London, 02 June 2020 -- Moody's Investors Service (Moody's) has today changed the
outlook to negative from stable on Botswana Power Corporation (BPC),
a national energy company in Botswana responsible for energy production,
transmission, distribution and supply. Concurrently,
Moody's has affirmed the Baa2 issuer rating of BPC.
Today's rating action on BPC follows the change in outlook to negative
from stable on the A2 rating of the Government of Botswana on 29 May 2020.
For further information, please refer to the sovereign press release:
https://www.moodys.com/research/--PR_424935
.
RATINGS RATIONALE
The change in outlook to negative from stable reflects the very strong
linkages between the rating of BPC and the credit quality of the Government
of Botswana, given the significant government influence and control
over BPC and the company's role in implementing a range of policy
mandates associated with national development objectives.
The affirmation of BPC's Baa2 rating reflects Moody's expectation
that (1) the Government of Botswana will continue to provide timely financial
support to the company, as necessary, given the critical role
of BPC to the country and its mission to ensure that Botswana has access
to electricity, and (2) substantially all of BPC's commercial borrowings
will continue to be covered by the government guarantees.
The government support in the form of ongoing subsidies and guarantees
is a key factor underpinning BPC's rating, given the company's
(1) high indebtedness and weak financial profile on a standalone basis;
(2) weak liquidity profile, with liquidity reliant on timely cash
transfers from the Government of Botswana; (3) significant asset
concentration and poor asset quality, with multiple design issues
affecting output from BPC's coal-fired power plants;
(4) high reliance on contracts for power imports; (5) a system of
tariff setting framework, which has not provided for cost and investment
recovery in the past, and is evolving as reflected in a 22%
tariff increase effective 1 April 2020; and (6) uncertainty around
the remediation programme of Morupule B power plant.
Overall, under Moody's methodology for government-related
issuers (GRI), the Baa2 issuer rating of BPC combines (1) the company's
baseline credit assessment (BCA) of b2, and (2) Moody's assessment
of very high dependence and very high likelihood of extraordinary support
being provided by the Government of Botswana.
Moody's assessment of a very high probability of the government support
in the event of financial distress reflects (1) the strategic importance
of BPC as the only energy utility in the country, (2) the government's
ongoing support in the form of revenue and capital transfers, and
(3) the government guarantees covering the bank loans. Moody's
assessment of a very high dependence takes account of BPC's domestic focus.
The issuer rating expresses a view on the credit risk of BPC excluding
any specific contractual credit support provided to the funders of the
company through the government guarantees.
LIQUIDITY
BPC's liquidity is weak. Moody's understands that as of end-March
2020, BPC held cash on balance sheet of BWP598 million, which
includes Debt Service Reserve Account balance and government projects
funds. Given cash flow weakness, the company needs to raise
additional funding for its day to day operations in the near term.
Its scheduled debt maturities are, however, covered by a fully
funded debt service reserve account, with next principal repayment
of some BWP300 million due in September 2020.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental, social and governance (ESG) considerations are important
to BPC's business profile.
BPC is exposed to environmental and carbon transition risk because of
its coal-fired generation assets. This is, however,
mitigated by the lack of viable alternatives at this juncture with renewables
yet to be developed in Botswana. The company's social risk is mainly
related to the political sensitivity around its tariffs and the impact
of the coronavirus pandemic, given substantial implications for
public health and safety. For BPC, the effects of the pandemic
include lower electricity demand, weaker cash collection and delay
to the remediation schedule for Morupule B power plant, given reliance
on international contractors and supplies of spare parts. BPC's
corporate governance is weak, given no permanent management in place
for over a year. The company's activities are closely supervised
by the government as BPC's shareholder.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on BPC is in line with that of the Government of
Botswana, reflecting that the company's rating is very strongly
influenced by that of its shareholder.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Given a negative outlook, upward rating pressure is unlikely in
the medium term. The outlook could be changed to stable if the
Government of Botswana outlook was stabilised and BPC's operating
performance appeared to be at least stabilising.
A downgrade of Botswana's sovereign rating could lead to a downgrade of
BPC's issuer rating. Downward rating pressure could also occur
if (1) there was any uncertainty about the government continuing to provide
timely financial support to BPC; (2) the company's financial profile
were to deteriorate; (3) there was a material change in the company's
capital structure (for example, if BPC were to raise unguaranteed
debt); or (4) Moody's assessment of very high support for the company
were revised downwards. In addition, severe delays or uncertainty
around the remediation programme of Morupule B plant could also put downward
pressure on the rating.
The methodologies used in this rating 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.
Headquartered in Gaborone, Botswana, Botswana Power Corporation
is a national energy company responsible for the country's generation,
transmission, distribution and supply of electricity. It
is 100% owned by the Government of Botswana. In the financial
year ended March 2019, BPC generated revenues of BWP3 billion (USD253
million).
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.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Joanna Fic
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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