Sri Lanka's
Ceylon Electricity Board needs investments of $1.7 billion by 2022, and the
company not expected to hike rates amid losses, Fitch Ratings said after
similar action on the sovereign credit rating, cutting its outlook negative.
"The
Outlook revision follows Sri Lanka's' B' Long-Term Foreign-Currency Issuer
Default Rating (IDR) to Negative from Stable over the Outlook revision,"
Fitch said. "The CEB rating, which is entirely state-owned, is equalized
with that of the sovereign of Sri Lanka to represent clear linkages in line
with the requirements of Fitch's Parent and Subsidiary Rating Linkage."
CEB earnings
expected to remain weak due to subsidized tariffs and the rising cost of
generation, while cash flows will be negative due to aggressive expansion
plans, accounting for a 6 percent increase in demand for electricity by 2025,
Fitch said. CEB, which charged with improving the country's power
infrastructure, will bear the bulk expenditures, estimated by management at
about USD 1.7 billion over 2019-2022, Fitch said.
To keep the
state enterprise afloat, the government provides CEB explicit guarantees,
equity infusions, and debt. Fitch said the credit profile of the CEB would be
much lower if the state did not back it up. Fitch revised the Outlook on the
National Long-Term Rating to Positive from Stable by Ceylon Electricity Board
(CEB) and affirmed the rating at 'AA+ (lka).'
The Outlook
revision follows the Outlook revision to Stable Negative on Sri Lanka's ' B '
Long-Term Foreign-Currency Issuer Default Rating (IDR); see
fitchratings.com/site/pr/10105494 for information.
In position with
Fitch's Parent and Subsidiary Rating Linkage criteria, the CEB rating, which is
wholly state-owned, is levelled with that of the Sri Lankan sovereign to
reflect strong linkages. The equalization takes into account the strategic
importance that CEB places on Sri Lanka in maintaining power security and
providing affordable energy to the public. The vital importance of the CEB for
the state stems from its role as the sole grid operator and distributor of the
nation and the producer of 80 percent of Sri Lankan electricity.
Fitch believes
that the Government of Sri Lanka is using CEB as a mechanism to provide an essential
public service. CEB sells electricity at subsidized rates, without appropriate
and prompt government financial reimbursement.
We do not
anticipate that the relations between CEB and its parent would collapse in the
medium term, as the supply of electricity at subsidized rates can only be
carried out by a government entity such as CEB, as private businesses would not
be willing to bear the loss. Low Standalone Credit Profile: Fitch assesses
CEB's Standalone Credit Profile as much weaker than its support-driven ranking,
and believes it is difficult to provide a notch-specific standalone CEB credit
view due to poor visibility of the margin and the need for continued state
support to maintain operations.
CEB continues to
make operating losses because tariffs are lower than its average cost of
manufacturing, selling, and transmitting –which compels the company to borrow
to support its daily business. Significant investments in new generation
infrastructure and network upgrades, which are funded primarily by borrowing,
further strain the balance sheet.
OSL Take: The
looming power crisis in Sri Lanka has resulted in the opening up of many
business/investment opportunities in the country’s power and energy sector. The
government of Sri Lanka is continuously exploring solutions to address the
rapidly increasing demand for electricity. The government is also focusing on
sustainable energy generation methods.
VBS/AT/20200306/Z_TB9
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