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 equalized 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.

TPP’s ‘ccc’ Standalone Credit Profile (SCP) continues to reflect its weaker business profile, following the government-driven disposal of several large power plants, and weak cash flow generation of the remaining assets leading to high leverage and poor standalone liquidity. Positively, the SCP reflects TPP’s still large market share compared with other market participants and Fitch Ratings’ expectations of tariff growth and efficiency improvements.

Around 95% of TPP’s debt at end-1H24 (versus 94% at end-2023) 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 a large state-controlled bank. State-guaranteed debt falling below 75% of total debt would lead Fitch Ratings to notch down TPP’s IDR from the sovereign ratings under its Government-Related Entities (GRE) Criteria.

Under Fitch Ratings’ GRE Criteria, the agency assesses both decision-making and oversight, and precedents of support as ‘Very Strong’. The Uzbek government owns 100% of TPP shares, approves the company’s strategy and capex, and sets its tariffs. TPP is also listed among the strategically important and systemic enterprises in Uzbekistan. The government directly provides or guarantees over 90% of the company’s debt and provides liquidity support through the extension of loan repayments or budget loans. Other forms of support include equity injections and dividend exemptions.

Fitch Ratings assesses preservation of government policy role as ‘Strong’ as a TPP default may temporarily endanger the continued provision of services, including electricity and heat production, due to its social function, still large market share of around 20%-25%, and a large workforce. Contagion risk is ‘Not Strong Enough’ as, despite a large amount of outstanding debt (USD1.2 billion at end-1H24), most of it is incurred with or on-lent by the state. TPP is not present in the Eurobond market.

Tariffs for electricity from most TPP power plants rose 11% from June 2024, while tariffs for gas, TPP’s key cost, remained flat in 2024. This should support EBITDA in 2024, after a very weak 2023 result. All of TPP’s revenue and around 80% of costs are regulated, underlining the influence of regulatory decisions on tariffs on its financials. 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 state-owned buyer, Uzenergosotish JSC.

The disposal of three power plants in 2023 and Talimarjan thermal power plant (1.7GW) being classified as discontinued operations has reduced TPP’s installed capacity to 4.5GW, with a market share in generation at 20%-25% in 2024, from around 70% in 2022. Consolidation of the Angren plant and Tashkent heating plant in 2023 was insufficient to offset the loss of disposed power plants, due to their small size and weak profitability. Timing for the consolidation of a large Novo-Angren plant (2.1GW) remains unclear, and Fitch Ratings therefore does not include it in its rating case.

Syrdarya thermal power plant, the largest remaining plant of TPP, saw electricity generation fall 20% year on year in 1H24, following the commissioning of new and more efficient capacity in the Syrdarya region. Management expects the Syrdarya plant’s profitability to weaken from 2024, although the plant will remain competitive, due to its role in the regional energy balance. Fitch Ratings expects that commissioning a new efficient 900MW unit at Talimarjan plant in 2025-2026 will support TPP’s competitive position and market share.

The SCP reflects Fitch Ratings’ expectations that funds from operations (FFO) leverage will be above its positive sensitivity of 7.5x over 2024-2026; its smaller scale and asset base; weaker asset quality; and 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. TPP’s financial profile is under pressure from high projected leverage, large foreign-exchange (FX) mismatch between revenue and debt, and a reliance on state funding.

In July 2024, all energy purchase and selling obligations were transferred to a single buyer Uzenergosotish JSC. TPP expects that this will improve financial discipline in the sector and reduce non-payments. TPP also expects that the government will support it with past receivables collection from National Electric Grid. Both of these changes will take time to implement. Fitch Ratings expects that cash collections for TPP will remain dependent on other parties of the electricity value chain that are outside of TPP’s control.

The Uzbek government plans to liberalise the electricity market in 2026 to improve efficiency and modernise its aging infrastructure. In 2024, the government introduced social norms of electricity and gas consumption for households, with higher tariffs for above-the-limit consumption. Further progress will depend on how the government balances the need for reforms with social aspects to tariff increases. Liberalisation leading to higher prices and margins has a potentially positive impact on TPP’s cash flows.

The ratings of Uzbekistan-based electricity distribution and sales company Regional Electrical Power Networks JSC (BB-/Stable; SCP: ccc) and Uzbekhydroenergo JSC (BB-/Stable; SCP: b+) are also equalized with the sovereign’s. Similarly to TPP, nearly all of their debt is provided by the state or secured by government guarantees. Among other GREs in Uzbekistan, the ratings of JSC Almalyk Mining and Metallurgical Complex (BB-/Stable; SCP: b+) and JSC Uzbekneftegaz (BB-/Stable; SCP: b) are also equalized with Uzbekistan’s, due to strong links with the government.

Among international peers, Kazakhstan Electricity Grid Operating Company’s (KEGOC, BBB/Stable; SCP: bbb-) IDR is notched up once from its SCP for strong links with its sole owner, the Republic of Kazakhstan (BBB/Stable). TPP’s links with the state are similar to those of JSC Samruk-Energy (BB+/Stable; SCP: b+). Samruk-Energy’s rating reflects a ‘top-down minus two’ notch approach from Kazakhstan. 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 53% share of total guaranteed debt over 2024-2028.

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 asset divestments, TPP continues to benefit from larger-scale operations, but this is balanced by weaker profitability.