Research Update:
Oman Electricity Transmission Co.
Downgraded To 'BBB' After Action On
Sovereign; Outlook Stable
Primary Credit Analyst:
Karim Nassif, Dubai (971) 4-372-7152; [email protected]
Secondary Contact:
Sarah Harkins, CFA, London +44 (20) 7176 3716; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 1
1487744 | 300382017
Research Update:
Oman Electricity Transmission Co. Downgraded
To 'BBB' After Action On Sovereign; Outlook
Stable
Overview
• On Nov. 20, 2015, we lowered our long-term sovereign credit rating on the
Sultanate of Oman to 'BBB+' from 'A-', with a negative outlook.
• Under our criteria, we view the likelihood of government support to Oman
Electricity Transmission Co. (OETC) as "extremely high."
• As a result, we are lowering our long-term corporate credit rating on
OETC to 'BBB' from 'BBB+'.
• The stable outlook reflects our view of the stability of OETC's
stand-alone performance.
Rating Action
On Nov. 25, 2015, Standard & Poor's Ratings Services lowered its long-term
corporate credit rating on Oman Electricity Transmission Co. (OETC) to 'BBB'
from 'BBB+'. We also downgraded the notes issued by orphan special-purpose
vehicle Lamar Funding Ltd. (LFL) to 'BBB' from 'BBB+'.
The outlook is stable.
Rationale
The downgrade of OETC follows a similar rating action on the Sultanate of Oman
(see "The Sultanate of Oman Long-Term Rating Lowered To 'BBB+'; Outlook
Negative; Short-Term Rating Affirmed At 'A-2'," published Nov. 20, 2015, on
RatingsDirect). We regard OETC as a government-related entity (GRE), under our
criteria.
In accordance with our criteria for GREs, we base our rating approach on our
view of:
• OETC's very strong link with the Omani government, given the company's
monopoly status as the sole transmission system operator and its 100%
state ownership through the Ministry of Finance and government-owned
Electricity Holding Co. SAOC (EHC).
• The company's exposure to potential privatization risk. However, we
consider it unlikely that any flotation will take place in the next
two-to-three years. Furthermore, we expect that the government would
maintain a controlling stake in the company after any potential change in
ownership.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 2
1487744 | 300382017
Research Update: Oman Electricity Transmission Co. Downgraded To 'BBB' After Action On Sovereign; Outlook
Stable
• The requirement that the Ministry of Finance provide "adequate financing"
to enable OETC to undertake its operations under Article 67 of Omani
electricity sector law, which mitigates the fact that OETC's obligations
are not explicitly guaranteed.
• OETC's critical policy-based role as the sole transmission system
operator in Oman and the backbone for generating companies and
distribution entities using the network. OETC has the task of fulfilling
the government's economic and infrastructure mandate by ensuring the
reliability and security of network supply. It has a substantive
investment schedule over the next five years in particular. The success
of this is paramount, in our view, to meeting the power demands of the
country's general population and commercial and public enterprises.
As a result of OETC's GRE status and our view of the "extremely high"
likelihood of government support, the recent downgrade of the Sultanate of
Oman has led us to lower the rating on OETC by one notch.
The resulting 'BBB' rating on OETC also factors in our 'bbb-' assessment of
its stand-alone credit profile (SACP), which, in turn, reflects our view of
the company's "strong" business risk profile and "significant" financial risk
profile, as our criteria define these terms.
Our assessment of OETC's business risk profile as "strong" reflects our view
of the company's low-risk regulated operations, which have a 100% cost
pass-through thanks to a regulated, asset-based model. The model is similar to
that of the U.K.'s Office of Gas and Electricity Markets but adapted to Oman's
fast-growing electricity sector. This is through the model's adherence to a
consistent weighted-average cost-of-capital formulation, the closeness of
revenues earned relative to maximum allowed revenue historically, the relative
independence of the regulator, and the absence of key performance indicators,
which limit penalties and deductions.
Our view of OETC's financial risk profile as "significant" is constrained by
the company's ambitious capital expenditure (capex) program, set to be
initiated in 2015, which we forecast will increase OETC's debt compared with
historical levels. We expect that OETC will post negative discretionary cash
flows until end-2020. We project that OETC's adjusted funds from operations
(FFO)-to-debt ratio will gradually decrease from about 16% in 2015 to 13%,
over the next two years. However, we expect it will remain above the 13% level
that we regard as consistent with "significant" financial risk. We also expect
that the company's adjusted FFO-to-cash interest ratio will be comfortably
within 3.5x-5.5x in 2015 and 2016.
Our modifier for OETC's comparable ratings analysis is negative, factoring in
that its credit metrics (specifically FFO to debt) are at the lower end of our
"significant" financial risk profile category.
Under our base case for OETC, we assume:
• Annual EBITDA margins of about 85% on the back of the regulated business
model framework and stable cost structure. The maintenance cost structure
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 3
1487744 | 300382017
Research Update: Oman Electricity Transmission Co. Downgraded To 'BBB' After Action On Sovereign; Outlook
Stable
is generally rigid and likely to remain so while OETC renegotiates
contracts.
• Growth in the regulated asset base, owing to the large capex program we
estimate at about Omani rial (OMR) 575 million over 2015-2019.
• The debt-to-capital ratio will be 50% for 2015, gradually increasing to
56% by year-end 2019.
• Inflation in line with our economic forecasts for Oman.
Based on these assumptions, we arrive at the following credit measures for
OETC:
• Adjusted debt to EBITDA slightly exceeding 5x in the years 2015-2017.
• Adjusted FFO to debt of 13%-16% for the years 2015-2017.
On May 7, 2015, OETC issued an OMR385 million (US$1 billion equivalent) senior
unsecured bond through its orphan special-purpose vehicle LFL. On the day the
bond documents were signed, LFL simultaneously entered into a loan agreement
with OETC, under which the bond proceeds were lent on to OETC with a fixed
debt-service schedule. The debt-service schedule is aligned with the LFL's
debt-service obligations to its bondholders. As such, we equalize our rating
on this senior unsecured debt with that on OETC.
Liquidity
We regard OETC's liquidity as "adequate," under our criteria. We expect that
the company's sources of liquidity will exceed its uses by the minimum
threshold of 1.1x for our "adequate" category over the next 12 months,
following the completion of the transaction. We also assume that liquidity
sources would cover uses even if forecast EBITDA were to decline by 10%, and
that the company will retain adequate headroom under its financial covenants.
We also assess that the company has sound relationships with banks, the
ability to absorb high-impact, low-probability events with limited need for
refinancing, and generally prudent risk management.
Principal liquidity sources include:
• Cash flow from operations of about OMR59 million in the next 12 months.
• Working capital inflows of about OMR1 million-OMR4 million.
• OMR118 million of cash balance available with OETC as of June 30, 2015 to
meet its capex needs over the next 12 months.
• An OMR95 million committed cash reserve made available by EHC, which any
of the subsidiaries can access if needed.
• OMR385 million of total bond proceeds in 2015.
Principal liquidity uses consist of:
• Capex of OMR100-OMR120 million in the next 12 months.
• Dividends of OMR11.5 million.
• Repayments of OMR267 million completed in the first half of 2015.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 4
1487744 | 300382017
Research Update: Oman Electricity Transmission Co. Downgraded To 'BBB' After Action On Sovereign; Outlook
Stable
Outlook
The stable outlook on OETC incorporates our assumption that the company will
retain its critical role as the country's transmission system operator, and
very strong link with the government, based on its 100% government ownership.
For the 'bbb-' SACP, we assume that OETC will adhere to credit metrics
commensurate with our significant financial risk category. These include OETC
posting FFO-to-debt ratios comfortably above 13% on a weighted-average basis,
although we note that a downward revision of the SACP of up to three notches
would not necessarily change the ratings on OETC.
Downside scenario
We could lower the rating if we believed the likelihood of extraordinary
government support to OETC had weakened, all else being equal. This could, for
example, be as a result of significant dilution in government ownership. The
rating on OETC could also come under pressure through a material change in the
regulatory system covering OETC's operations, or if the company started to
make significant additional borrowings beyond its current plans.
That said, we consider downside risk to the rating as a result of any
weakening in the SACP, to be limited. We would have to lower the SACP by four
notches to prompt us to lower the rating on OETC, all else being equal.
Upside scenario
An upgrade of OETC is currently unlikely, in our view. The most likely
triggers would be an upgrade of Oman or a one-notch upward revision in the
SACP, all else being equal. An upward revision of the SACP would follow a
substantial improvement in the financial risk profile, with FFO to debt of 18%
or more, or a marked improvement in the business risk profile.
Ratings Score Snapshot
Corporate credit rating: BBB/Stable/-Business risk: Strong
• Country risk: Moderately high
• Industry risk: Very low
• Competitive position: Strong
Financial risk: Significant
• Cash flow/leverage: Significant
Anchor: bbb
Modifiers
• Diversification/portfolio effect: Neutral (no impact)
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 5
1487744 | 300382017
Research Update: Oman Electricity Transmission Co. Downgraded To 'BBB' After Action On Sovereign; Outlook
Stable
•
•
•
•
•
Capital structure: Neutral (no impact)
Liquidity: Adequate (no impact)
Financial policy: Neutral (no impact)
Management and governance: Fair (no impact)
Comparable ratings analysis: Negative (-1 notch)
Stand-alone credit profile: bbb• Sovereign rating: BBB+/Negative/A-2
• Likelihood of government support: Extremely high (+1 notch from SACP)
Related Criteria And Research
Related Criteria
• General Criteria: Rating Government-Related Entities: Methodology And
Assumptions, March 25, 2015
• General: Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Dec. 16, 2014
• Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov.
19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions,
Nov. 19, 2013
• General: Corporate Methodology: Ratios And Adjustments - Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Timeliness Of Payments: Grace Periods,
Guarantees, And Use Of 'D' And 'SD' Ratings, Oct. 24, 2013
• General Criteria: Methodology: Management And Governance Credit Factors
For Corporate Entities And Insurers, Nov. 13, 2012
• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating,
Oct. 1, 2010
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Ratings List
Downgraded
To
From
Oman Electricity Transmission Co.
Corporate Credit Rating
Senior Unsecured
BBB/Stable/-BBB
BBB+/Stable/-BBB+
Lamar Funding Ltd.
Senior Unsecured
BBB
BBB+
Additional Contact:
Industrial Ratings Europe; [email protected]
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 6
1487744 | 300382017
Research Update: Oman Electricity Transmission Co. Downgraded To 'BBB' After Action On Sovereign; Outlook
Stable
Complete ratings information is available to subscribers of RatingsDirect at
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by
this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left
column. Alternatively, call one of the following Standard & Poor's numbers:
Client Support Europe (44) 20-7176-7176; London Press Office (44)
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm
(46) 8-440-5914; or Moscow 7 (495) 783-4009.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 7
1487744 | 300382017
Copyright © 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval
system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not
responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for
the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any
damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com
(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information
about our ratings fees is available at www.standardandpoors.com/usratingsfees.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
NOVEMBER 25, 2015 8
1487744 | 300382017