Moody's assigns A1 / positive rating to Saudi Electricity Company

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

"SEC's ratings are supported by the company's dominant position in the largest electricity market in the Gulf region", says Philipp Lotter, Dubai/DIFC based Senior Credit Officer at Moody's and lead analyst for SEC. "The expectation of increasing financial leverage as the company executes its investment plan and some medium-term regulatory uncertainty constrain ratings", Lotter adds.

SEC's A1 ratings reflect the strength of its pre-eminent domestic market position as integrated and monopoly electricity provider in the Kingdom of Saudi Arabia and its vital role in providing security of national power supply. Additional support derives from the company's 81% ownership by the Saudi government that provides enhancement to the company's stand-alone credit profile, which Moody's believes would be an A2 excluding any government support. Accordingly, Moody's views SEC as a government-related issuer (GRI) and determines its rating in line with its methodology for such issuers.

SEC's ratings reflect its key role in providing the fast growing Saudi economy with electricity supply. Ratings are also enhanced by a favourable procurement cost structure as SEC sources most of its fuel needs from Saudi Aramco, which is obliged by Royal Decree to maintain adequate supply of fuel to SEC. The company also has a solid financial profile and good cash flow generation, which -- despite rising investments -- is expected to remain moderate as long as a tariff structure is maintained that allows SEC to at least partially pass on cost increases to end users.

Conversely, ratings take into account expectations of significant capital expenditures which will determine an increase in SEC's leverage over time. SEC is likely to invest close to SAR90bn by 2010 ($25bn) to meet increasing electricity demand. Moody's highlights a history of both high accrued government receivables and payables, which however are being addressed and should be reduced over time without resulting in any substantial increase in cash liabilities for SEC. On the regulatory side, unbundling and private sector participation, which are part of the government's plan to promote a more competitive structure for the Saudi electricity industry, could create a more challenging operating environment over the long term.

Ratings incorporate Moody's assumption of strong government support which Moody's believes the government would extend to SEC, if required. SEC plays a vital role in the economic development of the Kingdom and Moody's believes that the government would provide direct and indirect support to SEC under any circumstances to avert a default on any of its financial obligations. Indeed the Government already provides SEC with a SAR14.9bn interest free subordinated loan with a grace period of 25 years starting from the company's date of incorporation. Moody's believes that a cash repayment of this amount as highly unlikely. Ratings also reflect the fact that SEC derives all its revenues from one geographic market and is therefore significantly exposed to any shock that could negatively impact the Kingdom's economy. Accordingly, we regard the dependence between SEC and the government as fairly high.

The outlook is currently positive, reflecting the positive outlook on the A1 local currency bond rating of the government of Saudi Arabia. Under current government support assumptions, sovereign-related factors constitute the main sensitivity for any upward or downward rating movements. Thus an upgrade of Saudi Arabia's sovereign rating will result in a corresponding upgrade of SEC's rating. We are not expecting any change in the company's current ownership structure, although ratings do incorporate the possibility of a more competitive power market with further introductions of IPP's and IWPP's. However, SEC will remain the prominent partner in any such arrangements. Any events -- however unlikely -- that would constitute a step-change in policy towards SEC could therefore result in its rating being lowered closer towards its fundamental level. We would also expect the government to continue to provide funding to SEC, if and when required.

Headquartered in Riyadh in the Kingdom of Saudi Arabia (KSA), Saudi Electricity Company (SEC) is the dominant state-owned electric utility in Saudi Arabia, where it serves 4.95 million customers. The company operates as a vertically integrated utility, with business activities including electricity generation, transmission and distribution.