Moody’s Investors Service, the bond credit rating business of Moody’s Corporation, has recently upgraded the ratings of Saudi Electricity Company (SEC) to A1 from A2.The main reason is due to increased government support to the company.
The upgrade to A1 highlights Moody’s revised assumption of government support to Very High from High and the action is underpinned by a proposed new regulatory framework set to be implemented on 01-01-2021.
The new framework will offer a more transparent and predictable compensation mechanism for SEC than is currently the case and will lead to more stable and predictable cash flows for most of the company’s operations. The framework will allow SEC to recover its operational costs and earn a fair rate of return of 6.0% on its investments under a regulated asset base model with control periods of three years. However, Moody’s recognizes the need for an operating track record under the new regulatory framework, especially when it comes to the timeliness of payments, the rating agency stated.
Moody’s notes that the SHI pays cash coupons which can be postponed at the option of the company under certain circumstances. Moody’s also notes that the SHI is a bilateral agreement between SEC and the Ministry of Finance which may be amended if agreed by the parties.
The outlook on all ratings is negative, reflecting the negative outlook on Saudi Arabia’s sovereign rating and the significant credit linkages between SEC and the government, according to a press release on Wednesday.
Moody’s considers SEC’s liquidity profile as adequate and expects a rise in the company’s capital expenditures under the new regulatory framework which will require external funding.
SEC’s baseline credit assessment (BCA) remained unchanged at baa1.