CEB seen making operating losses in 2017 : Fitch
View(s):Sri Lanka’s electricity consumption is set to grow by five per cent per annum over 2017-2020, there is unlikely to be any electricity tariff increase in the next two years and Rs. 80 billion per annum on average is expected to spend over the next two to three years on generation, transmission and distribution.
This data is contained in Fitch Ratings latest report on the Ceylon Electricity Board (CEB) attributing a National Long-Term Rating of ‘AAA (lka)’ with a stable outlook.
In a media release, Fitch said it 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,” Fitch said, while adding: “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”.
While CEB’s standalone credit profile is weaker than its support-driven rating due to exposure to high regulatory risks, a weak operating performance and debt-laden balance sheet; 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.
The CEB has almost full network connectivity and accounted for more than 75 per cent of the Sri Lanka’s generation capacity at end-2016. It will be the key driver in achieving the government’s target of increasing current installed capacity within 20 years to meet electricity demand.
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.
Fitch said the CEB had Rs. 10.2 billion of unrestricted cash as of end-2016 as well as Rs. 80 billion of unutilised credit facilities under the 2017 borrowing limit set by the Sri Lankan government to meet Rs. 17 billion of debt falling due in the next 12 months. “However, we expect the CEB to make operating losses in 2017 and, together with capex of around Rs. 50 billion (excluding capex funded by specific project loans), its liquidity position might be tight. We expect the government to step in and provide financial support if required, as has been seen in the past,” the release added.