(The following statement was released by the rating agency)JOHANNESBURG/LONDON, April 04 (Fitch) Fitch Ratings has affirmed Namibia Power Corporation (Pty) Ltd's (NamPower) Long-Term foreign currency Issuer Default Rating (IDR) at 'BBB-' and Short-Term IDR at 'F3'. Fitch has also affirmed NamPower's National Long-Term rating at 'AA-(zaf)' and its Short-Term rating at 'F1+(zaf)'. The Outlooks on the Long-term ratings are Stable. The affirmation reflects the alignment of NamPower's ratings with those of the Namibian sovereign (BBB-/Stable). Under Fitch's parent and subsidiary rating linkage methodology, NamPower has strong legal, operational and strategic links with the state of Namibia, including direct government guarantees for part of NamPower's debt. In Fitch's view, the ties between NamPower and its sole shareholder are likely to remain strong in the foreseeable future. NamPower is the monopoly electricity company in Namibia and has a crucial role in executing electrification policies and ensuring sufficient electricity supply. This includes the KuduPower project, for which we expect significant undertakings by the government. KEY RATING DRIVERSStrong Government SupportGiven the track record of tangible state support and the government's involvement in NamPower's investment decisions, Fitch expects this relationship will remain unchanged in the medium term. NamPower has previously benefited from state financial support in the form of an energy subsidy for NAD360m in 2008. Fitch expects future energy subsidies to pay for the fuel used in generation before Kudu Power Station comes into operation. The state also guarantees 21% of NamPower's debt as at FYE13.Kudu Power Project FundingNamPower is expected to be the controlling partner for the combined cycle gas turbine project with estimated total costs USD1,240m, including financing costs and with 70/30 debt to equity ratio. The project is strategic for both the country and NamPower. However, the size is beyond the company's financial capacity. As such, the government will provide a significant contribution, including guarantee undertakings, limiting financial and commercial risks for NamPower.In the 2014/2015 budget, the Namibian government has provided for NAD1.6bn (USD150m) and a further NAD2.6bn (USD245m) is likely to be provided in the 2016/2017 budget for NamPower to support KuduPower. NamPower's minimum 51% equity component for KuduPower Special Purpose Vehicle (SPV) is estimated at USD190m. Considering the proposed funding structure, including project-level debt with limited recourse to NamPower, Fitch will focus on NamPower's credit metrics on an unconsolidated basis, initially reflecting NamPower's equity contribution to KuduPower. The final investment decision for KuduPower is expected in June 2014. Copperbelt Energy Corporation (CEC) has signed a joint development agreement and will hold a stake of approximately 20%-30% in the KuduPower SPV. NamPower will on-sell 200MW-300MW to CEC. Further equity (19%-29%) will be sourced from other strategic investors and off-take counterparties. Power Purchase Agreement (PPA)All the power produced by Kudu Power Station will be sold to NamPower through a long-term PPA. This is expected to create a secure revenue stream sufficient to support all KuduPower's costs including; debt servicing, operational commitments and investor returns. NamPower will sell about half of the power on the domestic market under the existing cost pass through regulation with the remainder exported under long-term Power Export Agreements (PXA). Substantially all commercial risks (price, volume, FX) are thus expected to be pass-through for NamPower. Similarly power delivery obligation under the PXAs will mirror the project's ability to deliver the power to the system with the key risk for NamPower relating to its ability to upgrade its transmission capacity and maintain its availability. Counterparty risk under the PXA should be mitigated by the equity contribution. We assume that the government will provide a direct financial undertaking for the project to secure its finance-ability and thus indirectly guarantee NamPower's obligation under the PPA.Technical RisksNamPower is evaluating engineering and procurement contract bids for the turn key project with a view to limit its technical risk exposure to levels corresponding to its relative inexperience in the technology. The operating and maintenance contract will also be outsourced, potentially to the strategic investor. In addition with the likely government undertakings, we view NamPower's risks as initially limited to its equity contribution share and the additional transmission capex. Electricity Imports to Weight on the BusinessUntil the Kudu project is commissioned around 2018, NamPower will continue to import an increasing amount of electricity to satisfy domestic demand. Therefore, Fitch expects NamPower's operating margin to decrease due to the relatively expensive imports compared with its own hydro power. Although the tariff regulation allows for cost pass through, electricity imports will likely dilute the profit margin. Fitch expects near term material weakening in NamPower's credit ratios due to the margin reduction and increased investments with a recovery expected post KuduPower commissioning. As a result, we believe NamPower will likely face pressure on some of its loan covenants with the Development Financial Institutions (DFIs), but we expect that DFIs will likely take a longer-term view and allow medium-term relaxation of covenants. The company may also invest further minority equity into a scalable private-public partnership project to provide up to 250MW of heavy fuel or gas-fired modular capacity to balance the domestic market demand and strategically support security of supply.LIQUIDITY & DEBT STRUCTURE Adequate LiquidityNamPower had a NAD1.7bn cash buffer as of FY13 supported by a relatively liquid investment portfolio of NAD2.9bn as of FY13 (FY12:NAD2.5bn). This can be accessed at short notice to bolster its liquidity position and investment needs. This compares with NAD219m of short-term debt and Fitch's expectation of negative free cash flow of around NAD22m for 2014.RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: A positive action on Namibia's sovereign rating would result in a positive rating action on NamPower, providing that the strength of parent subsidiary linkage does not weaken. Negative: Future developments that could lead to negative rating actions include:- A decline in government support or a negative rating action on Namibia's sovereign rating would likely result in negative rating action on NamPower.- Long-term operating cash flow falling below Fitch's expectations or a final investment decision on Kudu project in the absence of additional government support for both the project and NamPower.Contact:Primary Analyst Yeshvir SinghAssociate Director Fitch Southern Africa (Pty) Ltd +27 11 290 9401 23 Impala Road, Sandton Secondary Analyst Roelof Steenekamp Director +44 20 3530 1374 Committee Chairperson Josef Pospisil Senior Director +44 20 3530 1287 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.Additional information is available on 
  www.fitchratings.com.
  (a) No part of the rating was influenced by any other business activities of the credit rating agency;(b) The rating was based solely on the merits of the rated entity, security or financial instrument being rated;(c) Such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available at 
  www.fitchratings.com.
 Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
 Additional Disclosure Solicitation Status 
  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826220
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