Johannesburg, 25 October 2018 — Global Credit Ratings has today assigned the National Water and Sewerage Corporation a long term national scale Issuer rating of AA(UG), and a short term rating of A1+(UG). The outlook is accorded as Stable. The ratings are valid until 31 October 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to National Water and Sewerage Corporation (“NWSC”, “the Corporation”) based on the following key criteria:
NWSC provides piped clean water to around 11million people, with its jurisdiction covering the core economic centres of the country. The Corporation is central to the Government of Uganda’s efforts to raise the population’s living standards, as evidenced by the exponential growth in areas under its jurisdiction. Accordingly, government support can be considered very high.
NWSC has demonstrated sustained robust operating performance, which has seen connections rise by 40% over the FY13 to FY18 review period and water production increase by 50%. NRW decreased from 60% in 1998 to 31% at FY18, but further reduction are hampered by the aging infrastructure and faulty meters in Kampala, although levels are being reduced in new jurisdictions. Overall, the level of NRW compares favourably with water providers in other developing countries.
NWSC benefits from an efficient and sustainable tariff mechanism, which has allowed average tariffs to escalate at a sufficient rate to cover the rising unit production costs of water (including depreciation), notwithstanding some contraction in the differential. This positive margin between the average tariff charged and the costs per unit has ensured NWSC’s ongoing financial profitability without the need for external operating subsidies, and represents a key rating strength. Favourable tariffs and rising volumes have seen revenue more than double over the 5-year review period. While cost pressures have resulted from taking over new areas, operating improvements implemented have led to stronger margins in subsequent years. Thus, although the EBITDA margin declined to 16.1% in FY15, it recovered to 22.5% in FY16, before spiking to 27.1% in FY18 (due to increased income from other sources). Such wide earnings margins have facilitated strong profitability over the review period, and provide sufficient headroom for NWSC to absorb short term cost pressures.
Debt utilisation has been limited, but NWSC has settled all obligations on time and in full, establishing a positive debt servicing track record. The Corporation only maintains an overdraft facility, but access to funding is likely to be forthcoming from local financial service firms. More significantly, NWSC enjoys substantial access to grant funding from a wide range of development institutions and donors. The Corporation is in constant contact with these organisations to ensure that funding is available for projects when needed, but the lack of secured funding facilities or contractual commitments does weaken GCR’s assessment of liquidity.
Although the substantial capex in the pipeline implies project delivery risk, NWSC has demonstrated a strong ability to bring large capex projects to fruition.
The negotiation and maintenance of substantial secured funding commitments from a wide range of finance institutions would support financial stability and could lead to positive ratings movement. Continued strong service delivery and growth in earnings, could also support ratings progression. Conversely, project delays, particularly if funded with debt, could result in some debt service pressure. Perceived reduction in support from the Government of Uganda and/or development institutions could also result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/ last rating (October 2018)|
|Long term: AA(ZA)|
|Short term: A1+(UG)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Public Entities, updated February 2018
Criteria for Rating Water Utilities, updated February 2018
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) No part of the rating process was influenced by any other business activities of the credit rating agency; b.) The ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) Such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The National Water and Sewerage Corporation participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to the National Water and Sewerage Corporation.
The information received from the National Water and Sewerage Corporation and other reliable third parties to accord the credit ratings included:
- Audited financial statements for FY17, and four years comparative audited financial statements
- Finalised financial statements for FY18
- Corporate Plan 2018-2021
- SCAP 100 project document
- Quarterly operations report for FY18
- Sixth performance contract between NWSC and the GoU
- Review of applicable legislation
- Asset-Liability Committee information pack June 2018
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR assigns National Water and Sewerage Corporation a rating of AA(UG); Outlook Stable