Posted on August 10, 2011

Moody's Investors Service has assigned a long-term local currency issuer rating of A1 to Qatar Electricity and Water Company Q.S.C. (QEWC). The outlook assigned to the rating is stable. This is the first time that Moody's has assigned ratings to QEWC.


Ratings Rationale:

QEWC's A1 rating is mainly supported by the beneficial contractual framework that was put in place by the State of Qatar that significantly reduces the exposure of QEWC and its Qatari joint ventures to common industry risks for utilities -- namely, regulatory, demand and price risks. The company benefits from a stable operating cash flow stream, which is derived from secure, long-term power purchase agreements as well as from power and water purchase agreements with the 100% government-owned Qatar General Electricity and Water Corporation (not rated, known as Kahramaa) acting as sole off-taker. The latter benefits from a government guarantee with respect to its financial obligations under contracts with QEWC for plants commissioned after 2002. All QEWC's plants are gas-fired and gas purchase agreements are all with Qatar Petroleum (Aa2/stable).

"Capacity-derived payments are structured in all agreements to ensure that fixed operating costs, investment costs, an agreed return on equity and comprehensive debt servicing are covered on a cash basis. The cost pass-through mechanisms that are built into the tariffs mitigate QEWC's exposure to any volatility in prices and gives QEWC's financial performance stability," says Franck Nowak, a Dubai-based Analyst in Moody's Corporate Finance Group and lead analyst for QEWC.

The assigned A1 rating incorporates significant uplift from its stand-alone profile equivalent to a Baa1 rating, reflecting potential support from QEWC's main shareholder, the State of Qatar (Aa2/stable). Electricity and water generated by the company and its joint ventures account for the whole of Qatar's installed capacity and will remain critical in supporting economic activity (notably the plants in the country's industrial cities).

"QEWC's financial profile is currently characterised by high leverage relative to global peers, although it benefits from a strong contractual framework, ensuring returns on equity and debt servicing at the project level," adds Mr. Nowak. QEWC is also expected to follow a deleveraging trend in the medium term as the company has no need to fund either new investments or the construction of new plants given the current excess capacity in both electricity (currently around 35%) and water (currently around 23%). Kahramaa expects this excess capacity to be sufficient to meet the needs implied by the foreseen economic growth in Qatar, to which we assume QEWC will remain predominantly exposed.

"Overseas expansion, which is one of QEWC's strategic goals, could also bring forth regulatory uncertainties as QEWC may have to work in legal and regulatory environments different from those of Qatar. Partly mitigating our concerns is the strong recurring cash flow from QEWC's operating plants, which provides the company with a buffer against some of these uncertainties, and our expectation that QEWC will continue to exercise prudent financial management," explains Mr. Nowak.

The stable outlook reflects Moody's expectation that there will be no material adverse changes in the framework within which QEWC currently operates. In terms of financial metrics, Moody's expects QEWC to maintain adjusted FFO interest coverage at above 3.5x at all times, with FFO to debt migrating towards the high teens and debt to book capitalisation trending towards 70%.

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A sustained operating performance, with FFO interest coverage consistently above 4.0x, FFO to debt in the high teens and debt to book capitalisation trending below 70% could put positive pressure on the rating though this would also have to be assessed in the context of the already high exceptional support assumption. A sovereign upgrade could also trigger an upgrade of QEWC's rating.

An adverse shift in the contractual agreements, currently not anticipated over the life of the projects in place, could materially affect the rating. The rating could also be downgraded if QEWC's credit strength deteriorates substantially, such that its adjusted FFO interest coverage falls below 3.5x. This could be a result of more aggressive than expected international acquisitions or investments funded predominantly by debt. Any change in our current high support assumption or a downgrade of the sovereign rating could also negatively impact the rating.

The principal methodology used in rating Qatar Electricity and Water Company Q.S.C. was the Regulated Electric and Gas Utilities Industry Methodology published in August 2009. Other methodologies used include the Government-Related Issuers methodology published in July 2010.

The company is listed on the Qatar Stock Exchange. The State of Qatar is QEWC's largest shareholder with a direct stake of 43%. As of December 2010, the company reported consolidated revenues of QR3.4bn ($0.9bn) and QR22.1bn in assets ($6.0bn).


Regulatory Disclosures:

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure. Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information. Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it.


source: Ameinfo

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