CEB to invest Rs.90-100 bn on new generation capital spending
View(s):The Sri Lanka Government aims to spend Rs.90 billion-100 billion per annum in the next two years as capital expenditure mainly on new power generation capacity, according to Fitch Ratings.
In a media release on Monday, Fitch affirmed the Ceylon Electricity Board’s (CEB) National Long-Term Rating at ‘AA+(lka)’ with a Stable Outlook.
The rating on CEB is equalised with that of the Sri Lankan sovereign (B/Stable), reflecting strong linkages with the parent (government), 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, it said.
“Fitch assesses the linkages between CEB and the state to be strong, reflecting explicit guarantees and financial support through equity infusions and debt funding. The government also implicitly guarantees CEB’s project loans, which account for around 80 per cent of its outstanding debt. These loans are extended by bilateral and multilateral agencies and routed through the government for development of power infrastructure. CEB’s strategic importance to the state stems from its position as the country’s sole grid operator and distributor and the generator of 80 per cent of electricity in Sri Lanka,” the statement said.
“We do not expect CEB’s linkages with its parent to weaken in the medium term as the provision of electricity at subsidised rates can be carried out only by a state entity such as CEB, because private companies would not be willing to bear losses,” it said.
Fitch assesses CEB’s standalone credit profile to be much weaker than its support-driven rating and believes providing a notch-specific standalone credit view of CEB is difficult due to poor margin visibility and the need for continued state support to sustain operations. CEB continues to make operating losses because tariffs are lower than its average generation, distribution and transmission costs which compel the company to borrow even to sustain its day-to-day operations. The balance sheet is further weakened by significant investments on new generation capacity and network upgrades funded primarily through borrowings.
Fitch said CEB posted an EBITDAR of Rs.17 billion in 2018, but its free cash flow (FCF) generation was a negative Rs.66 billion amid high interest costs, working capital outflows and capex.
“We do not believe the government will adopt a tariff structure for electricity that reflects the cost of production and distribution ahead of important elections in 2020. CEB’s current average tariff, which has not been revised since 2013, is around 10-15 per cent below the average cost of supplying a unit of electricity. The government has succeeded in introducing cost-reflective pricing formulas for other essential goods, such as fuel and liquefied petroleum gas, but there is no indication whether this will be adopted for electricity.
Fitch said the regulator expects electricity demand in Sri Lanka to increase by about 6 per cent per year in the next five years, which will require significant capacity expansions if the industry is to make up for the existing supply shortage. Hydro power, which accounts for around 41 per cent of the country’s power generation, has been highly volatile in the past few years due to unfavourable weather patterns. This pushed CEB to look for alternative sources, such as natural gas and other renewable energy sources.
As at end-2018, CEB had Rs.18 billion of unrestricted cash and Rs.11 billion of unutilised credit facilities to meet Rs.22 billion of debt falling due in the next 12 months.