Hong Kong, October 27, 2020 -- Moody's Investors Service has assigned a first-time corporate family
rating (CFR) of B3 to Pakistan Water and Power Development Authority (WAPDA).
The rating outlook is stable.
RATINGS RATIONALE
WAPDA's B3 CFR is primarily driven by its baseline credit assessment
(BCA) of b3, and Moody's expectation of a very high likelihood
of support from, and a very high level of dependence on, the
Government of Pakistan (B3 stable) in times of need, under Moody's
joint-default analysis approach for government-related issuers.
"WAPDA's b3 BCA reflects its dominant position in supplying hydropower
services and developing water infrastructure in Pakistan, as well
as the recurring financial support it receives from the Pakistani government,"
says Boris Kan, a Moody's Vice President and Senior Credit Officer.
"At the same time, the BCA is constrained by the company's
weak financial profile due to its sizable hydropower capacity expansion
spending, and the delays in collecting hydropower generation tariffs,"
adds Kan.
Moody's expectation of a very high likelihood of government support
is based on the fact that the Pakistani government fully owns and directly
supervises the company. It also reflects the company's strategic
importance to the government, as its sole platform to (1) construct
and operate hydropower assets to supply affordable electricity,
and (2) build water storage facilities to help address the country's
acute water challenges.
Although there is no explicit uplift incorporated in the rating,
the very high likelihood of extraordinary support indicates the resilience
of WAPDA's B3 rating, even if the company's BCA is lowered,
assuming no material change in the underlying credit worthiness of WAPDA.
The company's delays in collecting hydropower tariffs is mainly
driven by the significant cash shortfall in the Central Power Purchasing
Agency (CPPA), which is the state-owned agency that purchases
power from the company on behalf of the nation's distribution companies.
This shortfall mainly stems from (1) the gap between the low end user
electricity tariffs and high power generation costs, (2) high transmission
losses, and (3) low recovery from end users on electricity tariff
payments, which increases CPPA's leverage and constrains its
repayment capabilities.
As a result, Moody's expects WAPDA's financial metrics
to remain weak over the next one to two years, driven by (1) the
company's sizable capital spending plans to expand its hydropower
capacity, and (2) the delays in collecting hydropower tariffs,
which puts pressure on the company's working capital.
Moody's projects that the company's FFO to debt ratio will remain
weak at about 3.0%-4.5% over the course
of the 2020 to 2022 fiscal years, and its FFO interest coverage
will remain at about 1.6-1.7x over the same period.
Such credit metrics support WAPDA's BCA of b3.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook primarily reflects (1) the current stable outlook on
Pakistan's sovereign rating, (2) Moody's expectation
that the company's BCA will remain appropriately positioned at b3,
and (3) its strategic importance will not be materially affected by regulatory
changes.
Moody's could upgrade WAPDA's rating if the Pakistani government's
ability to provide support strengthens, which would be illustrated
by an upgrade of the sovereign rating.
On the other hand, Moody's could downgrade WAPDA's rating
if the Pakistani government's ability to provide support weakens,
which would be illustrated by, but not limited to, a downgrade
of the sovereign rating, or a demand for repayment by WAPDA on loan
principle or interest owed to the Pakistani government.
The company's BCA could be downgraded if (1) there are changes in Pakistan's
regulatory environment that adversely affect the company's profitability,
or (2) WAPDA' financial position weakens, such as due to aggressive
debt-funded investments or further delays in the collection of
electricity tariffs.
Financial metrics indicative of a BCA downgrade include the company's
FFO/debt falling below 2.0% and FFO interest coverage staying
below 1.2x over a prolonged period.
However, a moderate weakening in the company's BCA is unlikely to
immediately lead to a downgrade of its CFR, given the very high
likelihood of extraordinary support from the Pakistani government.
The rating also considers the following environmental, social and
governance (ESG) factors.
WAPDA's governance risk is moderate. While WAPDA is wholly
owned and under the administrative control of the Pakistani government,
its financial policy is characterized by high capital spending and leverage.
The absence of independently audited financial statements for the company's
water segment is another important consideration. However,
such risk is currently manageable at the current rating level.
WAPDA's environmental risk is also moderate. While the company's
carbon transition risks are low given that the relatively low carbon intensity
of its hydropower units, WAPDA may need to make additional investments
to secure more water resources for the population and alleviate Pakistan's
water scarcity problem.
WAPDA faces moderate social risks overall in terms of health and safety
conditions, especially with regards to the construction and operation
of its hydropower and water projects and is exposed to an acceleration
in COVID-19 related conditions in Pakistan which could affect its
workforce.
The methodologies used in these ratings were Regulated Electric and Gas
Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
WAPDA was established through an Act of Parliament in 1958. It
is an autonomous and statutory body under the administrative control of,
and 100% ownership by the Federal Government of Pakistan.
WAPDA constructs and operates hydropower generation assets to generate
affordable and clean electricity to relieve end user burden. The
company also builds water storage and related facilities to help address
the country's acute water challenges.
As of June 2020, WAPDA's total installed hydropower capacity
amounted to about 9.4 gigawatts, comprising 22 hydropower
units and representing 95% of the country's hydro power.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Boris Kan
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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Hong Kong
China (Hong Kong S.A.R.)
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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