October 27, 2020 (MNL): Moody's Investors Service has assigned a first-time corporate family rating (CFR) of B3 to Pakistan Water and Power Development Authority (WAPDA), along with a ‘stable’ rating outlook.

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 operates 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 creditworthiness of WAPDA.

The company's delays in collecting hydropower tariffs are 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 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 principal 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.

Moody’s

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