ISLAMABAD: Moody’s Investors Service on Tuesday assigned a first-time corporate family rating (CFR) of B3 to Water and Power Development Authority (Wapda) and a stable outlook.
Wapda’s B3 CFR is primarily driven by its baseline credit assessment (BCA) of B3, and 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, the New York-based rating agency said.
“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,” said 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, he added.
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 construct and operate hydropower assets to supply affordable electricity, and 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 the power authority.
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 the gap between the low end user electricity tariffs and high power generation costs, high transmission losses, and low recovery from end users on electricity tariff payments. This 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 the company’s sizable capital spending plans to expand its hydropower capacity, and the delays in collecting hydropower tariffs, which puts pressure on the company’s working capital.
The rating agency said the Wapda’s stable outlook primarily reflected the current stable outlook on Pakistan’s sovereign rating, Moody’s expectation that the company’s BCA will remain appropriately positioned at B3, and its strategic importance will not be materially affected by regulatory changes. The rating could be upgraded if the 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 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 the authority on loan principle or interest owed to the Pakistani government.
The company’s BCA could be also downgraded if there are changes in Pakistan’s regulatory environment that adversely affect the company’s profitability, or Wapda’s financial position weakens, such as due to aggressive debt-funded investments or further delays in the collection of electricity tariffs.
The company builds water storage and related facilities to help address the country’s acute water challenges.