Fitch Ratings has affirmed the Water and Power Development Authority’s (WAPDA) long-term foreign- and local-currency issuer default ratings at ‘B-‘ and its outlook is stable.
WAPDA’s main business is the operation and maintenance of hydropower stations as well as the construction of new power stations, said the international rating agency this week. It made up 95 percent of the nation’s hydroelectric power capacity and 24 percent of total capacity in 2020. According to the National Electric Power Regulatory Authority (NEPRA), hydroelectric power capacity continues to expand and will reach to around 35 percent of total capacity by 2028.
“We maintain our ‘very strong’ assessment regarding WAPDA’s ownership structure and control mechanism,” said Fitch. WAPDA is a parastatal entity that operates based on the government’s guidelines. The government owns 100% of WAPDA and has a tight grip on its overall operation, including financing. The Public Accounts Committee (PAC) conducts annual audits of WAPDA.
According to Fitch, WAPDA has a ‘very strong’ support track record. A favourable 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 percent of debts) and loans that are ultimately incurred by the government, to ensure the entity’s financial stability.
According to Fitch, WAPDA is Pakistan’s largest hydropower supplier. It accounted for 95 percent of the hydropower capacity in the country and is responsible for flood control and water supply. The NEPRA plans to expand hydropower’s share of total electricity generation to 35 percent by 2028, which will bolster the social-implications of a default by the entity. “We expect a severe service disruption should WAPDA fail because there is limited alternative hydroelectric capacity available,” said Fitch.
Fitch views 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 said the entity plans significant capex in 2021-2023, while the funding structure will shift towards market sources, away from the government. WAPDA will contribute around 10% of 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,” said the Fitch Ratings.