March 14, 2012 / 3:07 PM / 5 years ago

TEXT-Fitch affirms Saudi Electricity Co at 'AA-'

March 14 - 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 SAR51bn interest-free loan to the company, to be
drawn in five annual instalments beginning in 2012, to support SEC's SAR219.2bn
capex spending program (2012-2016). SEC received about SAR7.5bn in direct
government funding in 2011 as well as the Ministry of Finance assuming an
additional SAR27.7bn 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 SAR30bn annually in capex over the past three years and plans to
increase average capital spending to about SAR44bn 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 SAR25.9bn in total liquidity, including
SAR7.3bn in cash, with most of the remainder comprising headroom under existing
government and commercial facilities. This compares well with around SAR8.1bn in
debt maturities in 2012, including SAR5bn in Sukuk bonds.	
Additional information is available on The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
Applicable criteria: 'Corporate Rating Methodology', dated 12 August 2011, and
'Rating Sukuk', dated August 16, 2011 are available at	
Applicable Criteria and Related Research:	
Corporate Rating Methodology	
Rating Sukuk

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