ECONOMYNEXT – Fitch Ratings Lanka said it given Sri Lanka’s state-owned power utility, Ceylon Electricity Board (CEB), a National Long-Term Rating of ‘AAA(lka)’ with a Stable Outlook.
CEB’s rating is equalised with that of the sovereign, rated B+/Stable, based on the strong linkages with its parent, in line with Fitch’s Parent and Subsidiary Rating Linkage criteria, a statement said.
“The equalisation takes into consideration CEB’s strategic importance to Sri Lanka in ensuring power security and supply of affordable electricity to the public,” it said.
Fitch said it expects CEB to continue to make losses in 2017 and its balance sheet is significantly weak for a utility company as it sells power below cost at subsidised rates but does not foresee the government implementing a pricing formula in the near-term, given the political and social implications.
The full rating report is given below:
Sri Lanka’s CEB state power utility gets ‘AAA(lka)’ Fitch rating
Oct 16, 2017 11:14 AM
Fitch Ratings-Colombo-13 October 2017: Fitch Ratings Lanka has published Sri Lanka-based Ceylon Electricity Board’s (CEB) National Long-Term Rating of ‘AAA(lka)’ with a Stable Outlook. CEB is fully owned by the Sri Lanka sovereign (B+/Stable).
CEB’s rating is equalised with that of the sovereign based on the strong linkages with its 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.
KEY RATING DRIVERS
Strong Linkages with State: Fitch believes the Sri Lankan government uses CEB as a vehicle to provide an essential public service. CEB provides electricity at subsidised tariffs without much financial compensation from the government. Fitch assesses the linkages between CEB and the state to be strong, reflecting high ownership and management control, explicit guarantees and financial support through equity infusions and debt funding. CEB’s strategic importance to the state stems from being the country’s sole grid operator and distributor and accounting for the majority of generation capacity. We expect the state to provide extraordinary support to CEB over and above most other state entities.
We do not expect the government to liberalise the electricity sector or privatise CEB in the medium term, as high generation costs would compel the government to continue providing subsidies, which can be done primarily through a state entity. As such, we do not expect CEB’s linkages with the state to weaken.
Weak Standalone Profile: CEB’s standalone credit profile is weaker than its support-driven rating of ‘AAA(lka)’ due to exposure to high regulatory risks, a weak operating performance and debt-laden balance sheet. However, Fitch believes providing a notch-specific standalone credit view of CEB is meaningless due to poor margin visibility. This stems from a lack of clarity on a tariff framework and absence of a cost-reflective pricing formula, which could adequately cover its generation costs. State support will be necessary to sustain CEB’s operations over the medium term, as Fitch believes electricity will continue to be sold below cost.
Monopoly Status in Power Sector: CEB has almost full network connectivity and accounted for more than 75% of the Sri Lanka’s generation capacity at end-2016. CEB will be the key driver in achieving the government’s target of increasing current installed capacity by 2.5x within 20 years to meet electricity demand, which CEB expects to rise by 5% per annum over the long term. New capacity in mini hydro, thermal and renewable energy will come from private players, but CEB will undertake all large power-generation projects and improvements to the transmission and distribution network, which require significant capital investments.