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Fitch affirms Saudi Electricity at 'AA-,' outlook stable

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 SEC's sukuk issues at "AA-" and assigned the new $ 1 billion 3.473 percent due 2023 and $ 1 billion 5.06 percent due 2043 international sukuk issues a final rating of "AA-."
SEC's affirmation at the "AA-" rating level with a stable outlook reflects Fitch's consideration 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 program, including its expected weight upon SEC's balance sheet over the next few years.
The detachment from the Saudi sovereign rating ("AA-"/positive), not continuing to align the ratings as the sovereign is upgraded, reflects the continuing expectation of direct and indirect support from the Saudi government and its institutions, as well as the low expectation of electricity market liberalization within a meaningful time horizon.
To clarify further, if the sovereign rating were to be upgraded to "AA" at some stage in the future, SEC's rating would likely remain at "AA-", notched down from the sovereign rating.
The affirmation follows Fitch's decision to affirm Saudi Arabia's long-term foreign and local currency IDRs at "AA-" and revise the outlook to positive from stable.
At the "AA-" rating level SEC's ratings are aligned with the Saudi Arabia, based on strong legal, operational, and strategic links, in accordance with Fitch's parent and subsidiary rating linkage methodology. If the sovereign rating was upgraded to 'AA,' SEC's rating would likely remain "AA-," notched down from the sovereign rating. KSA directly owns 74 percent of SEC (and indirectly owns another 7 percent through Saudi Aramco, a state-owned enterprise).
SEC has been instrumental in executing Saudi Arabia's policies on electrification. Through its council of ministers, the government is responsible for approving the electricity tariffs that SEC can charge its customers. Currently, the electricity tariffs for residential customers are deeply subsidized.
SEC's key credit strengths are its monopolistic position in the electricity transmission and distribution sector and a dominant position in the electricity generation segment within the Kingdom. Low generating capacity utilization (a function of the market dynamics) and limited visibility in the cost structure remain key rating concerns. In addition, lack of clarity about the future settlement of the subsidized fuel costs payable to Saudi Aramco creates uncertainty about long-term cash flow visibility and stability. In the past, the Saudi government assumed the payment of fuel costs onto the account of the Ministry of Finance.
Historically, state financial support has been strong. Currently, SEC is drawing down upon the government-approved SR 51 billion soft loans to partially finance its capital projects through 2015. SEC will spend approximately SR 150 billion through 2015 on various segments of the electricity infrastructure in the Kingdom. Fitch notes that the massive capital spending program under the current tariff regime will adversely affect the credit metrics. Future government support through soft loans and assumption of fuel-related costs will be critical for the company's financial position. Hence Fitch assumes that SEC will continue to receive state support since the current electricity tariff structure for residential customers (about 50 percent of total electricity consumption within the Kingdom) is deeply discounted.
Fitch-calculated leverage, measured by net debt/funds from operations (FFO) and interest, is expected to rise above 4x by 2015 from 2.1x at the end of 2012. These ratios take into account the SR 51 billion of governmental support for the new capital projects.
Fitch assumes that the company will supplement cash from operations with debt to fund its capital program and that it will continue to defer fuel costs payable to Saudi Aramco. Nonetheless, SEC's standalone credit profile under a cost plus tariff regime is significantly lower than the current state support driven rating level.
Liquidity at SEC is adequate. At the end of 2012, it had approximately SR 24 billion in total liquidity, including SR 3 billion in cash, with most of the remainder comprising headroom under existing government and commercial facilities.
This compares with around SR 1.5 billion of maturities due in 2013, and significantly negative free cash flow expectation.
In April 2013, SEC successfully raised about SR 7.5 billion in new sukuk.

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