Outlook stable: Fitch assigns Wapda maiden 'B-' rating

The Fitch Ratings has assigned Water and Power Development Authority (Wapda) first-time long-term foreign and local-currency issuer default ratings of "B-" with a stable outlook.
Fitch Ratings in its latest report stated that Wapda is a hydroelectric-oriented power-generation company, wholly owned by the Government of Pakistan (B-/Stable), with the public policy mission of executing the unified and coordinated development of the country's water and power resources.
The entity operates three key business units, - hydroelectric, water and finance - after Wapda's power wing was unbundled in 1998. The hydroelectric unit is Wapda's core commercial business, accounting for around 95 percent of total revenue, and is regulated by the government.
The company's ratings are based on its hydroelectric business, rather than the water and finance segments, as the hydroelectric unit is it's only regulated business that engages in commercial activity; the water and finance segments are funded by government aid and grants.
Fitch Ratings states that the Wapda was established under the WAPDA Act with parastatal status and is wholly owned by the Government of Pakistan, which maintains tight control of the company. The entity's budget and accounts require government approval, as do changes in its powers, duties and projects.
An audit report is submitted annually to the Committee on Public Accounts for scrutiny. The government guarantees 38 percent of the entity's debts, or 58 percent, if excluding re-lending that was ultimately incurred with the government.
The government funds the majority of the Wapda's projects via grants, re-lending and loans. It also provides a favourable tariff scheme, sufficiently meeting the Wapda's operating costs and provides a reasonable return on investment. "We expect consistent support due to the importance of the hydroelectric plants and the company's contribution to economic development," it added.
The report further stated that the Wapda was responsible for the country's hydropower generation, flood control and water supply. It is Pakistan's largest hydropower supplier, accounting for more than a quarter of the country's power generation and 95 percent of hydropower capacity in 2019.
Wapda's hydroelectric share in the country's power generation mix is planned to expand to 35 percent by 2028, from 29 percent in 2018, according to National Electric Power Regulatory Authority, which will intensify Wapda's policy role. Its capacity is difficult to substitute, as independent power producers only account for 5 percent of hydroelectric capacity, implying severe service disruption should Wapda fail.
It further stated that the entity is a proxy funding vehicle for the government, which contributes funds for Wapda's projects and guarantees the company's overseas borrowings. Wapda plans to finance on its own credit with less government involvement and this is likely to expand the government's borrowing capacity.
"We expect a default by Wapda to significantly affect government-related entities (GRE) in the domestic and overseas markets in light of its parastatal status," Fitch Ratings added.
"We expect heavy expansion capex over the next six years raise leverage, as measured by net debt/EBITDA, although it should remain below 7.0x in the medium-term (2019: 6.6x) due to the supportive tariff scheme.
We forecast EBITDA interest coverage at 1.4x over the same period after factoring in rising debt and the tariff scheme adjustment. The capex will spur revenue growth, regardless utilisation volatility, as the contractual framework reflects invested capital rather than electricity output. Zero dividend payouts and an income tax exemption also ease the burden," maintained the report.
Fitch Ratings stated that Wapda's ratings are equalized with those of Pakistan, reflecting its assessment of the four factors in its GRE criteria that arrives at a weighted score of 50.
The Standalone Credit Profile (SCP) is capped at the sovereign's IDR and therefore cannot exceed "b-" given the central role of the government as counterparty. The SCP does not affect the IDR due to the weighted GRE score of 50, which equalises Wapda's ratings with the sovereign rating, regardless the SCP.
An upgrade of Fitch's credit view on the sovereign may trigger positive rating action on Wapda. A sovereign downgrade, weaker government links or lower socio-political and financial implications of default may lead to negative rating action.