Fri 10 2020 09:27:39

Tashkent, Uzbekistan ( -- Fitch Ratings has assigned Uzbekistan-based hydro power generator Uzbekhydroenergo JSC (UGE) a Long-Term Foreign Currency Issuer Default Rating (IDR) of ‘B+’ with Stable Outlook.

Fitch rates UGE top down minus one notch from the rating of Uzbekistan (BB-/Stable) under Fitch’s "Government-Related Entities Rating Criteria". This reflects our assessment of links with its ultimate shareholder, Uzbekistan, and the company’s Standalone Credit Profile (SCP), which we assess at ‘b’.

Strong Links with State: Fitch views the overall linkage of UGE with the sovereign as strong. This is reflected in our ‘Strong’ assessment of status ownership and control, largely due to the government’s indirect majority ownership, the company’s inclusion in the list of strategically important enterprises for the government, and our ‘Very Strong’ assessment of record of support due to 100% debt guarantee from the state, although it might diminish following further non-guaranteed funding of the capex programme.

State support includes tax exemption until 2022, and minimum dividends to the parent, which we expect to continue until capex peaks.

‘Moderate’ Socio-Political and Financial Default Implications: Fitch Ratings views the socio-political impact of a theoretical default as moderate, as UGE has only 10% market share in Uzbekistan, and its services may be substituted with only temporary disruption, while its development project can be delayed.

The financial implications of potential 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 companies given its undiversified funding base.

‘b’ SCP: UGE’s SCP reflects its solid business profile with a monopoly position in hydroelectric generation in Uzbekistan, evolving regulatory framework and risks associated with the general operating environment in Uzbekistan. Tariffs are exposed to the evolving regulatory environment in Uzbekistan with short-term tariffs, making UGE’s earnings less predictable than those of other CIS utilities peers, which operate under regulatory regimes with longer track records and have better asset quality. The SCP also captures the likely deterioration of UGE’s financial profile due to expected debt-funded capex increase.

Negative FCF Expected: UGE plans to embark on substantial capex within the government-approved programme of more than USD2 billion (UZS24,225 billion) over 2020-2030. Fitch expects UGE’s free cash flow (FCF) to remain significantly negative within the rating horizon. The company plans to finance the investment programme largely with borrowed funds primarily from international financial institutions.

We consider UGE’s planned large investments to be opportunistic, and that they might be postponed due to lower electricity production or lower than expected electricity tariffs growth following the slowdown of the domestic economy.

Capex-Driven Leverage Increase: We expect the implementation of the aggressive investment programme, which will be largely funded by debt, to lead to a material deterioration of UGE’s credit metrics. Fitch expects funds from operations (FFO) gross leverage to deteriorate to about 3x in 2020 (from 1.6x in 2019) and to average 4.5x over 2021-2024 owing to its extensive capex programme 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 deterioration in leverage beyond acceptable levels, for example if total debt/EBITDA is weaker than 3.0x.

High FX Exposure Risk: UGE is subject to foreign-currency fluctuations risk, as all its total debt of UZS1,382 billion (USD145 million) at end-2019 was denominated in US dollars, while most of its revenue is denominated in the local currency (som). The company does not hedge its FX risks. The company also plans to continue funding future capex from debt raised in foreign currencies. We anticipate further som devaluation against foreign currencies (it has lost 9% against the US dollar so far in 2020), which may further erode the company’s financial profile.

Coronavirus Impact Minimal: Fitch expects Uzbekistan to be among the few sovereigns to avoid an economic contraction in 2020. We also do not regard lowered consumption as a risk for UGE, as the low-cost electricity producers have priority in the merit order over thermal generators and have lower volume risk, while production volumes are dependent on river water levels, which were low in 1H20, both seasonally and compared with the multi-year average.

We therefore expect UGE’s 2020 production volumes to decline by about 16% yoy mostly due to weaker hydro resource, and these to be gradually normalised from 2021 following normalization of hydro conditions and also taking into account newly commissioned capacities.

Evolving Regulation: The regulatory regime for utilities in Uzbekistan has a limited track record, and we view it as less transparent and predictable than the regulatory regimes in Russia, Kazakhstan and Georgia. UGE’s tariffs are approved by the Ministry of Finance in conjunction with the company’s declared opex and partially cover its extensive expansionary capex programme.

One-Year Tariffs, Potential Market Liberalisation: UGE’s tariffs are approved for one year, and historically were in line with or even outpaced inflation. We expect tariffs to be inflated by an average of 11% over 2020-2025, which is below the company’s assumptions. However, tariff growth may be limited due to social considerations. Management expects the transition to direct contracts with large industrials upon completion of its large hydro power plant from 2024, which is not included in our rating case. 

UGE operates in a weaker operating environment than other Fitch-rated EMEA utilities. The tariffs are exposed to the evolving regulatory environment in Uzbekistan with short-term tariffs, making UGE’s earnings less predictable than those of other CIS utilities peers such as Russia’s RusHydro PJSC (BBB-/Stable, SCP bb+), EN+ Group IPJSC (B+/Stable), Rosvodokanal LLC (BB-/Stable) and JSC Samruk-Energy (BB/Stable, SCP b+), Kazakhstan Utility Systems (B+/Stable), and JSC Georgian Oil and Gas Corporation (BB/Negative, SCP bb-), which operate under a regulatory regime with a longer track record and have better asset quality.

UGE’s SCP of ‘b’ is supported by its monopoly position in hydroelectric generation in Uzbekistan. It is therefore better positioned in terms of generation than other rated peers as hydro generating sources have priority in the merit order over thermal generators. However, UGE operates on a smaller scale (based on total installed capacity) and has a more concentrated customer base. Therefore, we view UGE’s overall business profile as marginally weaker.

UGE’s financial metrics for 2019 are strong relative to peers’, but the company’s ‘b’ SCP reflects potential credit metrics pressure from capex increase. UGE’s financial profile is weaker than those of Samruk-Energy, Kazakhstan Utility Systems, Georgian Oil and Gas Corporation and Rosvodokanal.


+998 71 2815040

14 Bobur street, Yakkasaroy tumani Tashkent, Uzbekistan

* - Required fields