Moody’s Investors Service (Moody’s) two Fridays ago assigned a Baa2 long-term issuer rating to Botswana Power Corporation (BPC). The outlook is stable.
This is the first time Moody’s has assigned BPC a rating. BPC is the national energy company in Botswana responsible for energy production, transmission, distribution and supply. It is 100% owned by the Government of Botswana (A2 stable).
BPC is subject to significant government influence and further acts to implement a range of policy mandates associated with national development objectives.
Through the Ministry of Mineral Resources, Green Technology and Energy Security, the government exercises strong oversight over the company’s strategy and operations while also having the final say on the level of end-user tariffs. In this context, BPC pursues investment projects that may not be commercial (for example, electrification of rural areas in the country) but are intended to meet policy objectives. Continuing investment against a backdrop of tariffs that are not cost-reflective is, however, underpinned by ongoing financial support from the government.
BPC’s Baa2 issuer rating is underpinned by (1) the expectation that the Government of Botswana will continue to provide timely financial support to the company, as necessary, given the critical role of BPC to the country and its mission to ensure that Botswana has access to electricity, and (2) an assumption that substantially all of BPC’s commercial borrowings will continue to be covered by the government guarantees.
The Baa2 rating is, however, constrained by BPC’s high indebtedness and weak financial profile on a standalone basis, with the company’s liquidity position reliant on timely cash injections from the government. The rating also reflects the company’s significant asset concentration and poor asset quality, with multiple design and construction issues affecting output from BPC’s coal-fired plants.
While the Morupule A power plant (132-megawatt (MW)) is expected to come back fully online this year, the remediation programme for the larger Morupule B power plant (600 MW) has only started and there is uncertainty around the improvement in the plant’s availability once the works have been completed in 2023, as per the current schedule.
The poor reliability of its power plants increases Botswana’s reliance on electricity imports, reducing visibility over the company’s internally generated cash flows. In addition, there is a range of Environmental, Social and Governance (ESG) related factors that weigh BPC’s credit quality, including the company’s corporate governance, political sensitivity around its tariffs and its exposure to coal generation fleet.
Overall, under Moody’s methodology for government-related issuers (GRI), the Baa2 issuer rating of BPC combines (1) the company’s baseline credit assessment (BCA) of b2, and (2) Moody’s assessment of very high dependence and very high likelihood of extraordinary support being provided by the Government of Botswana. Moody’s assessment of a very high probability of the government support in the event of financial distress reflects (1) the strategic importance of BPC as the only energy utility in the country, (2) the government’s ongoing support in the form of revenue and capital transfers, and (3) the government guarantees covering the bank loans. Moody’s assessment of a very high dependence takes account of BPC’s domestic focus. The issuer rating expresses a view on the credit risk of BPC excluding any specific contractual credit support provided to the funders of the company through the government guarantees.
Rationale for a stable outlook
The stable outlook on BPC is in line with that of the Government of Botswana, reflecting the fact that the company’s rating is very strongly influenced by that of its shareholder.
What could change the rating up/down
Given the operational challenges facing BPC, upward rating pressure is unlikely in the midterm. A downgrade of Botswana’s sovereign rating could lead to a downgrade of BPC’s issuer rating. Downward rating pressure could also occur if (1) there is any uncertainty about the government continuing to provide timely financial support to BPC; (2) the company’s financial profile were to deteriorate; (3) there is material change in the company’s capital structure (for example, if BPC were to raise unguaranteed debt); or (4) Moody’s assessment of very high support for the company were revised downwards.
In addition, severe delays or uncertainty around the remediation programme of Morupule B plant could also put downward pressure on the rating. The methodologies used in this rating were Regulated Electric and Gas Utilities published in June 2017, and Government-Related Issuers published in June 2018.
Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. Headquartered in Gaborone, Botswana, Botswana Power Corporation is a national energy company responsible for the country’s generation, transmission, distribution and supply of electricity. It is 100% owned by the Government of Botswana. In the financial year ended March 2019, BPC generated revenues of BWP3 billion (USD276 million).