Singapore August 30 2024: Moody’s Ratings (Moody’s) has upgraded Pakistan Water and Power Dev Authority’s (WAPDA) corporate family rating (CFR) to Caa2 from Caa3 and Baseline Credit Assessment (BCA) to caa2 from caa3. The outlook on the rating was revised to positive from stable.
This rating action follows Moody’s Ratings’ rating action on the Government of Pakistan (Caa2 positive) on 28 August 2024.
“The upgrade of WAPDA’s CFR and outlook change mirrors the action taken on the Government of Pakistan’s rating, given their close credit linkage. This, in turn, is a reflection of the government’s full ownership and direct supervision of the company and WAPDA’s purely domestic-based operations,” says Spencer Ng, a Moody’s Ratings Vice President and Senior Credit Officer.
RATINGS RATIONALE
WAPDA’s Caa2 CFR incorporates its caa2 BCA and our assessment of a high likelihood of extraordinary support from, and the company’s very high dependence on, the Government of Pakistan when needed, under Moody’s Joint Default Analysis (JDA) for government-related issuers.
WAPDA’s caa2 BCA reflects its exposure to persistent operating challenges at its 969 megawatt (MW) Neelum Jhelum power station (NJHP) and its weak financial profile due to its sizeable hydropower capacity expansion plan, its long receivables cycle and delayed tariff decisions. The BCA also considers WAPDA’s position in Pakistan’s power sector as a dominant hydropower supplier, as well as the recurring financial support it receives from the government.
The company’s weak financial profile is the result of an unpredictable regulatory framework and its inability to sufficiently recover costs in a timely manner, leading to delayed tariff decisions and a long receivables cycle. We project WAPDA’s funds from operations (FFO) will remain very weak over the next 12-18 months, and a sustained recovery will likely depend on the regulator approving an increase in its tariffs as well as the operational resumption of NJHP. Our assessment of WAPDA’s financial metrics is based on the combined financials of WAPDA’s power segment and Neelum Jhelum.
For the same reasons, WAPDA’s liquidity will remain weak because of its substantial current borrowings and large capital spending. The company did not repay certain government loans as per the agreed repayment schedule, in part due to the delays in its recovery of outstanding receivables from its government-owned off-taker. We expect this situation will continue.
Operations at NJHP has been suspended since May 2024 because of weak pressure in the hydro project’s tailrace tunnel. It is unclear when the project could resume operations or the repair cost required at present. During this period, NJHP will likely rely on recovery of outstanding receivables to meet its operating cash requirement, fund the repair cost and service its external debt. NJHP had previously shut down for 13 months after major cracks were discovered in its tunnel and had just resumed operations in September 2023.
We expect of a high likelihood of government support for WAPDA considers the Pakistani government’s full ownership and direct supervision of the company. It also reflects the company’s strategic importance to the government as it is an important platform that (1) constructs and operates hydropower assets to supply affordable electricity in Pakistan, and (2) builds 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. In addition, the financial challenges faced by the government, reflected in its Caa2 ratings, indicate its limited capacity to provide support to WAPDA.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The positive outlook on the rating mirrors the positive outlook on Pakistan’s sovereign ratings, based on our expectation that the relationship between WAPDA and the government will remain intact at least over the next 12-18 months.
We could upgrade the rating if we upgrade Pakistan’s sovereign ratings with no changes in the relationship between WAPDA and the government and upon getting greater clarity over the cost and time involved in restoring operations at NJHP.
Conversely, we could downgrade WAPDA’s rating if Pakistan’s sovereign rating is downgraded. A downgrade of the BCA is also likely if WAPDA’s operating performance materially deteriorates, with NJHP unable to return to satisfactory operation on a sustained basis.
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 Pakistani government.
WAPDA, established through an Act of Parliament in 1958, is an autonomous and statutory body under the administrative control of the Federal Government of Pakistan, which fully owns the company.
WAPDA constructs and operates hydropower generation assets to generate affordable and clean electricity. It also builds water storage and related facilities to help address Pakistan’s acute water challenges.
As of June 2023, WAPDA’s total installed hydropower capacity amounted to about 9 gigawatts, comprising 25 hydropower units and representing around 90% of the country’s hydro power.
