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BPC’s high indebtedness, weak financial profile a concern – Moodys

Publishing Date : 20 January, 2020


Last week Moody's Investors Service (Moody's) assigned a Baa2 long-term issuer rating to Botswana Power Corporation (BPC) with a stable outlook tag, the United Kingdom based rating agency said in a statement last Friday.

Dispatched from London, United Kingdom the communiqué says reflecting its strategic importance within the country, BPC is subject to significant government influence and further acts to implement a range of policy mandates associated with national development objectives. This is the first time Moody's has assigned a rating to BPC. Botswana Power Corporation 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).

Through the Ministry of Mineral Resources, Green Technology and Energy Security, the government exercises strong oversight over the company's strategy and operations whilst 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.

Moody’s says BPC's Baa2 issuer rating is underpinned by first 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 secondly an assumption that substantially all of BPC's commercial borrowings will continue to be covered by the government guarantees.

Moody’s lead analyst for BPC rating Joanna Fic, who is Senior Vice President in Moody’s Infrastructure Finance Group says  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.” 

Joanna Fic observed that while the Morupule A power plant a 132 megawatt (MW) is expected to come back fully online in 2020 the remediation programme for the larger Morupule B power plant a 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. Moodys also noted that on the negative the poor reliability of its BPC power plants increases Botswana's reliance on electricity imports reducing visibility over the company's internally generated cash flows.

“In addition, there are a range of Environmental, Social and Governance (ESG) related factors that weigh on BPC's credit quality, including the company's corporate governance, political sensitivity around its tariffs and its exposure to coal generation fleet,” added  Joanna Fic.  In the overall, under Moody's methodology for government-related issuers (GRI), the Baa2 issuer rating of BPC combines the company's baseline credit assessment (BCA) of b2, and 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 firstly  the strategic importance of BPC as the only energy utility in the country and secondly  the government's ongoing support in the form of revenue and capital transfers as well as 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.



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