE Rating Criteria is weaker than for Regional Electrical Power Networks JSC (BB-/Stable, SCP: b-) due to the latter’s higher socio-political importance and its access to end-customers. Both companies benefit from almost all debt being provided or guaranteed by the state. TPP’s ties with the state are also weaker than those of JSC Almalyk Mining and Metallurgical Complex (BB-/Stable, SCP: b+), but stronger than Uzbekhydroenergo JSC’s (BB-/Stable; SCP: b+).

Compared with international peers’, TPP’s ties with the state are similar to those of Kazakhstan Electricity Grid Operating Company (KEGOC, BBB-/Stable; SCP bb+). The latter has a stronger SCP and limited need for state support, but higher socio-political importance. TPP’s ties are slightly weaker than those of JSC Samruk-Energy (BB+/Stable; SCP b+). Samruk-Energy’s links with the state strengthened after Kazakhstan committed to providing guarantees for Samruk-Energy’s debt to fund gasification projects, leading to an average 40% share of total guaranteed debt over 2024-2027.

On a standalone basis, TPP has a weaker business profile than Samruk-Energy and Limited Liability Partnership Kazakhstan Utility Systems (KUS, BB-/Stable) as Kazakh peers benefit from better cash collections, a stronger operating environment and higher revenue visibility. TPP shares the same operating and regulatory framework as Uzbekhydroenergo. Following the assets divestment, it continues to benefit from larger-scale operations, but this is balanced by weaker profitability.