Fitch Affirms NamPower at 'BBB-'; Outlook Stable

LONDON LONDON--()--Fitch Ratings has affirmed Namibia Power Corporation (Pty) Ltd's (NamPower) Long-Term foreign-currency Issuer Default Rating (IDR) at 'BBB-' and Short-Term IDR at 'F3'. Fitch has also affirmed NamPower's National Long-Term rating at 'AA+(zaf)' and its Short-Term rating at 'F1+(zaf)'. The Outlooks on the Long-Term ratings are Stable.

The affirmation reflects the continued alignment of NamPower's ratings with those of the Namibian sovereign (BBB-/Stable). Under Fitch's parent and subsidiary rating linkage methodology, NamPower has strong legal, operational and strategic links with the state of Namibia, including direct government guarantees for part of NamPower's debt. In Fitch's view, tangible support, including the share of debt with direct government guarantees, may decrease if there is a lack of new large-scale investments, which may affect our assessment of the strength of the links with the shareholder. NamPower is the monopoly electricity company in Namibia and has a crucial role in executing electrification policies and ensuring sufficient electricity supply.

KEY RATING DRIVERS

Strong Government Support

Given the record of tangible state support and the government's involvement in NamPower's investment decisions, Fitch expects this relationship to remain unchanged in the medium term. NamPower has benefited from state financial support in the form of a NAD360m energy subsidy in 2008 and we expect the zero-dividend policy to be maintained. The state also guaranteed 17% of NamPower's debt as at financial year-end 2015 (FYE15). The guarantees relate to amortising debt and the share of debt with direct government guarantees is thus decreasing. We may reassess the strength of the shareholder links if the share continues to decrease, which may happen in the absence of new large-scale investments.

The Kudu Gas-To-Power Project (KuduPower) is strategic for both the country and NamPower. However, the size is beyond NamPower's financial capacity. As such, the government is expected to provide a support package of NAD3.7bn, including equity contribution and guarantee undertakings, limiting financial and commercial risks for NamPower.

Increasing Power Imports Negative

NamPower is largely dependent on energy imports, importing 64% of the total energy it supplied in FY15 (66% in FY14). Given the growth of the Namibian economy and potential step-up in demand from the extractive industries, demand will continue to outstrip domestic generation. Peak demand increased to 657 megawatts (MW) during FY15 (FY14: 629MW). NamPower's total installed generation capacity was about 500 MW, of which Ruacana hydropower plant accounts for about 70%, which is dependent on seasonality and rainfall.

Fitch believes the relative cost of expensive imported energy compared with its own hydropower will continue to place negative pressure on EBITDA margins. The expiry of longstanding power purchase agreements (PPAs) with Zimbabwe Electricity Supply Authority (ZESA) was replaced by more expensive PPAs that have contributed to a weaker EBITDA. With certain PPAs denominated in US dollars, the weaker currency has also negatively affected EBITDA with the Namibian dollar (NAD) depreciating by about 28% against the US dollar in the year to 1 June 2016.

Credit Metrics to Weaken

EBITDA fell to NAD888m for FY15 (FY14: NAD1,038m) and Fitch expects EBITDA margin to decline to about 12% for FY16 from about 20% in FY15. Although the tariff regulation allows for cost pass-through, under-recovery of electricity imports are placing pressure on the profit margin and may emerge as a credit concern.

Fitch expects near-term material weakening of NamPower's credit metrics due to the margin reduction and increased investments. NamPower could invest into a scalable private-public partnership project to provide about 120MW of capacity to balance the domestic market demand and support the security of supply. Fitch expects funds from operations (FFO) adjusted net leverage to weaken from 0.7x in FYE15 to about 2.5x excluding KuduPower and about 8x including KuduPower by FYE18.

SAPP Is Important Contributor to NamPower's Energy Trading

The 12-member Southern African Power Pool (SAPP) continues to be important contributor to Namibia's energy requirements. The supply of energy by the major contributors has been fairly stable in percentage terms over the financial years 2015 and 2014. We expect a greater contribution of energy to be supplied from Eskom in financial year 2016. The SAPP has had energy and capacity deficiencies, but the position with Eskom has improved in the past 12 months.

Fitch expects the supply schedule to remain tight over the next 12 to 24 months, especially in the absence of a firm supply agreement with Eskom Holdings SOC Ltd (local-currency Long-Term IDR of BBB/Stable). Eskom supplied about 1,000 gigawatt hours (GWh) of Namibia's energy requirement of 4,254 GWh in FY15. Eskom supplies Skorpion Zinc Mine (Skorpion) via a back-to-back agreement whereby Eskom bills NamPower for the units consumed by Skorpion, then NamPower bills Skorpion for those units sold by Eskom. This agreement accounts for about 50% of the total energy supplied by Eskom. NamPower has entered into a short-term firm supply agreement on the remaining energy from Eskom.

No Investment Decision Taken

Through the Short-term Power Supply Committee, which was formed by the Minister of Mines and Energy to address the supply-side challenges and includes members of the mining ministry, the Electricity Control Board and NamPower, we believe the stakeholders understand the importance of Namibia installing its own generation capacity. However, the Namibia generation capacity continues to evolve as the final decision on KuduPower faces further delays. At this stage, Fitch understands that NamPower has various short- and medium-term power generation project options to address generation capacity, although NamPower and the Namibian government have not reached a final investment decision.

Standalone Credit Profile

NamPower's standalone credit profile is commensurate with a 'BB' rating category in our view, reflecting the business profile with limited generation diversification and increasing exposure to imported energy and our expectation of increasing leverage required to fund the capacity expansion.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for NamPower include:

- Average annual growth of energy sales of 3% for 2016 to 2018

- Capex of about NAD4.4bn for the next three years until 2018 (excludes KuduPower and includes 120 MW generation plant)

- Tariff increases of 10% expected for 1 July 2016

- We assume NamPower will raise NAD1.2bn under the existing Domestic Medium Term Note programme (limit NAD5bn, utilisation NAD750m) or from other financiers between 2016 and 2018

- NAD3bn of liquid investments to be used to fund capex, we exclude the liquid investment portfolio of NAD4.6bn (FYE15) from readily available cash

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to positive rating action include:

- A positive action on Namibia's sovereign rating would result in positive rating action on NamPower, providing that the strength of the parent-subsidiary linkage does not weaken.

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- A decline in government support or negative rating action on Namibia's sovereign rating.

- Long-term operating cash flow falling below Fitch's expectations or a final investment decision on major project in the absence of additional government support for both the project and NamPower.

LIQUIDITY

NamPower had NAD403m of cash at end-March 2016 supported by a liquid investment portfolio of NAD6.2bn. This can be accessed at short notice to bolster its liquidity position and investment needs. This compares with NAD217m of short-term debt and Fitch's expectation of negative free cash flow of about NAD130m for 2016.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Principal Analyst:
Richard Barrow, +44 20 3530 1256
Director
or
Supervisory Analyst:
Yeshvir Singh, +44 20 3530 1810
Associate Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Committee Chairperson:
Josef Pospisil, +44 20 3530 1287
Managing Director
or
Media Relations:
Peter Fitzpatrick, +44 20 3530 1103
London
peter.fitzpatrick@fitchratings.com

Contacts

Fitch Ratings
Principal Analyst:
Richard Barrow, +44 20 3530 1256
Director
or
Supervisory Analyst:
Yeshvir Singh, +44 20 3530 1810
Associate Director
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
or
Committee Chairperson:
Josef Pospisil, +44 20 3530 1287
Managing Director
or
Media Relations:
Peter Fitzpatrick, +44 20 3530 1103
London
peter.fitzpatrick@fitchratings.com