The affirmation reflects the continued alignment of SEC’s ratings with Saudi Arabia (KSA, ‘AA-’/Stable), based on strong legal, operational, and strategic links, in accordance with Fitch’s parent/subsidiary methodology.

SEC is instrumental in executing the kingdom’s government policies on electrification and maintaining a stable and reliable electricity infrastructure.

The government, through its council of ministers, is responsible for approving the electricity tariffs that SEC can charge its customers.

Historically, the state financial support has been very strong.

In 2010, the government approved a SR15 billion 25-year interest-free loan to the company, of which SR3.75 billion was drawn through December 2010.

In 2010, the government also extended the moratorium on dividend distributions to the state until 2019.

In June 2011, the government approved an additional SR51 billion to finance the future capital projects as the company embarks on a large capital-spending program through to 2015.

SEC will spend around SR153 billion until 2015 on various segments of the electricity infrastructure in the Kingdom.

In 2007, the government assumed SR13.3 billion payable by SEC to Saudi Aramco for fuel costs.

SEC’s monopoliztic position in the electricity transmission and distribution sector and its dominance in the electricity generation segment within the Kingdom are also key rating drivers.

Rating concerns include low generating capacity utilization factors, high transmission losses, and limited visibility in the cost structure.

Additionally, non-settlement of the subsidized fuel costs to Saudi Aramco creates uncertainty over the long-term cash flow perceptibility and stability.

The company has been adding around 300,000 new customers annually and the average electricity consumption growth in the Kingdom has averaged around six percent per annum.

Currently, 95 percent of the transmission network in the Kingdom is interconnected and owned by SEC.

However, Fitch notes that the massive capital-spending program will pressure the credit metrics and it will be critical for the financial viability of the company, and hence its ratings, to receive ongoing state aid since the current electricity tariff structure for residential customers (about 54 percent of total electricity consumption within the Kingdom) is deeply discounted.

Fitch calculated leverage, measured by net debt/funds from operations (FFO), which is expected to rise above 6x by 2015 from 1.7x in 2010 with the proposed capital spending program ending in 2015. These ratios do not take into account the recently announced SR51 billion in the 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.

The stable outlook mirrors that of Saudi Arabia and also reflects predictability of SEC’s near-term revenue stream and strength of the Kingdom’s economy and its financial position.

The liquidity at SEC is strong.

At the end of Q1 2011, SEC had approximately SR19.1 billion in total liquidity, including SR5.6 billion in cash.

In 2010, SEC had successfully raised SR7 billion through its third sukuk (maturing on May 10, 2030).

The five-year capital spending program is designed to enhance the stability and reliability of the electricity supply by installing new power generating capacity to meet the increased electricity demand and replacement of the aging inefficient generating units.

The company plans to retire around 10,000 MW from its existing power generation capacity by 2015. SEC also plans to improve the transmission grid interconnection within its four regions from 95 percent to 97.5 percent.

The company also owns 31.6 percent of the now completed Gulf Interconnectivity Project, interconnecting the transmission grid of six gulf nations.