ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board (CEB) has been rated ‘AA+(lka)’ with a stable outlook, from an earlier ‘AAA(lka)’, with the rating agency saying it does not expect a tarriff hike with an election in the officing.
Sri Lanak’s local rating scale was re-caliberated by Fitch and is a downgrade of the government’s credit by Fitch.
CEB is now rated AA+(lka) with a stable outlook from an earlier AAA(lka) in the local rating scale.
"We view the relationship between CEB and the sovereign as one of a stronger parent and weaker subsidiary and CEB’s rating is equalised with that of the sovereign, reflecting strong linkages with the parent…" the rating agency said.
"We do not expect the government to increase electricity tariffs in the foreseeable future to levels that adequately cover CEB’s generation, distribution and transmission costs.
"The government sets tariffs based on its socio-economic objectives and has not revised tariffs for almost three years despite rising generation costs. The CEB’s average cost of supplying a unit of electricity to customers in 2017 was around 20% higher than the average tariff."
The full statement is reproduced below:
CEYLON ELECTRICITY BOARD
Rating Equalised With Sovereign: CEB’s National Long-Term Rating downgrade considers the Sri
Lankan sovereign’s weaker ability to extend support, reflected in the downgrade of the
sovereign’s ratings.
We view the relationship between CEB and the sovereign as one of a
stronger parent and weaker subsidiary and CEB’s rating is equalised with that of the sovereign,
reflecting strong linkages with the parent, in line with Fitch’s Parent and Subsidiary Rating
Linkage criteria. The equalisation takes into consideration CEB’s strategic importance to Sri
Lanka in ensuring power security and supply of affordable electricity to the public as the
monopoly electricity transmitter and distributor in the country. CEB also accounts for around
70% of the power generation in the country.
Strong State Linkages: Fitch assesses the linkages between CEB and the state as strong,
reflecting high ownership and management control, explicit guarantees and financial support
through equity infusions and debt funding. The government also implicitly guarantees CEB’s
project loans (about 80% of outstanding debt), which are extended by bilateral and multilateral
agencies and routed through the government for development of power infrastructure.
CEB
provides electricity at subsidised rates, fulfilling an essential service for the government. CEB
has almost full network connectivity and accounted for more than 70% of Sri Lanka’s generation
capacity at end-2017.
We do not expect CEB’s linkages with its parent to weaken in the medium term as the
government’s need to provide electricity at subsidised rates can be carried out only by a state
entity such as CEB, as private companies would not be willing to incur losses. Fitch views CEB’s
standalone credit profile as much weaker than its support-driven rating and believes providing a
notch-specific standalone credit view of CEB is meaningless due to poor margin visibility and
the need for continued state support to sustain operations.
Tariff Increases Unlikely: We do not expect the government to increase electricity tariffs in the
foreseeable future to levels that adequately cover CEB’s generation, distribution and
transmission costs.
The government sets tariffs based on its socio-economic objectives and has
not revised tariffs for almost three years despite rising generation costs. CEB’s average cost of
supplying a unit of electricity to customers in 2017 was around 20% higher than the average
tariff.
We do not expect the government to raise electricity tariffs or implement a costreflective
pricing formula as it faces elections in the next 24 months amid rising living costs due
to higher fuel costs and local-currency depreciation.
Rising Generation Costs: We expect generation costs to remain high in the next couple of years
amid rising oil prices and volatile contribution from low-cost hydropower. We expect the share
of hydropower in the generation mix to remain below historical levels due to declining load
factors and very little new capacity additions. We expect CEB to turn to high-cost oil-based
sources to meet the shortfall.
In addition, CEB and independent power producers have been compelled to purchase fuel at
market prices since mid-2018, after the government introduced a pricing formula, compared
with subsidised prices offered previously. We do not expect the liquefied natural gas projects
proposed under CEB’s generation expansion plan for 2018-2037 to contribute significantly to the
generation mix in the next two to three years.
Weak Balance Sheet: CEB’s balance sheet continues to weaken due to persistent losses and
significant investments. It is unable to recover operating costs under the current tariff
structure, and has to borrow to sustain its day-to-day operations. Further CEB, as government’s
main investment arm in the power sector, is likely to have large capex to improve country’s
power generation and transmission and distribution network. As such we do not expect CEB’s
balance sheet to recover in the medium term unless the government reduces its debt by
converting some of it to equity. (Colombo/Feb18/2019 – Corrected – SB)