Fitch rates Dubai Electricity and Water Authority at 'AA-'; Outlook Stable

The Outlook for the Long-term IDR is Stable. DEWA is the exclusive vertically integrated electricity and potable water utility in the Emirate of Dubai and is fully state-owned.

The ratings predominantly reflect DEWA's ownership structure and strategic importance to the development of Dubai. Fitch has applied its 19 June 2007 criteria report, entitled 'Parent and Subsidiary Linkage', to establish DEWA's IDR and notes that its creditworthiness is closely aligned with that of the State. The government's involvement in DEWA manifests itself in numerous ways as it appoints the board members and sets the electricity and water tariffs. DEWA also closely coordinates its strategic plan, annual budget and funding plans with the government. In addition, DEWA sources its gas, which is the primary fuel needed to fire its generation plants, from the Dubai Supply Authority DUSUP.

The ratings are also supported by its monopolistic position in a market with substantial growth expectations and consistently improving efficiency levels under the current management team (efficiency compares well with international and regional peers). In addition, DEWA has a modern asset base, with about half of its capacity commissioned over the past five years.

However, on a stand-alone basis, DEWA's business and financial profile would warrant a Long-term IDR substantially below 'AA-(AA minus)'. This is mainly because of the negative impact of large investment requirements on its future financial profile, which, until 2006, was characterised by a net cash position. The speed and extent of the expected increase in leverage will partly depend on the development of Dubai's economy and its property sector. Fitch also expects DEWA's tariff framework to better reflect the company's cost base over time (tariffs have remained flat since 1998).

Negative rating factors also include limited visibility regarding the performance of individual business units as activities are still bundled (typical in developing markets in the region where generation, transmission and distribution have yet to be separated), and the dependence on a single source of gas supply. While efforts are made to ensure that gas supply volumes are sufficient to cover requirements over the next few years, new sources of gas will have to be secured in the medium term. Profitability can be severely compromised if gas supply volumes are insufficient, as became evident in 2006 when DEWA had to purchase secondary liquid fuels at much higher prices.