RAM Ratings opines that Sarawak Energy Berhad's (SEB or the Group) AAA/Stable rating will remain intact despite the recently announced water tariff for generation of electricity. As part of Sarawak's efforts to expand its revenue base, the state announced a tariff revision for taking or impounding of water from any river or stream for electrical energy under budget for 2020. The rate will be raised to 2.5 sen per kWh effective 1 January 2020, from the present 1 sen.
Given that a large proportion of SEB's electricity output originates from hydro sources, the 150% hike in tariff translates into about RM300 mil of additional generating cost per annum for the Group. That said, our sensitised cashflow analysis indicates that SEB's credit metrics will stay healthy and still support its AAA rating albeit marginally weaker than our earlier projections backed by its solid business fundamentals.
SEB's funds from operation debt coverage (FFODC) ratio is expected to range around 0.130.14 times between fiscal 2020 and 2022, compared to the previous expectation of 0.150.17 times. We highlight that this is still stronger than the Group's five-year average of 0.11 times for 2014-2018. Meanwhile, we envisage SEB's gearing ratio to continue easing, tapering to an average of 1.65 times between fiscal 2020 and 2022 (previous projection: 1.51 times; last five years' average: 2.68 times). This is despite RM1.0 bil-RM2.0 bil of projected annual debts during the same span (versus the earlier assumed RM1.0 bil-RM1.5 bil). The new borrowings to fund plant-ups as well as transmission and distribution assets are envisaged to remain supported by the progressive ramping up of electricity demand from bulk customers.
Notably, SEB monopolises the generation, transmission, distribution and retail of electricity in Sarawak. It plays a strategic role in making available and delivering electricity to power the state and is also a key facilitator of the Sarawak Corridor of Renewable ESCORE). SEB is wholly owned by the Sarawak state government through the State Financial Secretary. Based on our rating methodology for government-linked entities, the Group benefits from a very high likelihood of extraordinary government support in the event of financial distress.
That said, we caution that any sudden and/or sustained deterioration in the Group's financial profile due to unexpected cost increases without the corresponding cash inflow or external support will affect its rating. We will continue monitoring the relevant developments and reassess the rating for any further unexpected or drastic changes.
Liew Kar Ling
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