Fitch affirms Saudi Electricity Company at 'AA'; outlook stable

The Outlook for the Long-term IDR is Stable.

SEC is the incumbent vertically integrated electricity utility in the Kingdom of Saudi Arabia (KSA, rated 'AA-' (AA minus)/Outlook Stable).

The affirmations conclude the annual review process.

SEC's ratings are aligned with the sovereign's to reflect the government's strong tangible and intangible support for SEC.

The government directly owns 74% of SEC and appoints the majority of the company's board of directors.

Key areas of tangible support include a SR14.9bn 25-year interest free loan whose status will be reviewed upon maturity in 2025, a moratorium on government dividends until 2010 and the assumption by the government of a SR13.3bn debt previously payable by SEC to Saudi Aramco.

The government also establishes the price of fuel feedstocks from Saudi Aramco and the timeframe for payment of fuel feedstocks.

SEC is strategically important to the sovereign because of its critical role in implementing energy policy.

The Saudi Economic Council is currently developing a 'Total Solution for the Electricity Sector' which is expected to provide further support for SEC.

The ratings also take into account SEC's position as the incumbent vertically integrated electricity utility in the KSA.

It has a monopoly position in power distribution and transmission and has an 85% market share in power generation in Saudi Arabia.

Demand is expected to continue to grow at 6% per annum.

SEC has a strong financial profile with total adjusted net debt to EBITDAR of 0.6x.

In the past few years FFO has been growing, but changes in working capital have fuelled a rapid increase in CFO that has helped SEC meet its growing capital expenditure needs.

Planned capital expenditure over 2008-2011 is SR90bn.

The surge in capital expenditure is expected to lead to a deterioration in credit metrics, however, this has been factored into the current rating.

Negative ratings factors include limited transparency in a pre-unbundling environment and significant transactions with related entities.

The stand-alone rating of SEC is currently in the mid-'A' range based on a stable business profile and strong credit metrics.

For an integrated utility, Fitch would typically apply a one notch uplift from the IDR to the senior unsecured rating, but this does not apply in the KSA due to a country soft-cap of 'RR4'.