WAPDA | Sukuk | May-17: PACRA Rating Report

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1. The Pakistan Credit Rating Agency Limited Rating Report Report Contents WAPDA | Sukuk | May-17 Dissemination Date 01-Feb-2021 24-Jun-2020 26-Dec-2019 26-Jun-2019 28-Dec-2018 28-Jun-2018 20-Nov-2017 04-Apr-2017 Long Term Rating AAA AAA AAA AAA AAA AAA AAA AAA Rating History Short Term Rating - 1. Rating Analysis 2. Financial Information 3. Rating Scale 4. Regulatory and Supplementary Disclosure Outlook Stable Stable Stable Stable Stable Stable Stable Stable Action Maintain Maintain Maintain Maintain Maintain Maintain Initial Preliminary Rating Watch YES YES YES YES - Rating Rationale and Key Rating Drivers The Water and Power Development Authority of Pakistan (WAPDA) is in the process of the construction of the DASU hydropower project (Dasu). Dasu, once completed would become the second-largest hydel project in Pakistan. Dasu stage 1 (2,160 MW) is expected to complete by 2023 with a cost of PKR 510.980bln (USD ~3.179bln). For partial financing of the project, WAPDA is issuing debt instruments worth PKR 88bln (TFCs: 35.2bln, Sukuks: 52.8bln) in multiple tranches. For this purpose in May 2017 first tranche of debt instruments has been issued and WAPDA is planning to issue a second tranche in early 2021. The ratings of PPTFCs (Tranche 1: PKR 10bln, Tranche 2: PKR 4.235bln) and Sukuks (Tranche 1: PKR 15bln, Tranche 2: PKR 6.353bln) reflects an unconditional and irrevocable guarantee by the Government of Pakistan (GoP). The guarantee covers the payment of the total outstanding amount of the instruments and related profit components. GoP would pay the entire called amount immediately upon receiving a demand notice from the trustee. Additionally, WAPDA is maintaining a debt payment account (DPA) under the exclusive lien of the trustee. Within the first fifteen days of each month, WAPDA deposits an amount equal to 1/6th of the upcoming installment in the DPA. The rating apart from a debt payment and guarantee mechanism recognizes WAPDA's strategic importance as the major hydroelectric power supplier to the country. WAPDA generated 32,295GWh electricity in FY20. WAPDA expects to generate an additional ~8,070MW by the completion of new hydel projects in the next four years. WHE's financial profile draws comfort from strong cash flows. However, it remains dependent on repayment behavior of power purchaser. Continued compliance with the predefined covenants of PPTFC, including maintenance of DPA would remain critical. The watch captures that the financial statements of the issuer for FY20 are being audited and will be approved in the next month. This will be followed by the process for the approval of financial statements for the ongoing financial year. Disclosure Powered by TCPDF (www.tcpdf.org) Name of Rated Entity WAPDA | Sukuk | May-17 Type of Relationship Solicited Purpose of the Rating Debt Instrument Rating Applicable Criteria Methodology | Sukuk(Jun-20),Methodology | Debt Instrument(Jun-20),Methodology | IPP(Jun-20),Criteria | Rating Modifier(Jun-20) Related Research Sector Study | Power(Jan-20) Rating Analysts Madiha Sohail | madiha.sohail@pacra.com | +92-42-35869504
2. POWER The Pakistan Credit Rating Agency Limited Incorporated WAPDA - PROFILE 1958 – Through a statuary act Major business lines Legal status Head office Chairman Installed Capacity Power Generation Water Development PSE Lahore LT. General (Retd.) Muzzamil Hussain 8,420 MW ISSUER PROFILE INDUSTRY SNAPSHOT  Pakistan total power generation is increasing on the back of new power projects under CPEC  Pakistan's energy mix is shifting towards Gas/RLNG and coal from Furnace Oil and other expensive sources  Pakistan plans to add over 10,000MW hydel electricity in the next decade.  Going forward, cheap renewable electricity will be a challenge to the viability of thermal power plants. STRONG  WAPDA is a statutory body fully owned by the Government of Pakistan and was established through WAPDA Act 1958.  WAPDA has the primary responsibility to develop Hydel Power Projects  The entity generates a total of 32,295GWh. It is the largest hydel energy producer in the country.  WAPDA is in the process of constructing different projects which are to add ~8,070MW by 2024. ABOUT THE DEBT INSTRUMENTS STRONG  WAPDA has issued privately placed term finance certificates (TFC) of PKR 10bln and Sukuks of PKR 15bln to partially finance Dasu Hydropower Project (Dasu). Profit on the debt instruments will be payable semi-annually at 6MK + 1.45%. Till now WAPDA has made seven profit payments both on TFC and Sukuk.  The profit paid to the Sukuk A certificates holders and TFC A holders as of Nov-20 is PKR 710mln and PKR 474mln respectively. The principal payment of the Sukuk A certificate and TFC A will start from May-23.  WAPDA is planning to issue a second tranche of TFC B and Sukuk B amounting to PKR 4.235bln and 6.352bln in early 2021.  The total project cost of Dasu is PKR 510.980bln (USD ~3.179bln) which is to be financed from local and external financing. ECC has approved up to PKR 144bln as local financing for the project.  WAPDA maintains a Debt Payment Account (DPA) which is held under an exclusive lien in favor of the trustee. WAPDA replenishes the DPA with 1/6th of the upcoming installment.  Shortfall occurring for three consecutive months will constitute an event of default. Government guarantee will be callable by the trustee after serving a cure period of 45 days.  The underlying agreements of the instruments include GoP guarantee, Trust Deed, and Investor Agreement. Further, to follow the Islamic structure of Sukuks, Musharaka Agreement, Purchase Undertaking Agreement, and Payment Agreement are signed between the issuer and Sukuk holder. GOVERNANCE &MANAGEMENT STRONG     WAPDA is a statutory body under the administrative control of the Federal Government. The Authority comprises the Chairman, member of each wing (Water, Power, and Finance), and secretary WAPDA. Lt. General (Retd.) Muzzamil Hussain is the Chairman of WAPDA since 2016. Mr. Hussain - a retired army professional and a diplomat brings the experience of over 3 decades with him to the management of the WAPDA.  The Ministry of Water Resources provides oversight to WAPDA.  WAPDA has a highly experienced management team with most of them having a long-term association. BUSINESS RISK STRONG  WAPDA generates a total of 32,295GWh, while many projects are in pipeline including Tarbela 5th Extension and Dasu I and Diamer Basha. The aforementioned projects with a maximum capacity of 8,070MW are expected completion in the year 2021, 2023, and 2024 respectively.  WAPDA generation increased by 19% in FY20: 32,295Gwh (FY19: 27,196Gwh; FY18: 26,773Gwh).  WAPDA’s revenue in 6MFY20 is PKR 31,303mln (6MFY19: PKR 35,401mln). Revenue in FY19 is PKR 67,230mln (FY18: PKR 59,317mln). FINANCIAL RISK VERY STRONG  WAPDA as part of its arrangements with provinces pays Net Hydel Profit @ 1.155Kwh to provinces. This amount is recoverable from CPPA-G via approved tariff. NEPRA approved WAPDA’s tariff including Net Hydel Profit payable to provinces was approved in FY17. Consequently, WHE’s receivables increased significantly in 6MFY20 to PKR 208,724mln (6MFY19: PKR 183,306mln). Thus, receivable days have also increased to 1,173days as of Dec-19 (as of Dec-18: 734days).  WAPDA’s free cash flow from operation (FCFO) during 6MFY20 is PKR 27,101mln (6MFY19: PKR 30,926mln). FCFO in FY19: PKR 58,276mln (FY18: PKR 50,557mln). Consequently, WAPDA’s debt service ratio in 6MFY20 is 1.8x. (6MFY19: 2.5x). During 6MFY20, WAPDA’s leverage capital structure stood at 28% (6MFY19: ~30%), on account of the decrease in long term debt (6MFY20: PKR 287,376mln, 6MFY19: PKR 346,274mln) and increase in short-term debt service liabilities. 
3. The Pakistan Credit Rating Agency Limited WAPDA Hydroelectric BALANCE SHEET As at Non-Current Assets Investments Related party exposure Cash and Bank Balances Stores and Spares Trade Receivables Receivable against Hydel Levies Other Current Assets Current Liabilities Current Liabilities Long term borrowings (Including current maturity) Other Non-Current Liabilities Shareholders' Equity PROFIT & PROFIT ACCOUNT Turnover Gross Profit Other Income Financial Charges Net Income CASH FLOW STATEMENT EBIDTA Free Cash Flow from operation (FCFO) Net Cash provided by operating activities Net Cash available from investing activities Cash flow from financing activities RATIO ANALYSIS Gross Margin Net Profit Margin Net Cash Cycle (Days) Interest Coverage Debt Payback Capital Structure PKR mln PKR mln PKR mln PKR mln PKR mln 31-Dec-19 30-Jun-19 31-Dec-18 30-Jun-18 30-Jun-17 Biannual Annual Biannual Annual Annual 1,263,092 2 110,681 7,698 208,724 2,078 11,951 1,604,226 1,258,436 3,000 2 71,672 7,511 193,570 9,324 1,543,514 1,173,922 30,000 69,194 5,594 183,306 12,887 13,455 1,488,358 1,169,948 31,000 69,687 5,095 101,324 605 45,045 1,422,705 1,145,131 2,000 58,086 4,694 53,472 1 8,471 1,271,855 148,597 330,100 95,505 1,030,025 1,604,226 114,413 321,013 82,936 1,025,152 1,543,514 115,707 352,850 44,973 974,828 1,488,358 58,838 343,189 54,621 966,056 1,422,705 35,496 229,745 38,103 968,512 1,271,855 31-Dec-19 31,303 17,847 (14,831) 4,873 31-Dec-19 29,944 27,101 15,842 (11,469) 34,367 31-Dec-19 57.0% 15.6% 1,151 2.0 16.6 71.6% 30-Jun-19 67,230 29,079 (38,691) (7,724) 30-Jun-19 61,347 58,276 9,724 (15,064) 7,325 30-Jun-19 43.3% -11.5% 775 1.6 19.6 72.8% 31-Dec-18 35,401 19,598 (12,354) 8,772 31-Dec-18 33,750 30,926 12,269 (13,969) 1,208 31-Dec-18 55.4% 24.8% 717 2.7 11.1 70.2% 30-Jun-18 59,317 31,827 (32,287) 605 30-Jun-18 52,699 50,557 (49,919) (60,254) 121,774 30-Jun-18 53.7% 1.0% 427 1.6 19.7 72.8% 30-Jun-17 65,235 36,250 2,654 (21,349) 17,015 30-Jun-17 60,450 57,857 39,255 (71,393) 43,284 30-Jun-17 55.6% 26.1% 240 2.7 6.8 80.0%
4. Scale – Debt Instrument Rating Credit Rating Credit rating reflects forward-looking opinion on credit worthiness of underlying debt instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default. Long-term Rating Definition Scale AAA Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong capacity for timely payment of financial commitments A1+ The highest capacity for timely repayment. A1 A strong capacity for timely repayment. A2 A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions. AA+ AA Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. AAA3 A+ A Short-term Rating Definition Scale High credit quality. Low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions. A4 An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions. The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions. Liquidity may not be sufficient. ABBB+ BBBBB+ BB Moderate risk. Possibility of credit risk developing. There is a possibility of credit risk developing, particularly as a result of adverse economic or business changes over time; however, business or financial alternatives may be available to allow financial commitments to be met. BBB+ B High credit risk. A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. BCCC CC Very high credit risk. Substantial credit risk “CCC” Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. “CC” Rating indicates that default of some kind appears probable. “C” Ratings signal imminent default. C D Obligations are currently in default. Outlook (Stable, Positive, Negative, Developing) Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’. Rating Watch Alerts to the possibility of a rating change subsequent to, or, in anticipation of some material identifiable event with indeterminable rating implications. But it does not mean that a rating change is inevitable. A watch should be resolved within foreseeable future, but may continue if underlying circumstances are not settled. Rating watch may accompany rating outlook of the respective opinion. A1+ Long-term Rating BBB Short-term Rating Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. A1 A2 A3 A4 AAA AA+ AA AAA+ A ABBB+ BBB BBBBB+ BB BBB+ B BCCC CC C *The correlation shown is indicative and, in certain cases, may not hold. Suspension It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn. Withdrawn A rating is withdrawn on a) termination of rating mandate, b) the debt instrument is redeemed, c) the rating remains suspended for six months, d) the entity/issuer defaults., or/and e) PACRA finds it impractical to surveill the opinion due to lack of requisite information. Harmonization A change in rating due to revision in applicable methodology or underlying scale. Surveillance. Surveillance on a publicly disseminated rating opinion on debt instrument is carried out on an ongoing basis till the maturity of the instrument or cessation of contract. A comprehensive surveillance of rating opinion is carried out at least once every six months. However, a rating opinion may be reviewed in the intervening period if it is necessitated by any material happening. Disclaimer: PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA. Our reports and ratings constitute opinions, not recommendations to buy or to sell. The Pakistan Credit Rating Agency Limited June 2020
5. Regulatory and Supplementary Disclosure (Credit Rating Companies Regulations,2016) Rating Team Statements (1) Rating is just an opinion about the creditworthiness of the entity and does not constitute recommendation to buy, hold or sell any security of the entity rated or to buy, hold or sell the security rated, as the case may be | Chapter III; 14-3-(x) 2) Conflict of Interest i. The Rating Team or any of their family members have no interest in this rating | Chapter III; 12-2-(j) ii. PACRA, the analysts involved in the rating process and members of its rating committee, and their family members, do not have any conflict of interest relating to the rating done by them | Chapter III; 12-2-(e) & (k) iii. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)] Explanation: for the purpose of above clause, the term “family members” shall include only those family members who are dependent on the analyst and members of the rating committee Restrictions (3) No director, officer or employee of PACRA communicates the information, acquired by him for use for rating purposes, to any other person except where required under law to do so. | Chapter III; 10-(5) (4) PACRA does not disclose or discuss with outside parties or make improper use of the non-public information which has come to its knowledge during business relationship with the customer | Chapter III; 10-7-(d) (5) PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of entity subject to rating | Chapter III; 10-7-(k) Conduct of Business (6) PACRA fulfills its obligations in a fair, efficient, transparent and ethical manner and renders high standards of services in performing its functions and obligations; | Chapter III; 11-A-(a) (7) PACRA uses due care in preparation of this Rating Report. 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The receipt of this compensation has no influence on PACRA´s opinions or other analytical processes. In all instances, PACRA is committed to preserving the objectivity, integrity and independence of its ratings. Our relationship is governed by two distinct mandates i) rating mandate - signed with the entity being rated or issuer of the debt instrument, and fee mandate - signed with the payer, which can be different from the entity (13) PACRA does not provide consultancy/advisory services or other services to any of its customers or to any of its customers’ associated companies and associated undertakings that is being rated or has been rated by it during the preceding three years unless it has adequate mechanism in place ensuring that provision of such services does not lead to a conflict of interest situation with its rating activities; | Chapter III; 12-2-(d) (14) PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA; | Reference Chapter III; 12-2-(f) (15) PACRA ensures that the rating assigned to an entity or instrument is not be affected by the existence of a business relationship between PACRA and the entity or any other party, or the non-existence of such a relationship | Chapter III; 12-2-(i) (16) PACRA ensures that the analysts or any of their family members shall not buy or sell or engage in any transaction in any security which falls in the analyst’s area of primary analytical responsibility. 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The highest rating has the lowest relative likelihood of default (i.e, probability). PACRA´s transition studies capture the historical performance behavior of a specific rating notch. Transition behavior of the assigned rating can be obtained from PACRA´s Transition Study available at our website. (www.pacra.com). However, actual transition of rating may not follow the pattern observed in the past | Chapter III | 14-(f-VII) Proprietary Information (23) All information contained herein is considered proprietary by PACRA. Hence, none of the information in this document can be copied or, otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s prior written consent Powered by TCPDF (www.tcpdf.org)
6. TENTATIVE REPAYMENT SCHEDULE Sukuk May-17 Nature of Instrument Years Sukuk | May17 15,000 mln 15 years Payment Period Date Principal as at Start of Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Powered by TCPDF (www.tcpdf.org) Size of Issue (PKR) May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20 Nov-20 May-21 Nov-21 May-22 Nov-22 May-23 Nov-23 May-24 Nov-24 May-25 Nov-25 May-26 Nov-26 May-27 Nov-27 May-28 Nov-28 May-29 Nov-29 May-30 Nov-30 May-31 Nov-31 May-32 Nov-32 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 14,250,000 13,500,000 12,750,000 12,000,000 11,250,000 10,500,000 9,750,000 9,000,000 8,250,000 7,500,000 6,750,000 6,000,000 5,250,000 4,500,000 3,750,000 3,000,000 2,250,000 1,500,000 750,000 Total Security Quantum of Security Nature of Assets WAPDA maintains a Debt 1. Un-conditional & irrevocable first Payment Account (DPA) with demand guarantee covering principal the HBL (Facility Agent). and profit from the Ministry of During each month (not later WAPDA’s own Finance, GoP. than the fifteenth (15th) day cash flows. 2. Exclusive lien over debt payment of each month), WAPDA account for the benefit of investors. shall deposit amount equivalent to the 1/6th share of the Installment into the DPA Profit Payments Principal Repaid Interest 6MK+1.45% 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 15,000,000 574,685 566,059 601,907 839,047 961,085 1,106,172 702,639 654,575 665,425 654,575 665,425 654,575 632,153 590,754 564,066 523,660 499,068 458,203 432,526 392,745 365,984 328,197 298,623 261,830 232,899 196,373 166,356 130,915 99,814 65,458 33,271 14,919,064 Cumulative amount to be paid 574,685 566,059 601,907 839,047 961,085 1,106,172 702,639 654,575 665,425 654,575 665,425 1,404,575 1,382,153 1,340,754 1,314,066 1,273,660 1,249,068 1,208,203 1,182,526 1,142,745 1,115,984 1,078,197 1,048,623 1,011,830 982,899 946,373 916,356 880,915 849,814 815,458 783,271 29,919,064 Trustee Pak Brunei Investment Company Balance as at end of 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 14,250,000 13,500,000 12,750,000 12,000,000 11,250,000 10,500,000 9,750,000 9,000,000 8,250,000 7,500,000 6,750,000 6,000,000 5,250,000 4,500,000 3,750,000 3,000,000 2,250,000 1,500,000 750,000 0 0