Fitch Affirms CEB at ‘AA+ (lka)’; Outlook Negative
Fitch Ratings has affirmed Ceylon Electricity Board's (CEB) National Long-Term Rating at 'AA+ (lka)' with a Negative Outlook. “We have also affirmed the National Rating on CEB's proposed senior unsecured debentures at 'AA+ (lka)'.” Fitch stated.
The CEB is the country's monopoly electricity transmitter and distributor, accounting for around 75% of the power generation. Fitch believes CEB's status, ownership and control by the government is 'Very Strong'. The government fully owns CEB, appoints its board and senior management, sets tariffs and decides on its investment strategy. CEB fulfils an essential service for the State by providing electricity at subsidised rates.
Fitch assessed the support record as 'Very Strong' as we believe there is a high likelihood of State support for the CEB. Government support to the CEB has included direct grants, two-step loans from multinational agencies, which account for around 70% of its outstanding debt, equity injections and guarantees on bank loans for some of its investment projects and working-capital requirements. We expect the support to continue as the government would want to ensure uninterrupted power supply in the country.
Fitch sees the socio-political implications of a default by CEB as 'Very Strong' as it would lead to service disruption since the board accounts for most of the country's power-generation capacity. A default would also make it difficult for the CEB to source feedstock used for power generation such as heavy oil and coal, which are imported. CEB's independent power producer agreements, which account for around 25% of the power generation, will also be affected as these are external arrangements with no clear alternatives and most of them use imported oil in their operations.
A default by CEB would have a 'Very Strong' financial effect on the State, as CEB's project loans, which account for around 70% of its outstanding debt, are also the State's obligations. These loans are extended by bilateral and multilateral agencies and routed through the government for development of the country's power infrastructure. Thus, a default on these project loans can be tantamount to a government default, dampening the state and its related entities' ability to raise debt.
CEB continues to post operating losses in the absence of a cost-reflective tariff structure or an effective subsidy reimbursement mechanism. CEB's current average tariff, which has not been revised since 2015, is around 20% below the average cost of supplying a unit of electricity.
Fitch expects the CEB to report EBITDA losses in the medium term, especially in the absence of an increase in tariffs and rising generation costs. We expect its low-cost hydropower generation to remain volatile in most years, which would require the CEB to rely on high-cost thermal power, driving up costs. We do not expect planned capacity additions from low-cost liquefied natural gas to come online before 2023. The CEB had a negative free cash flow (FCF) of LKR 55 billion in 2019 on an EBITDA loss of LKR 29 billion, high interest costs and significant capex.
Fitch does not expect the pandemic to have a material impact on the CEB's operations as it is considered an essential service. The CEB's receivables were affected during the lockdown period from April to May, which has normalised since July. However, the CEB had to absorb some of the relief measures extended by the government such as payment write-offs. The pandemic also helped the CEB to reduce its generation costs amid lower electricity consumption, which was primarily met through low-cost generation sources, and a drop in global prices of coal and heavy oils.
Fitch expects the CEB to invest heavily on new generation capacity and the upgrade of the transmission network to meet the country's electricity demand, which the regulator expects to rise by 6% per year in the medium term. The government is considering increased private-sector participation in developing the power sector, but the CEB will continue to play an active role, which would require material capital outlay.