Moody's assigns A1 rating to Dubai Electricity & Water Authority

This is the first time that Moody's has assigned ratings to DEWA.

"DEWA's ratings benefit from a long track record of efficient and modern operations, its monopoly as sole integrated utility, but most importantly from the overriding importance of stable long term power supply in the context of Dubai's ambitious expansion,"

says Philipp Lotter, Dubai/DIFC based Senior Credit Officer and lead analyst for DEWA. "This at the same time is DEWA's biggest challenge, given an expected tripling of capacity over the next decade which will require ongoing financing and thus lead to a more leveraged balance sheet", Lotter adds.

DEWA's A1 ratings reflect the group's intrinsic credit strengths and the additional enhancement that can be derived from the financial strength of the Emirate of Dubai, which 100% directly owns the company. Accordingly, Moody's views DEWA as a government-related issuer (GRI) and determines its rating in line with its methodology for such issuers.

DEWA's ratings reflect the company's central role in supporting the development and growth of Dubai's economy, and the numerous infrastructure, property, tourism and manufacturing projects that are currently in progress or envisaged as part of Dubai's Strategic Plan to 2015. Accordingly, ratings reflect this special status of the company, and the close ties - both operationally, strategically and politically
- that exist between it and the government.

Ratings are also supported by the group's largely modern and efficient facilities, a good customer service record and its decreed monopoly position as exclusive power and water provider in Dubai. Moody's regards DEWA as one of the more advanced and commercially minded power utilities in the region, given its history of good operational and financial performance, and the fact that DEWA is one of the few local utilities that has not required regular state subsidies to date.

Conversely, the company's ratings are currently constrained by the magnitude of its future investment plan - both operationally and financially - which will be a long term challenge for the company. DEWA will be required to more than triple power and water capacity over the next 10 years, which is likely to result in a step-change of its to date strong financial profile. Over the next 5 years, Moody's anticipates that DEWA will be required to invest more than USD 16 billion in the expansion of its generation, transmission and distribution facilities to cater for rising demand. It also comprises significant operational challenges, such as identifying and securing reliable contractors.

Ratings also incorporate some uncertainty regarding the company's current tariff structure, which today is not fully reflective of its rising fuel costs and capital investments and will therefore need to be regularly adjusted, if an appropriate financial profile is to be maintained.

Finally, ratings also recognise the growing long term gas and fuel procurement demands - a feature DEWA shares with most of its peers in the region - which may not be able to be fully met from current supply sources.

DEWA's fundamental credit profile is further complemented by Moody's view of high government support that would be extended to the company, if needed. This view is supported by the strategic, if not overriding role DEWA plays in the development of Dubai. The development of Dubai's electricity and water desalination infrastructure is a critical factor for a successful implementation of "Dubai Strategic Plan 2015". The plan addresses the need to increase electricity generation and water desalination in order to accommodate Dubai's growing energy needs. Given this premise, Moody's believes that, if needed, the state would provide direct financial support to the company, as a failure for DEWA to meet its financial and operational obligations is not an option as it would undermine Dubai's overall economic growth.

Moody's regards the dependence between DEWA and Dubai as relatively high.

The company is fairly exposed to Dubai in financial terms, given that all its revenues are derived from government electricity and water tariffs.

This underlines the high correlation between these revenue streams and Dubai's economy. Moody's views the shared economic risk between the Dubai government and DEWA as high, given the high reliance of DEWA's success on the ongoing strength and growth of the Dubai economy, and vice versa.

Moody's adds that it presently does not notch DEWA's unsecured ratings to reflect subordination from a sizeable securitisation transaction in its debt structure on the assumption that DEWA will be raising predominantly unsecured funds going forward, and in view of the high government support, which implies that the government will not differentiate between secured and unsecured obligations, as a default of either would have the same reputational and potentially operational consequences, which the government would wish to avoid.

DEWA's rating outlook is stable. Dubai's power infrastructure needs are likely to result in DEWA carrying fairly high leverage for the foreseeable future, and Moody's would expect its tariff framework to recognise the growing burden from rising fuel and interest costs.

Accordingly, failure to obtain more cost reflective tariffs in the near term to allow for greater pass-through of costs would put added pressure on the company's financial profile. Under current government support assumptions, sovereign-related factors constitute the main sensitivity for any upward or downward rating movements. Moody's is not expecting any change in the company's current ownership structure or in its monopoly status. However, ratings do not exclude the possibility of minority international involvement in future power and water projects in Dubai through IWPP's.

Dubai Electricity & Water Authority ("DEWA"), incorporated in Dubai in the United Arab Emirates (UAE), is the state-owned monopoly provider of electricity and water in Dubai, where it serves more than 360,000 customers. The company operates as a vertically integrated multi-utility, with business activities including electricity generation, transmission and distribution as well as water desalination and distribution.