Fitch affirms Saudi Electricity Company at 'AA-': outlook stable

Key Drivers

- Rating Alignment With Saudi Arabia:

SEC's ratings are aligned with the Kingdom of Saudi Arabia (KSA, 'AA-'/Stable), based on strong legal, operational, and strategic links, in accordance with Fitch's Parent and Subsidiary Rating Linkage methodology. KSA directly owns 74% of SEC (and indirectly owns another 7% through Saudi Aramco, a state-owned enterprise).

SEC has been instrumental in executing the Kingdom's policies on electrification. Through its council of ministers, the government is responsible for approving the electricity tariffs that SEC can charge its customers. Currently, the electricity tariffs for residential customers are deeply subsidised.

-Low-risk Business Profile:

SEC's key credit strengths are its monopolistic position in the electricity transmission and distribution sector and a dominant position in the electricity generation segment within KSA. Low generating capacity utilisation (a function of the market dynamics) and limited visibility in the cost structure remain key rating concerns. In addition, lack of clarity about the future settlement of the subsidised fuel costs payable to Saudi Aramco creates uncertainty about long-term cash flow visibility and stability. In the past, the KSA government assumed the payment of fuel costs onto the account of the Ministry of Finance.

-Continued State Financial Support Critical

Historically, state financial support has been very strong. Currently, SEC is drawing down upon the government approved SAR51bn soft loans to partially finance its capital projects through 2015. SEC will spend approximately SAR150bn through 2015 on various segments of the electricity infrastructure in the KSA. Fitch notes that the massive capital spending programme under the current tariff regime will adversely affect the credit metrics. Future government support through soft loans and assumption of fuel-related costs will be critical for the company's financial position. Hence Fitch assumes that SEC will continue to receive state support since the current electricity tariff structure for residential customers (about 54% of total electricity consumption within the KSA) is deeply discounted.

-Weakening Standalone Credit Metrics:

Fitch calculated leverage, measured by net debt/funds from operations (FFO), is expected to rise above 4x by 2015 from 1.5x in 3Q2012 with the proposed capital spending programme ending in 2015. These ratios take into account the SAR51bn of governmental support for the new capital projects. Fitch assumes that the company will supplement cash from operations with debt to fund its capital programme and that it will continue to defer fuel costs payable to Saudi Aramco. Nonetheless, SEC's standalone credit profile under a cost plus tariff regime is significantly lower than the current state support driven rating level.

-Liquidity:

Liquidity at SEC is adequate. At the end of Q312, SEC had approximately SAR25.3bn in total liquidity, including SAR4.3bn in cash. This compares with around SAR1.5bn of maturities due in 2013, and significantly negative free cash flow expectation. In 2012, SEC successfully raised about SAR6.6bn in new Sukuk to repay SAR5.0bn of Sukuk in March 2012 and fund continued expansion.

Rating Sensitivity Guidance:

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- A positive action on KSA's sovereign rating will likely result in a positive rating action on SEC's IDR, providing that the strength of parent subsidiary linkage does not weaken.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Decline in the government support or a negative rating action on KSA's sovereign rating would likely result in negative rating action for SEC.