CEB gets ‘AAA’ rating from Fitch; outlook ‘Stable’

„Fitch doesn’t expect government to liberalise electricity sector or privatise CEB in medium term

Fitch Ratings Lanka has published Sri Lanka-based Ceylon Electricity Board’s (CEB) National Long-term Rating of ‘Aaa(lka)’ with a ‘Stable’ outlook. The CEB is fully-owned by the Sri Lanka sovereign (B+/stable).

The 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 the CEB’S strategic importance to Sri Lanka in ensuring power security and supply of affordable electricity to the public.

Fitch believes the Sri Lankan government uses the CEB as a vehicle to provide an essential public service. The CEB provides electricity at subsidised tariffs without much financial compensation from the government.

Fitch assesses the linkages between the CEB and state to be strong, reflecting high ownership and management control, explicit guarantees and financial support through equity infusions and debt funding.

The 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. Fitch expects the state to provide extraordinary support to the CEB over and above most other state entities.

“We do not expect the government to liberalise the electricity sector or privatise the 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 the CEB’S linkages with the state to weaken.”

The 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 debtladen balance sheet.

However, Fitch believes providing a notch-specific standalone credit view of the 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 the CEB’S operations over the medium term, as Fitch believes electricity will continue to be sold below cost.

The CEB has almost full network connectivity and accounted for more than 75 percent of Sri Lanka’s generation capacity at end-2016.

The CEB will be the key driver in achieving the government’s target of increasing the current installed capacity by 2.5x within 20 years to meet the electricity demand, which the CEB expects to rise by 5 percent per annum over the long term.

New capacity in mini hydro, thermal and renewable energy will come from private players but the CEB will undertake all large power-generation projects and improvements to the transmission and distribution network, which require significant capital investments.

Fitch estimates the majority of the CEB’S electricity tariffs to be below generation cost due to regulated pricing, resulting in large losses for the company. However, we do not foresee the government implementing a pricing formula in the near-term, given the political and social implications.

The CEB’S balance sheet is significantly weak for a utility company owing to its inability to recover operating costs. This has compelled the CEB to borrow to sustain its day-today operations.

Furthermore, the CEB is tasked with improving the country’s power infrastructure, which requires significant capital investment. Fitch does not foresee the CEB’S debt burden easing in the medium term unless the government converts part of the debt to equity, as has occurred in the past.