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 alignment of SEC’s ratings with the Kingdom of Saudi Arabia (KSA, ‘AA-‘/Stable). Under Fitch’s “Parent and Subsidiary Rating Linkage” methodology, SEC and the KSA have strong legal, operational, and strategic links. The KSA directly owns 74% of SEC, and 81% including the 7% of shares held by Saudi Aramco, a state-owned enterprise. SEC is instrumental in executing the Kingdom’s policies on electrification, maintaining a stable and reliable electricity infrastructure, and in providing electricity to domestic consumers at a state-determined tariff that is heavily subsidised. Through its council of ministers, the government is responsible for approving the electricity tariffs that SEC can charge its customers.
Historically, state financial support has been very strong. In 2011, the KSA government approved a 25-year SR51billion interest-free loan to the company, to be drawn in five annual instalments beginning in 2012, to support SEC’s SR219.2billion capex spending program (2012-2016). SEC received about SR7.5billion in direct government funding in 2011 as well as the Ministry of Finance assuming an additional SR27.7billion payable to Saudi Aramco for fuel purchased by SEC through 2009. In 2009, the KSA government extended the moratorium on dividend distributions by SEC to the state until 2019.
SEC’s monopolistic, low-risk, and regulated electricity transmission and distribution business and dominant presence in the electricity generation segment within the Kingdom also support the credit profile. However, rating concerns include execution risk related to SEC’s large capex programme, low capacity utilisation rates in the electricity generation segment of the business, high electricity transmission losses, limited visibility in the current cost structure, and lack of clarity around the process to settle future fuel costs with Saudi Aramco.
The recent formation of a wholly owned subsidiary, National Transmission Company (NTC), with plans to transfer the transmission related assets to NTC for equity and debt and with an arrangement to lease the entire system capacity to SEC will be rating neutral.
The company is going through an unprecedented growth phase. It has spent approximately SR30billion annually in capex over the past three years and plans to increase average capital spending to about SR44billion annually over the next five years. Fitch anticipates that the massive capital spending programme will put pressure on credit metrics and it will be critical for the financial viability of the company and its ratings to receive ongoing state aid, especially since the current electricity tariff structure for residential and certain other customers (representing about 53% of total electricity consumption within the KSA) is deeply discounted.
Fitch calculated funds from operations (FFO) adjusted net leverage is expected to rise to around 7x by 2015, from 2.0x in 2011, assuming that the proposed capital spending programme is completed on time and within budget. This translates into a standalone credit profile that is significantly weaker than the current state support driven rating level.
Fitch assumes that the company will supplement cash flow from operations and already approved government funding with debt to fund its capex programme and to meet debt maturities. Additionally, the company will continue to defer fuel costs payable to Saudi Aramco
The stable outlook mirrors that on the KSA. SEC’s liquidity is strong. At the end of 2011, it had approximately SR25.9billion in total liquidity, including SR7.3billion in cash, with most of the remainder comprising headroom under existing government and commercial facilities. This compares well with around SR8.1billion in debt maturities in 2012, including SR5billion in Sukuk bonds.