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

TPP’s rating is equalised with that of its parent Uzbekistan (BB-/Stable) under Fitch’s Government-Related Entities (GRE) Rating Criteria, reflecting its strong ties with the state.

We assess the company’s Standalone Credit Profile (SCP) at ‘b-’ to reflect an opaque regulatory framework and short-term tariffs leading to weak revenue visibility. It also factors in high counterparty risk and weak cash collection, high leverage and large foreign-exchange (FX) mismatch between revenue and debt.

Positively, the SCP reflects the company’s large size and a dominant position in electricity generation in Uzbekistan, reasonable electricity tariffs and Fitch-expected tariff growth and efficiency improvements, which should sustain the company’s viability on a standalone basis.

Ratings Equalised with Sovereign’s: TPP scores 30 support points under Fitch’s GRE Criteria, which together with its ‘b-’ SCP, leads to its rating being equalised with the state’s under our notching guidelines.

Strong Links with State: We view the status, ownership and control factor as ‘Strong’ as the state is TPP’s sole shareholder and the company is included in the government’s list of strategically important enterprises. The support track record is ‘Very Strong’ as around 85% of the company’s debt is provided either by 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. Other forms of support include minimal dividends to the parent and equity injections.

Incentive to Support: We view the socio-political impact of a TPP default as ‘Moderate’ as its market share will gradually decline following renewable projects development and as other operators will be able to provide substitutes with only minor or temporary disruption. TPP has a large workforce of over 10,000 people and a significant asset renovation programme.

We assess the financial implications of a default as ‘Strong’ as TPP is one of the largest corporate borrowers in Uzbekistan, holding around USD3 billion of debt. This, together with the presence of international banks among lenders, would have a significant impact on the parent and other GREs in case of a TPP default.

‘b-’ SCP: TPP’s business profile benefits from its large size and dominant position in electricity generation in Uzbekistan with around a 70% market share in 2022, and reasonable electricity tariffs. However, TPP expects its market share to decrease to around 50% by 2026 as Uzbekistan makes progress with hydro and other renewable projects development. The business profile is constrained by the opaque regulatory framework and short-term tariffs leading to weak revenue visibility, poor cash collections, and limitations of the operating environment in Uzbekistan. Its financial profile is weak due to high projected leverage, limited liquidity and large FX mismatch between revenue and debt.

Regulatory Decisions Drive Financials: 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 at 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. Therefore, regulated cost growth is as important as tariff increase itself.

High Counterparty Risk: TPP’s cash collections from National Electric Grid of Uzbekistan, to which it sells generated electricity, are low due to the latter’s weak standalone financial profile and weak payment discipline. TPP reached EBITDA margins of 19%-27% in 2020-2021, but large and increasing trade receivables led to a small funds from operations (FFO) 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 dependent on tariff decisions for other parties of the electricity value chain and is outside management’s control.

Expansion Capex to Increase Efficiency: TPP’s business plan incorporates an ambitious investment programme of around USD2.2 billion until 2026, which includes the construction of 2.3 GW of new capacity with efficient combined-cycle gas turbines, and maintenance capex. It should improve fuel efficiency and decrease repair costs. TPP expects to fund investments with above-inflation tariff indexations, international loans channeled through the Ministry of Finance or state-guaranteed loans. We expect TPP to remain negative in free cash flow (FCF) to 2025, as was the case in 2020-2021.

Projected High Leverage: We forecast FFO gross leverage on average at around 7x over 2022-2025 (8.9x at end-2021). This is based on electricity tariff growth at around inflation level to 2025, gas tariff growth slightly below inflation and moderate improvement in cash collections from the single buyer. Our projections are highly sensitive to the regulator’s tariff decisions.

FX Mismatch in Revenue/Debt: TPP is exposed to foreign-currency fluctuations risk as almost all of its debt is denominated in US dollars, euros and Japanese yen against all revenue in local currency (Uzbek soum). TPP does not hedge its FX risks, and plans to continue funding capex from debt raised in foreign currencies from international banks. We forecast Uzbek soum to depreciate around 5% annually, which would have a negative impact on the company’s financial profile.

The strength of ties with the government under Fitch’s GRE Rating Criteria is comparable to those of Regional Electrical Power Networks JSC (BB-/Stable, SCP: b-) as both companies benefit from almost all debt being provided or guaranteed by the state. Ties are also similar to those of JSC Almalyk Mining and Metallurgical Complex (BB-/Stable, SCP: b+) and JSC Uzbek Metallurgical Plant (BB-/Stable; SCP: b+), and slightly stronger than for UzbekHydroEnergo JSC (BB-/Stable; SCP: b).

TPP’s ties with the state are stronger than those of Kazakhstan-based GREs Kazakhstan Electricity Grid Operating Company (KEGOC, BBB-/Stable; SCP bb+) and JSC Samruk-Energy (BB+/Stable; SCP bb-) as those peers are stronger on a standalone basis and need less state support.

On a standalone basis, TPP has a weaker business profile than Samruk-Energy and Limited Liability Partnership Kazakhstan Utility Systems (KUS, B+/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 hydro producer UzbekHydroEnergo and benefits from larger size and scale of operations, but this is balanced by weaker profitability.

TPP has a weaker financial profile than Samruk-Energy, KUS and UzbekHydroEnergo and a similar one to Regional Electrical Power Networks.