CEB unlikely to raise power rates due to oncoming elections: Fitch

Fitch Ratings has affirmed Sri Lanka- based Ceylon Electricity Board's ( CEB) National Long-Term Rating at ' AAA( lka)' with a Stable Outlook.

CEB's rating is equalised with that of the Sri Lankan sovereign ( B+/ Stabl e ) , reflecting strong linkages with the parent, 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 as the monopoly electricity transmitter and distributor in the country. CEB also accounts for around 70 per cent of the power generation in the country, Fitch said in a media release.

“Fitch assesses the linkages between CEB and the state as strong, reflecting high ownership and management control, explicit guarantees and financial support through equity infusions and debt funding. The government also implicitly guarantees CEB's project loans ( about 80 per cent of outstanding debt), which are extended by bilateral and multilateral agencies and routed through the government for development of power infrastructure. CEB provides electricity at subsidised rates, fulfilling an essential service for the government. We do not expect CEB's linkages with its parent to weaken in the medium term as the government's need to provide electricity at subsidised rates can be carried out only by a state entity such as CEB, as private companies would not be willing to incur losses. Fitch views CEB's standalone credit profile as much weaker than its support- driven rating and b e l i eves providing a notch- specific standalone credit view of CEB is meaningless due to poor margin visibility and the need for continued state support to sustain operations,” the release said.

Fitch said it didn’t expect the government to increase electricity tariffs in the foreseeable future to levels that adequately cover CEB's generation, distribution and transmission costs. The government sets tariffs based on its socio-economic objectives and has not revised tariffs for almost three years despite rising generation costs. CEB's average cost of supplying a unit of electricity to customers in 2017 was around 20 per cent higher than the average tariff.

“The government faces elections in the next 24 months, and amid rising living costs due to higher fuel costs and local- currency depreciation, we do not expect the government to raise electricity tariffs or implement a cost- reflective pricing formula,” Fitch said.

While generation costs would remain high in the next couple of years amid rising oil prices and volatile contribution from low- cost hydropower, Fitch said: “We expect the share of hydropower in the generation mix to remain below historical levels due to declining load factors and very little new capacity additions. We expect CEB to turn to highcost oil- based sources to meet the shortfall”.

Fitch assesses the linkages between CEB and the state as strong, reflecting high ownership and management control, explicit guarantees and financial support through equity infusions and debt funding. The government also implicitly guarantees CEB's project loans (about 80 per cent of outstanding debt), which are extended by bilateral and multilateral agencies and routed through the government for development of power infrastructure.