Outlook Stable

Fitch Ratings-London-27 November 2013: Fitch Ratings has affirmed Saudi Electricity Company's (SEC) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA-'. The Outlook on the Long-term IDR is Stable. Fitch has also affirmed its outstanding Sukuk issues, including issues under Saudi Electricity Global Sukuk Company and Saudi Electricity Global Sukuk Company 2, at 'AA-'.

The affirmation of the IDR and senior unsecured ratings reflects the continued strength of SEC's links with Saudi Arabia (AA-/Positive).

KEY RATING DRIVERS

Sovereign Support Critical

SEC's current ratings are at the same level with Saudi Arabia's 'AA-' ratings, based on their strong legal, operational, and strategic links, in accordance with Fitch's Parent and Subsidiary Rating Linkage methodology. However, the Stable Outlook reflects that if the sovereign rating is upgraded to 'AA', SEC's rating would likely remain 'AA-'. This reflects Fitch's view of SEC against the broader global electric utility peer group, where it is currently among the highest-rated entities, the residual risks and opportunities inherent in the sector; and the scale of the current investment programme, which will weigh on SEC's balance sheet over the next five years.

Historically, state financial support has been strong. SEC is drawing down the SAR51bn (USD14bn) soft loans from the government to partially finance its capital projects. Since its inception in 1999 SEC has not paid for fuel provided by Saudi Aramco. SEC transferred SAR41bn in 2007 and in 2011 of Aramco payables to the Ministry of Finance, converting them to long-term government payables. The Government has deferred all dividend payments from SEC since inception, with the latest 10-year deferral running through till 2020. The government appoints five out of SEC's nine board members, including the Chairman.

Integrated Business Profile

SEC is a monopolistic, vertically integrated utility in Saudi Arabia. The utility regulator, Electricity and Cogeneration Regulatory Authority (ECRA), has licensed SEC to generate, transmit, and distribute electricity in its designated service territory. The company remains dominant in the Kingdom's electricity generation sector even with the emergence of independent power producers (IPPs), holding 80% of the Kingdom's of total generation capacity at FYE12. SEC retains up to 50% equity positions in five IPPs, sources their fuel and purchases all electricity produced. Utilising generating capacity at IPPs ahead of its own plants is expected to result in some EBITDA margin compression in coming years, particularly in light of seasonal swings in electricity demand in the Kingdom.

Commitment to Growth

SEC is instrumental in meeting the country's growing electricity demand and executing the state policy on providing subsidised electricity within Saudi Arabia along with developing a robust, reliable, and stable electricity infrastructure. SEC's current capital spending plan of about SAR250bn (USD67bn) over the next five years (2013-2017) includes investment in electricity generation capacity, transmission infrastructure, and distribution assets.

Historically, the maximum annual capital investment by SEC has been around SAR38bn. Delivery of an even larger capex programme than the one executed previously, on time and on budget, while simultaneously managing other construction-related risks can be challenging.

Subsidised Electricity Tariff

The Council of Ministers, responsible for setting electricity tariffs, has authorised ECRA to set electricity tariffs for commercial, government, and industrial customers. The Council of Ministers has set the maximum electricity tariff that ECRA can approve at 26 halala per unit of electricity. However, the tariff charged to residential consumers is solely determined by the Council of Ministers, as it remains heavily subsidised.

Weakening Standalone Credit Metrics

Fitch calculated leverage, measured by funds from operations (FFO) adjusted net leverage, is expected to rise to 5x by 2014 from 2.1x at end-2012. These ratios take into account the SAR51bn of governmental support for the new capital projects. Fitch assumes that the company will supplement cash from operations with debt to fund its capital programme and that it will continue to defer fuel costs payable to Saudi Aramco. Nonetheless, SEC's standalone credit profile is significantly lower than the current state support- driven rating level.

Adequate Liquidity

Liquidity at SEC is adequate with approximately SAR23bn in total liquidity at end June 2013, including SAR7bn in cash, with most of the remainder comprising available committed government facility, export credit agency (ECA) and commercial facilities. This compares with around SAR8.8bn of maturities due in 2014, and significantly negative free cash flow expectation up to FY16.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Explicit guarantees from the KSA in favour of SEC could likely result in a positive rating action on SEC's IDR, providing that the remaining elements of the parent-subsidiary linkage do not weaken.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Decline in the government support or a negative rating action on KSA's sovereign rating would likely result in negative rating action for SEC.

Contact:
Principal Analyst
Yeshvir Singh
Associate Director
+ 27 11 290 9401

Supervisory Analyst
Josef Pospisil
Senior Director
+44 20 3530 1287
Fitch Ratings Ltd.
30 North Colonnade
London E14 5GN
Committee Chairperson
Arkadiusz Wicik
Senior Director
+48 22 338 6286

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

© Press Release 2013