S&P Global Ratings has assigned its ‘A-’ long-term issuer credit rating to Sarawak Energy Bhd (SEB) on expectation that it would almost certainly receive timely and sufficient financial support from the Sarawak state government given its strategic importance to and integral ties with the state.
SEB also benefits from a good earnings profile despite low and ad-hoc tariffs, according to the international rating agency.
This is underpinned by its status as a monopoly integrated electricity provider in Sarawak, long-term take-or-pay power purchase agreements (PPAs) with bulk industrial users, and favourable cost structure.
“However, the state-owned integrated utility has high debt leverage and continues to have a sizable capital expenditure (capex) pipeline,” cautioned S&P. “SEB will need to maintain stable operating and financial performance amid growing electricity demand to support deleveraging.”
As for its negative rating outlook, the rating agency quantified that this mirrors its credit rating on the Sarawak state (A-/Negative/–) even as it is of the view that the company has very high likelihood of receiving timely and sufficient financial support from the state government.
“The outlook also reflects our expectation that SEB will maintain stable cash flows and efficient operations which will support the company’s leverage and growth spending over the next 12-24 months,” justified the rating agency.
“It also reflects our view that the company’s management will remain prudent in its spending and shareholder distributions, maintain its current leverage, and manage cash outflow such that the debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) stays about five times in the next 12-18 months.”
The Sarawak state government maintains significant influence over SEB through its 100% ownership and golden share in SEB’s transmission & distribution (T&D) and retail business unit, Syarikat SESCO Bhd.
SEB is a wholly owned government entity with active government involvement via the State Financial Secretary (SFS) in terms of supervision, strategy, operations, funding, and financial management.
This includes the appointment of the entire board of directors who mostly have close linkages to the state government.
“SFS also ensures SEB delivers on its public service obligation of providing a stable supply of electricity at affordable prices,” observed S&P. “As a result, we believe SEB will receive timely and forthcoming financial support from the government in times of financial need.” – June 8, 2022
