Announcements Corporate Public Sector Rating Alerts

GCR has accorded Ekurhuleni Water Care Company Initial Ratings of BBB(ZA)/A3(ZA) with a Stable Outlook

Rating Action

Johannesburg, 20 April 2022 – GCR Ratings (“GCR”) has accorded Ekurhuleni Water Care Company national scale long and short-term Issuer ratings of BBB(ZA) and A3(ZA) respectively. The outlook is Stable.

Rated Entity / Issuer

Rating class

Rating scale

Rating

Outlook / Watch

Ekurhuleni Water Care Company

Long Term Issuer

National

BBB(ZA)

Stable Outlook

Short Term Issuer

National

A3(ZA)

Rating Rationale

The ratings on the Ekurhuleni Water Care Company’s (“ERWAT”) ratings are equalised with City of Ekurhuleni (“Ekurhuleni”) as it is a municipal entity controlled by the Metro. In April 2022, GCR accorded Ekurhuleni national scale long and short-term Issuer ratings of BBB(ZA) and A3(ZA) respectively.

GCR’s designation of ERWAT as an essential municipal entity of Ekurhuleni stems from its mandate to treat the waste water the Metro generates, one of the most important municipal responsibilities. Ekurhuleni has a 97% membership share in the company, making it the controlling member, with the remaining shares split between City of Johannesburg and Lesedi Municipality, for whom it also provides some water treatment services. While treating waste water is always important to ensure residents can live within a safe environment, it is critical to supporting the industrial base of Ekurhuleni’s economy, as industrial companies cannot operate without a means to treat waste water.

In this regard, GCR positively considers ERWAT large water purification infrastructure in support of the rating, as it cannot practically be replicated. Moreover, the company has substantial experience in waste water treatment, employing many experienced professionals that are able to operate the treatment plants. However, a key constraint to operations, is the aging infrastructure and the fact that the plants are already operating above design capacity, with the water treatment requirement expanding annually as the population growth. Management has indicated that around R8bn would be required to fully modernise and expand the facilities, yet capex has only been around R150m per annum. Actual capex fell to just R56m in FY21, but the company retains substantial cash which has been designated for capex, but was delayed due to COVID.

ERWAT’s financial profile is very closely integrated with Ekurhuleni, from which it derives around 90% of income. Moreover, payment for services is not exactly linked to a variable amount of service deliver. Rather, ERWAT submits its operating budget to the Metro as part of the annul budgeting process, the Metro then approves the amount necessary for operations and thereafter the allocated amount is paid monthly. Positively, these payments have been sufficient for ERWAT to meet its expenditure, with operating surpluses reported in recent years. ERWAT also generates some outside income by consulting to other municipalities, providing water testing and treatment services to private entities, as well as grey water to some surrounding farms, but these amounts remain small and are not consistent.

ERWAT indicated that payments by Ekurhuleni are largely received on time, which has supported favourable cash flow from operations. In FY20, all the cash generated (R147m) was used for capex, albeit that in FY21 on R56m was spent from R256m generated, albeit that this will be spent during the current and next financial years.

Currently, ERWAT receives all its funding through Ekurhuleni. However, the company does have debt on its balance sheet, being R361.6m from Nedbank (Originally R550m) and R32m remaining from INCA. Both facilities are being amortised semi-annually, with the repayments included in the operating budget. Accordingly, GCR considers debt service risks to be low.

ERWAT does maintain separate bank accounts from the Metro, with one used for day-to-day transactions and the other for capital projects. Cash in the capital account tends to fluctuate depending on when grants are received, or projects are implemented, but is all earmarked for specific expenditure. The amounts in the transactional account are generally low, and the company does not have a liquidity reserve to cover day to day expenditure. Accordingly the company is reliant on the timely transfer of funds from Ekurhuleni to meet its operating costs. This exposes ERWAT to the liquidity constraints currently being experienced by Ekurhuleni.

Outlook Statement

The Stable Outlook reflects that of Ekurhuleni and GCR’s expectation that adjustments made to the budget should support a strengthening of the Metro’s financial performance and liquidity position. Ekurhuleni’s gross debt and credit protection metrics are also expected to remain around current levels.

Rating Triggers

As ERWAT’s ratings are equalized with the Metro, any change in Ekurhuleni’s rating will result in a concurrent change in ERWAT’s rating.

Analytical Contacts

Primary analyst

Eyal Shevel

Sector Head: Corporate and Public Sector Ratings

Johannesburg, ZA

Shevel@GCRratings.com

+27 11 784 1771
     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, Jan 2022

Criteria for Rating Local and Regional Governments, June 2019

GCR Rating Scales, Symbols and Definitions, May 2019

GCR Country Risk Scores, December 2021

City of Ekurhuleni Rating Announcement, April 2022

Ratings History

Ekurhuleni Water Care Company

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long Term Issuer

Initial/ last

National

BB+(ZA)

Negative Outlook

March2022

Short Term Issuer

Initial/ last

National

B(ZA)

RISK SCORE SUMMARY

Rating Components & Factors

Risk scores

 

  

Operating environment

n.a

Double country risk score

n.a

Adjustments

n.a

 

  

Business profile

n.a

LRG Profile

n.a

Operating Performance

n.a

Management and governance

n.a
   

Financial profile

n.a

Leverage and capital structure

n.a

Liquidity

n.a
   

Comparative profile

10.75

Group support

10.75

Government support floor

n.a
   

Total Risk Score

10.75

 

Glossary

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Covenant

A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.

Income

Money received, especially on a regular basis, for work or through investments.

Interest Cover

Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.

Interest

Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.

Issuer

The party indebted or the person making repayments for its borrowings.

Long Term Rating

See GCR Rating Scales, Symbols and Definitions.

Market

An assessment of the property value, with the value being compared to similar properties in the area.

Offset

A right (Right of Offset) to set liabilities against assets in any dispute over claims.

Operating Cash Flow

A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Short Term

Current; ordinarily less than one year.

Upgrade

The rating has been raised on its specific scale

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Ekurhuleni Water Care Company. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Subsequent to an appeal, the rating was revised as reflected in the announcement.

Ekurhuleni Water Care Company 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 information received from Ekurhuleni Water Care Company and other reliable third parties to accord the credit ratings included:

  • Audited financial results of Ekurhuleni Water Care Company 2020/2021 (Plus four years of comparative numbers);
  • Auditor General reports for Ekurhuleni Water Care Company
  • Select debt and cash figures as at 31 December 2021;
  • Ekurhuleni Integrated Development Plan 2020/2021;
  • Ekurhuleni Long term planning reports


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