Standard & Poor's Ratings Services (S&P) yesterday revised its outlook on Saudi Electricity Co. (SEC), described as Saudi Arabia's virtual-monopoly provider of electricity generation and monopoly provider of electricity transmission and distribution services, to positive from stable.
"At the same time, we affirmed our 'AA-' long-term corporate credit ratings on the utility," S&P stated.
"The rating actions on SEC follow our similar actions on the Kingdom of Saudi Arabia."
The ratings on SEC continue to reflect our view that there is an "almost certain" likelihood that the Saudi government would provide timely and sufficient extraordinary support to SEC in the event of financial distress, S&P said, adding: "We consider SEC to be a government-related entity (GRE).
In accordance with our criteria for GREs, our view of an 'almost certain' likelihood of government support is based on our following assessment of SEC: 'Critical' role in providing essential power generation, transmission, and distribution services, and its central role in meeting the government's key economic and social objectives; and 'Integral' link with the government." The government maintains very tight control over SEC's strategy.
Furthermore, SEC has a track record of receiving ongoing financial support from the government in the form of long-term soft loans.
The ratings, S&P says, also reflect its expectations that the ongoing support from the government will continue.
"This has a strong influence on our assessment of SEC's stand-alone credit profile (SACP).
We do not consider any privatization process as likely in the near term."
"We assess SEC's SACP as being in the upper 'BB' category, reflecting our view of its 'satisfactory' business risk profile and 'significant' financial profile.
The SACP benefits from SEC's quasi-monopoly on generation and monopoly on transmission and distribution, with minimal, if any, prospect of competition in the medium term.
In addition, we factor into the SACP a strong growth forecast for electricity demand as well as ongoing government support," S&P added.
"These credit strengths are offset by our expectation of continued deterioration of credit metrics from 2013 to 2015 as the company presses on with its sizable capital expenditure (capex) program.
We anticipate that SEC will continue to report negative free cash flows during this period.
The SACP factors in our expectation that cash flow coverage measures such as funds from operations (FFO) to debt, including government interest-free loans, will remain between 12 percent and 15 percent from 2013 to 2015, and that the same ratio, excluding government interest-free loans, will remain well above 20 percent over the same period," S&P stated.
"We anticipate annual capex of between SR 45 billion and SR 50 billion (including both discretionary and nondiscretionary elements) during 2013-2015.
SEC has some discretion regarding these spending levels from year to year.
"The positive outlook reflects that on Saudi Arabia, and our expectation that we will continue to equalize the ratings on SEC with those on Saudi Arabia.
This reflects our view of 'almost certain' likelihood of extraordinary support from the government of Saudi to SEC in the event of financial distress.
"Any evidence of weakening government support, for example through an announcement of developments in terms of privatization or exposure to increasing competition, could weigh on the rating and result in a revision of our analytical approach.
Similarly, any change in ongoing government support that we believe would hamper SEC's payables, tariffs, or future funding plans could lead us to review the rating," S&P added.
