Saudi Electric Co. assigned 'A+' long-term corporate credit rating; outlook stable

"The ratings reflect the company's continuing key role in the Saudi Arabian economy and the intention of the Kingdom of Saudi Arabia (A+/Stable/A-1) to remain supportive of SEC's credit quality," said Standard & Poor's credit analyst Karim Nassif. "The ratings factor in explicit state support and have been equalized with those on the state. The ratings also benefit from strong forecast electricity demand growth, as well as SEC's quasi monopoly position in electricity generation and its monopoly position in electricity transmission and distribution services in the kingdom."

Further strengths include the company's strong historical and current capitalization levels and robust debt coverage ratios, although capitalization relative to debt and debt coverage ratios is likely to weaken going forward, Mr Nassif said.

These strengths are offset by SEC's high commitments under its capital expenditure program, which is expected to result in a deterioration in debt coverage ratios; uncertainty about the company's sources of funding; regulatory risk affecting its three key business segments; and uncertainty relating to accrued payables on SEC's balance sheet owed to oil company Saudi Aramco. In addition, SEC currently struggles to maintain a peak load capacity margin as demonstrated by brownouts (drops in voltage), although its medium- to long-term plans should ensure adequate capacity margins, subject to successful progress with its capital expenditure program.

Standard & Poor's analyses SEC using its criteria for government-related entities, and views the company as a public policy entity that benefits from implicit and explicit state support--albeit without an explicit financial guarantee. We consider that the ratings on SEC would be in the upper 'BBB' category on a stand-alone basis, based on the company's strong business profile and intermediate financial profile.

The company expects to invest about Saudi Arabian riyal (SAR) 90 billion for the 2007-2010 period. Based on our base-case financial model projections, this will lead to a deterioration in financial metrics.

Outlook

The stable outlook factors in continued strong implicit and explicit state support. The outlook also takes into account our expectation that the tariff regime will remain supportive and that outstanding working capital issues will be resolved.

"We would review our government-related entity rating approach if: any change in government support negatively affected SEC's payables, tariffs, or future funding plans; SEC were reorganized or privatized, resulting in diminished government support; or the government reduced its ownership, leading to the state having less than a 50% direct shareholding in SEC," Mr Nassif said.

Rating upside could arise if the rating on the sovereign were to improve, subject to SEC maintaining its current strong business and financial links to the state.