A couple of weeks has passed since the financial structure of Saudi Electricity Company (SEC) was transformed by a radical revamp, and it appears the markets like what they have seen — now that there has been a little time to digest the implications.
Shares in SEC, quoted on the Tadawul, had a strong run in the weeks leading to the announcement of a massive $45 billion shake-up but fell back once the terms were finally announced. They have come back strongly since, however, and now stand close to a year’s high of just over SR22 ($6).
It is no wonder the markets took a while to reach a positive assessment of the announcement, because it included a complex series of interlinked transactions encompassing government debts and charges, as well as tariff and regulatory structures.
Taken as a whole, it amounted to the biggest shake-up of the Saudi power sector since SEC was formed from a number of smaller regional generators two decades ago.
The most eye-catching aspect of the revamp was the conversion of $44.8 billion of debts and liabilities owed by the company to the Saudi government. These are to be turned into a Shariah-compliant financial instrument held by the Ministry of Finance — in effect, the biggest Islamic bond in history.
SEC said the bond is “equity like” but that it will not dilute existing shareholders. It will ultimately pay a 4.5 percent profit rate to the ministry.
Moody’s, the credit-rating agency, has crunched the numbers from the new financial set-up and come to the conclusion that assuming the new instrument as debt would mean a debt-to-capitalization ratio of 87 percent — but if the quasi-equity is excluded from the calculation the ratio would be materially lower, at about 36 percent next year.
The new regulatory structure will bring benefits, Moody’s predicted. “The new framework will offer a more transparent and predictable compensation mechanism for SEC than is currently the case,” it said, adding that the regulatory and tariff structure is one of the reasons it upgraded the SEC rating to A1 — a notch above its previous assessment.
This upgrade also reflects an assumption that Saudi government support for SEC under the new set-up is now rated “very high,” whereas previously it was just “high”, which aligns it with the sovereign rating Moody’s attributes to the Kingdom’s debt.
“The new regulatory framework will lead to more stable and predictable cash flows for most of the company’s operations,” Moody’s said. “The framework will allow SEC to recover its operational costs and earn a fair rate of return of 6 percent on its investments under a regulated asset base model with control periods of three years.”
SEC will also generate significant operating cash flows under the new regulatory framework, and will benefit from greater financial flexibility. However, it will probably need to return to debt markets from time to time to finance the vast capital-expenditure program needed to ensure Saudi consumers have access to adequate power once economic growth resumes.
What has emerged from the revamp is a modern corporate and financial structure more akin to its competitors in the international utilities sector, with a massive debt burden removed and government charges regularized and rendered more predictable.
Saudi consumers will not directly be affected by the changes in terms of charges for the electricity they use, but can only benefit in the long term from this streamlining and modernizing of SEC.
The new set-up might also — some way down the line — present an opportunity for the Kingdom to add to the resources it needs to fund the mega-projects of Vision 2030.
SEC is majority owned by the Public Investment Fund, with a much smaller stake held by Saudi Aramco, but the new structure could be viewed as a prelude to further share sales to the general investor public or to strategic partners.
Advisers are not talking up that possibility for the time being, but the new-look SEC is certainly a more attractive investment prospect.
Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai
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