OREANDA-NEWS. Fitch Ratings has assigned Namibia Water Corporation Ltd (NamWater) a Long-term foreign currency Issuer Default Rating (IDR) of 'BBB-' and a Long-term local currency IDR of 'BBB'. The Outlooks are Stable. A full list of rating actions is at the end of this comment.

The Long-term local currency IDR is supported by our view of the company's standalone credit profile as the national monopoly bulk water supplier in Namibia, with a cost pass-through tariff framework and strong financial profile. Although we expect capex to lead to negative free cash flow and increased leverage, the forecast metrics will remain commensurate with the ratings.

We view the company's links with its parent, the government of Namibia (Long-term local currency IDR, BBB/Stable; Long-term foreign currency IDR, BBB-/Stable) as strong, supported by significant tangible support, namely due to access to uncompensated raw water and contribution to capex. However, the lack of strong legal links (for example, guarantees of NamWater's debt) means that we would view the links as supporting the company's rating at one notch below the sovereign rating. As such, NamWater's standalone profile drives the rating. The Long-term foreign currency IDR is constrained by the sovereign rating.

KEY RATING DRIVERS
Supportive Tariff Determinations
NamWater operates on a full cost recovery basis as guided by the NamWater Act since the company's inception in 1997. Tariff increases are approved annually by the government, which creates exposure to political risk. The utility asset base is valued lower than replacement cost (revaluation of major assets was done between 2012 and 2014), which limits the company's ability to fund all capex through tariffs. The government provides funding for projects that are not economically viable through capital contribution, and some commercial customers also contribute to capex in full for their capacity reservation.

Credit Metrics Likely to Weaken Moderately
Fitch forecast funds from operations (FFO) adjusted net leverage to increase in the next few years from minus 0.6x in FY14, but to remain commensurate with the rating. The increase in leverage is likely to leave it relatively modest compared with domestic peers such as Namibia Power Corporation (BBB-/AA-(zaf)/Stable), Namibian Ports Authority (A+(zaf)/Stable) and Telecom Namibia (BB+/A-(zaf)/Negative), partially due to the government's co-funding of capex. In addition, NamWater does not plan to pay and the government does not require any dividends in the medium to long term in view of capex needs.

Diversified Customer Base
The water utility serves roughly 28,000 customers and 209 large bulk connections on a wholesale basis. The five largest bulk customers comprise 37% of total operating revenues. The city of Windhoek is the single largest customer, representing 24% of total operating revenues. Government-related entities constitute the bulk of the company's customers. We view the counterparty risk as comparable with regional peers.

Diversified Raw Water Sources
Raw water is derived from two sources, 69% from surface water supply with the balance of 31% from ground water. The Kavango river, the Kunene river in Angola, and the Orange river are the main source of surface water supply in addition to the water supplied by the dams across Namibia. The central areas are supplied with surface water from the three dam system, the Von Bach, the Omatako and the Swakoppoort dams. NamWater has 574 boreholes in production (ground water supply), 19 dams, 17 treatment plants and 377 reservoirs, which on a combined basis provides the water resources for Namibia. Raw water sources are diversified, with the utility's cost of sales only including desalinated water from FY14. The cost base reflects the low density of population and arid climate.

Strong Shareholder Links
We view the company's strategic and operational ties with the parent as strong but legal ties as moderate. This reflects the objective of the company to develop and manage Namibia's water resources and to improve the quality of water. Support provided by the government is evident in a zero dividend policy, procurement of raw water from the Ministry of Agriculture, Water and Forestry (MAWF) at zero cost and direct grants from MAWF for certain NamWater infrastructure projects.

Further, the NamWater Board of Directors are appointed by MAWF. The government's ownership of NamWater is entrenched through the approval of the company's infrastructure master plan. In the absence of an independent regulator, MAWF regulates the tariff setting for NamWater on the principal of full cost recovery basis. The MAWF also has an annual performance contract with the NamWater Board of Directors where specific deliverables are highlighted. Fitch assumes that further tangible support would be provided, if needed.

Healthy Liquidity
As of 31 January 2015, NamWater held aggregate liquidity of NAD145m, comprising NAD125m of cash and cash equivalents and NAD19.7m of committed, undrawn bank facilities (expiring February 2015). This compares with short-term debt maturities of NAD10.5m. In addition, NamWater has short-term investments in securities, which could be accessed at short notice to support its liquidity.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- We expect stable volume demand growth in water sales for (treated & untreated) to continue at approximately 1%, with sharp increase in 2017 driven by demand from a new mine.
- Water sales in irrigation is expected to decrease by 6.1% in FY15 as usage is expected to decrease as the utility installs water meters.
- We expect annual double digit tariff increases in the next few years.
- We expect stable EBITDA margins.
- In terms of the capital master plan total capex is NAD3.1bn, whilst the NamWater portion is NAD1.6bn. In the rating case, we have only assumed the NamWater portion as the remaining portion will be funded by MAWF and customer contributions.
- The agency expects negative FCF from FY16 onwards as the utility implements its capital master plan.
- Capex to be funded primarily from internally generated funds, monetisation of short-term investments and debt.

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating action include:
- Positive action on Namibia's foreign currency sovereign rating, providing that the strength of parent subsidiary linkage does not weaken.
- The rating impact of any improvement in the standalone profile (such as independently set long-term tariffs) would be limited by the sovereign ratings.

Negative: Future developments that could lead to negative rating action include:
- A change in tariff approvals not allowing full cost pass through, weaker cash collection rates or an increased capex funding on the balance sheet leading to weaker credit metrics such as FFO net adjusted leverage above 2.0x on a sustained basis.


LIST OF RATING ACTIONS;
Long-term IDR: assigned at 'BBB-', Stable Outlook
Long-term local currency IDR: assigned at 'BBB', Stable Outlook
Short-term local and foreign currency IDR: assigned at 'F3'
National Long-term rating: assigned at 'AA-(zaf)', Stable Outlook
National Short-term rating: assigned at 'F1+(zaf)'