KARACHI: Ratings agency Moody’s has acknowledged the ability of state-owned Pakistan Water and Power Development Authority (Wapda) in honoring its financial obligations that, however it says, is constrained by a shortfall in tariffs collection.
Moody’s Investors Service assigned a first-time corporate family rating of B3 to Wapda, driven by an expectation of a very high likelihood of support from, and a very high level of dependence on, the government in times of need.
"Wapda’s B3 BCA (baseline credit assessment) of b3 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,” a Moody’s Vice President and Senior Credit Officer Boris Kan said in a statement.
"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.”
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 Wapda,” Moody’s said.
Moody’s said 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 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, which increases CPPA’s leverage and constrains its repayment capabilities,” it said.
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.
Moody's projects that the company's funds from operations (FFO) to debt ratio will remain weak at about 3 to 4.5 percent 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.
Moody’s said the company’s stable outlook primarily reflects the current stable outlook on Pakistan's sovereign rating, its expectation that the company's BCA will remain appropriately positioned at b3, and 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.
The rating could be downgraded 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 Wapda on loan principle or interest owed to the government.
The company’s BCA could be downgraded if there are changes in 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.
