US credit rating agency, Fitch Ratings has affirmed Pakistan Water and Power Development Authority's (WAPDA) Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'B-' with a Stable outlook.
Fitch Ratings maintain a 'Very Strong' assessment regarding WAPDA's ownership structure and control mechanism.
It said that a favorable tariff scheme that covers financing and operating costs helps financial stability. WAPDA expects its fixed charges, which were equivalent to 95 percent of sales in 2020, to rise significantly in 2021, driven by an increase in Capex. The government provides strong financial support, such as government guarantees (30% of debts) and loans that are ultimately incurred by the government, to ensure the entity's financial stability.
It said that NEPRA plans to expand hydropower's share of total electricity generation to 35pc by 2028, which will bolster the socio-implications of a default by the entity. Fitch expects a severe service disruption should WAPDA fail because there is limited alternative hydroelectric capacity available.
“We view WAPDA as a proxy funding vehicle for the government in the power sector. The government currently provides a large share of financing for power-related Capex, but the policy direction for WAPDA is to expand its own indebtedness without the government's commitment. This will increase the financial implications for the state should it default. The entity's parastatal status means a default will affect future lending and increase borrowing costs significantly for other government-related entities,” Fitch stated.
WAPDA plans significant Capex in 2021-2023, while the funding structure will shift towards market sources, away from the government. WAPDA will contribute around 10pc of the total funding required for projects.
“We expect leverage to remain under 7x by 2025 from 4.9x in 2020, assuming that the periodic tariff reset is made without significant delay as planned each time. We expect WAPDA's net debt to equity to reach 1.0x by 2025 (2020: 0.2x) without equity injections,” it added.
Fitch informed WAPDA's ratings are equalized with those of Pakistan (B-/Stable), reflecting their assessment of the four factors in our Government-Related Entities Rating Criteria, which results in a weighted score of 50. The ratings of entities with scores of 50 or more are equalized with those of the sovereign, regardless of their Standalone Credit Profile (SCP).