Global Arab Network | Fitch: Outlook Stable for Dubai Electricity and Water Authority

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Fitch: Outlook Stable for Dubai Electricity and Water Authority

Global Arab Network - - Adam Turner

Tuesday, 21 April 2009 22:35

Fitch Ratings has affirmed the Dubai Electricity and Water Authority's (DEWA) senior unsecured and Long-term Issuer Default (IDR) ratings at 'A+' and Short-term IDR at 'F1'. The Outlook for the Long-term IDR is Stable. Fitch has also affirmed DEWA Funding Limited's AED3.2bn Sukuk maturing in 2013 at 'A+'.
DEWA is the vertically integrated electricity and potable water utility in the Emirate of Dubai and is fully state-owned. Its creditworthiness is closely aligned with that of the Emirate, in accordance with Fitch's parent subsidiary methodology (see the criteria report entitled, 'Parent and Subsidiary Rating Linkage', available on the agency's public website).

The Emirate's involvement in DEWA is manifested in numerous ways, including the appointment of board members and the setting of electricity and water tariffs. DEWA also closely coordinates its strategic plan, annual budget and funding plans with the government. In addition, DEWA sources its gas, which is the primary fuel source needed to fire its generation plants, from the Dubai Supply Authority (DUSUP).

Government support was again evident in 2008, when, pursuant to a decree, all existing (and future) land held by DEWA was actually transferred to the Authority. This has so far resulted in the capitalisation of plots of land for a value of AED19.8bn, with more to come. Among other aspects, this development opens up the possibility for DEWA to issue debt secured by land, although Fitch is unaware of any concrete plans as yet.

The ratings are also supported by DEWA's monopolistic market position, improving efficiency levels, and modern asset base. Nevertheless, on a standalone basis, DEWA's creditworthiness would warrant a Long-term IDR substantially below 'A+'.
This is partly because of the negative impact of investment requirements on its financial profile which, until 2006, was characterised by a net cash position. Fitch acknowledges though that key credit ratios are likely to weaken less than previously anticipated due to significant cuts in investment targets amid subdued demand growth.

DEWA reported a solid performance in 2008, during which revenues increased by more than 50%, the operating EBITDAR margin exceeded 60% and net income reached AED4.2bn (from a loss of AED743m in the prior year). This was supported by an improved tariff framework and enhanced availability of cost-efficient natural gas.

In 2008, the tariff system evolved from being a flat rate system to a tiered system whereby tariffs are increased according to volumes consumed. A sharp decline in fuel costs was due to a ramp-up in gas supply to DEWA on the back of a contract between Dolphin Energy Limited and DUSUP. This removed the need to use expensive diesel oil as a secondary fuel to fire its plants.

Year-end 2008 gross debt totalled AED19.1bn, up from 9.7bn in the prior year. Total debt includes USD2bn (AED7.3bn) of long-term funding under a USD4bn securitisation programme, pursuant to which DEWA has undertaken to assign utility receivables which are not available for servicing unsecured debt, and the AED3.2bn Sukuk issued in June.
The remaining debt at FYE08 was short-term, mainly comprising an AED8.1bn syndicated loan facility which fell due in April 2009 and which was only partially covered with available liquidity.

Meanwhile, management has successfully arranged for this facility to be renewed with a tenor of three years, taking pressure off the group's liquidity profile. Fitch will nevertheless continue to monitor DEWA's funding efforts and liquidity management as it rolls out its investment programme. The ratings are based on Fitch's understanding that financial support from the shareholder would be forthcoming in the event of a funding gap.

Global Arab Network

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