Fitch Ratings-London-29 June 2011: Fitch Ratings has affirmed Saudi Electricity Company's (SEC) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA-'. The Outlook is Stable. Fitch has also affirmed SEC's three Sukuk issues at 'AA-'.
The affirmation reflects the continued alignment of SEC's ratings with the Kingdom of Saudi Arabia (KSA, 'AA-'/Stable), based on strong legal, operational, and strategic links, in accordance with Fitch's parent/subsidiary methodology. The KSA directly owns 74% of SEC (and indirectly owns another 7% through Saudi Aramco, a state-owned enterprise). SEC is instrumental in executing the kingdom's government policies on electrification and maintaining a stable and reliable electricity infrastructure. The government, through its council of ministers, is responsible for approving the electricity tariffs that SEC can charge its customers. Currently, the electricity tariffs are deeply subsidised.
Historically, the state financial support has been very strong. In 2010, the government approved a SAR15bn 25-year interest-free loan to the company, of which SAR3.75bn was drawn through December 2010. In 2010, the government also extended the moratorium on dividend distributions to the state until 2019. In June 2011, the government approved an additional SAR51bn to finance the future capital projects as the company embarks on a large capital spending programme through to 2015. SEC will spend approximately SAR153bn until 2015 on various segments of the electricity infrastructure in the kingdom. In 2007, the government assumed SAR13.3bn payable by SEC to Saudi Aramco for fuel costs.
SEC's monopolistic position in the electricity transmission and distribution sector and its dominance in the electricity generation segment within the kingdom are also key rating drivers. Rating concerns include low generating capacity utilisation factors, high transmission losses, and limited visibility in the cost structure. Additionally, non-settlement of the subsidised fuel costs to Saudi Aramco creates uncertainty over the long-term cash flow perceptibility and stability.
The company has been adding around 300,000 new customers annually and the average electricity consumption growth in the kingdom has averaged around 6% per annum. Currently, 95% of the transmission network in the kingdom is interconnected and owned by SEC. However, Fitch notes that the massive capital spending programme will pressure the credit metrics and it will be critical for the financial viability of the company, and hence its ratings, to receive ongoing state aid since the current electricity tariff structure for residential customers (about 54% of total electricity consumption within the KSA) is deeply discounted. Fitch calculated leverage, measured by net debt/funds from operations (FFO), is expected to rise above 6x by 2015 from 1.7x in 2010 with the proposed capital spending programme ending in 2015. These ratios do not take into account the recently announced SAR51bn in the governmental support for the new capital projects.
Fitch assumes that the company will supplement cash from operations with debt to fund its capital program and that it will continue to defer fuel costs payable to Saudi Aramco. Nonetheless, SEC's standalone credit profile under a cost plus tariff regime is significantly lower than the current state support driven rating level.
The Stable Outlook mirrors that of the KSA and also reflects predictability of SEC's near-term revenue stream and strength of the KSA's economy and its financial position. The liquidity at SEC is strong. At the end of Q111, SEC had approximately SAR19.1bn in total liquidity, including SAR5.6bn in cash. In 2010, SEC had successfully raised SAR7bn through its third Sukuk (maturing on 10 May 2030).
The five-year capital spending programme is designed to enhance the stability and reliability of the electricity supply by installing new power generating capacity to meet the increased electricity demand and replacement of the aging inefficient generating units. The company plans to retire approximately 10,000 MW from its existing power generation capacity by 2015. SEC also plans to improve the transmission grid interconnection within its four regions from 95% to 97.5%. The company also owns 31.6% of the now completed Gulf Interconnectivity Project, interconnecting the transmission grid of six gulf nations.
Applicable criteria, "Corporate Rating Methodology", dated 13 August 2010 and "Parent and Subsidiary Rating Linkage", dated 14 July 2010, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage Criteria Report
All Fitch credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimers by following this link: http://fitchratings.com/
Contact:
Primary Analyst
Roshan Bains
Director
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Secondary Analyst
Erwin Van Lumich
Managing Director
+34 93 323 8403
Committee Chairperson
Raymond Hill
Senior Director
+44 20 3530 1079
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com
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© Press Release 2011
