Tashkent, Uzbekistan (UzDaily.com) — Fitch Ratings has affirmed Uzbekistan-based electricity distribution and sales company Regional Electrical Power Networks JSC’s (Regional Networks) Long-Term Issuer Default Rating (IDR) at ‘BB-’ with Stable Outlook.

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

The agency has revised Regional Networks’ Standalone Credit Profile (SCP) to ‘ccc’ from ‘b-’, due mainly to continuing poor standalone liquidity, a short-term debt maturity profile and our expectations of very weak funds from operations (FFO) generation and FFO leverage materially breaching our previous negative sensitivity of 7x in 2024-2026. The expected breach is due to the regulator’s adverse tariff decisions squeezing the company’s margins. Positively, the SCP incorporates the company’s dominant position in the domestic electricity distribution market.

Over 90% of Regional Networks’ debt at end-2023 was guaranteed by the state, leading to the rating being equalised with the state’s under Fitch’s Government-Related Entities (GRE) Rating Criteria. Fitch Ratings treated funds from international financial institutions, which the Ministry of Finance on-lends to the company, as equivalent to government guarantees. State-guaranteed debt falling below 75% of total debt would lead to the company’s rating being notched down two levels from the sovereign rating under our GRE Criteria.

Regional Networks’ revised SCP reflects its continuing poor liquidity and the agency’s expectations that FFO leverage will materially exceed its previous negative sensitivity of 7.0x over 2024-2026 (5x in 2023 and 3.8x in 2022) on the back of weaker EBITDA, working-capital outflows and capex. The SCP is constrained by an opaque regulatory framework for electricity distribution in Uzbekistan, high counterparty risk, low and erratic profitability, and large foreign-exchange (FX) mismatch between cash flows and debt.

In 2023 Regional Networks agreed with the state that it would not make timely repayments under certain loan agreements to the Ministry of Finance and Uzbekistan’s Fund for Reconstruction and Development of around UZS0.5 trillion (6% of total debt at end-2023). This triggered a cross default, causing all loans from those state creditors totalling UZS7.2 trillion (around 80% of debt) to be classified as payable on demand at end-2023.

In 2024, Regional Networks received formal letters from both state creditors confirming that they will not take any action regarding the missed debt payment, and refinanced most debt maturities to 2025. Fitch does not view this as a distressed debt exchange (DDE) as it only involves related parties of the company. However, the liquidity profile remains poor and subject to refinancing with state creditors.

Fitch Ratings expected sale tariff hike of 35% in 2024 following the regulator’s decision to increase electricity tariffs for some legal entities and households. However, the agency forecasts it to be more than offset by a 44% effective tariff growth for the purchase of electricity by Regional Networks in 2024, squeezing the company’s margin. As a result, we forecast EBITDA in 2024 to almost halve from 2023 to around UZS0.9 trillion. The government plans to further increase tariffs in 2025, affecting both revenue and cost for the company but their scale and timing remain unclear.

The poor regulatory framework weighs on Regional Networks’ business profile. It is characterised by low transparency, short-term tariffs and political risk as electricity tariffs are one of the government’s tools for social stability.

Changes in working capital ranged between inflows and outflows of UZS0.9 trillion over 2021-2023, contributing to significant volatility of cash flows (average EBITDA for 2021-2023 was UZS1.3 trillion). Working-capital volatility is due to varying payment discipline of customers and the company’s management of accounts payable for electricity, which is often driven by the government’s guidance.

Regional Networks’ business plan incorporates an ambitious investment programme of around UZS3.2 trillion (USD246 million) annually over 2024-2026 for digital transformation and network renovation and maintenance. It expects to fund investments with international loans channelled through the Ministry of Finance, state-guaranteed loans and own funds. Fitch Ratings expected the company to post negative free cash flow (FCF) to 2026, as was the case in 2019-2023. The company has some flexibility to postpone capex according to availability of funds.

Regional Networks is exposed to foreign-currency risk, with 78% of its debt at end-2023 (versus 83% at end-2022) denominated mostly in US dollars, while most of its cash flows are in Uzbek soum. The company does not hedge its FX risk and plans to continue funding capex from debt raised in foreign currencies from international institutions. The Uzbek soum has been stable relative to the US dollar, with an average depreciation of around 5% over 2020-2024.

Under our updated GRE Criteria, we assess both decision-making and oversight and precedents of support as ‘Very Strong’. The state has strong influence on Regional Networks’ strategy and operations by approving its investment plans and setting tariffs. It directly provides or guarantees nearly all of the company’s debt on top of equity injections.

Fitch Ratings assesses preservation of government policy role as ‘Strong’ as a Regional Networks default may temporarily endanger the continued provision of services due to its social function, significant infrastructure renovation programme and large workforce. Contagion risk is ‘Not Strong Enough’ as most of debt is directly from the state or state banks.