Moody’s Investors Service has revised Pakistan Water and Power Development Authority’s (WAPDA) outlook to negative from stable.
At the same time, Moody’s has affirmed the company’s B3 corporate family rating (CFR) and its b3 Baseline Credit Assessment (BCA). The rating action follows Moody’s affirmation of the Government of Pakistan’s B3 ratings with an outlook revision to negative from stable on 2 June 2022.
“The rating action on WAPDA reflects the close linkage of its credit quality with that of the Government of Pakistan, given the government’s full ownership and direct supervision, as well as the fact that WAPDA operates solely in Pakistan,” says Yong Kang, a Moody’s Analyst.
WAPDA’s B3 CFR is primarily driven by its b3 BCA and Moody’s assessment of a high likelihood of support from, and a very high level of dependence on, the Government of Pakistan (B3 negative) in times of need, under Moody’s Joint Default Analysis (JDA) for government-related issuers.
WAPDA’s b3 BCA reflects its position in Pakistan’s power sector as a dominant hydropower supplier, as well as the recurring financial support it receives from the government. At the same time, the BCA is constrained by the company’s weak financial profile due to its sizeable hydropower capacity expansion plan, the long receivables cycle, and delayed tariff decision.
Moody’s expectation of a 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 an important 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.
However, such considerations are offset by the risks stemming from the government’s low policy predictability and transparency, which resulted in a change in Moody’s support assumption to high from very high, under its JDA approach.
Although there is no explicit uplift incorporated in the rating, the high likelihood of extraordinary support indicates some degree of the stability of WAPDA’s credit quality, even if the company’s BCA were to be lowered, assuming no material change in the relationship between WAPDA and the government.
The company’s delays in collecting revenue are mainly driven by the significant cash shortfall at the Central Power Purchasing Agency (CPPA), the state-owned agency that purchases power from generation companies on behalf of the nation’s distribution companies. This shortfall mainly stems from the gap between the low end-user electricity tariffs and high thermal 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.
Moody’s projects WAPDA’s funds from operations (FFO) to debt ratio will remain weak at around 2%-4% over the next one to two years, driven by the company’s sizeable capital spending plans to expand its hydropower capacity and the continued delay in collecting electricity revenue, which puts pressure on the company’s working capital. That said, such a ratio level is still within Moody’s expectation for WAPDA’s b3 BCA.
In terms of environmental, social, and governance (ESG) factors, Moody’s has considered that WAPDA is exposed to environmental risks mainly because of physical climate risks in the form of extreme weather patterns, partly offset by a positive carbon transition exposure as a hydropower generator.
The weak track record of timely tariff adjustments, driven by affordability concerns, is factored in the company’s rating as a social consideration. Moody’s factors WAPDA’s high financial leverage stemming from an aggressive capital spending plan, and concentrated ownership in the assessment of the company’s governance risk.
The negative outlook on the rating mirrors the negative outlook on Pakistan’s sovereign ratings, given the close linkage of WAPDA’s credit quality with that of the government.
Moody’s could change the outlook to stable or upgrade WAPDA’s rating if the agency takes positive rating action on the sovereign and there is no material change in the relationship between WAPDA and the government. Moody’s could downgrade WAPDA’s rating if Pakistan’s sovereign rating is downgraded or the company’s BCA weakens significantly.
The BCA could be lowered if WAPDA’s profitability or financial position further weakens such that its FFO/debt falls below 2% and FFO interest coverage remains below 1.2x on a sustained basis as a result of (1) changes in Pakistan’s regulatory environment, (2) aggressive debt-funded investments without timely tariff adjustments and/or (3) further delays in the collection of electricity revenue.
However, a moderate weakening in WAPDA’s BCA is unlikely to immediately lead to a downgrade of its rating, because of the high likelihood of extraordinary support from the Pakistan government.
