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Standard & Poor's Ratings Services assigned a 'BBB-' long-term corporate credit rating to Dubai Electricity and Water Authority (DEWA), the public provider of electricity and water services. S&P set their outlook for DEWA as stable.
The ratings reflect S&P’s belief that the Dubai government will provide timely and sufficient extraordinary support for DEWA in the event of financial stress. The rating also takes into account DEWA's stand-alone credit profile (SACP), which we assess at 'bb-'.
S&P consider DEWA to be a government-related entity (GRE) under our criteria. In accordance with the rating agencies criteria for GREs, their view of the "very high" likelihood of extraordinary government support for DEWA, if needed, is based on our assessment of DEWA's:
“Very important role in providing essential power generation, transmission, and distribution services, and in meeting the government's key economic and social objectives. Electricity and water provision is vital to the economy and for the everyday needs of the population;” stated the report.
S&P’s assessment of DEWA's "Fair" business risk profile is supported by its dominant position in electricity generation and its monopoly on transmission and distribution power and water activities in the Dubai emirate. DEWA's business risk also reflects its competitively priced fuel agreements with the Dubai Supply Authority (DUSUP), and supportive tariff arrangements agreed by the government that provide for relatively healthy returns on capital compared to peers in the region.
These factors are offset by some regulatory uncertainty in some of DEWA's key business segments, including a lack of guaranteed contractual returns and exposure to fuel cost risk because of the absence of a decree stipulating full pass through of costs.
“We qualify DEWA's financial risk profile as "aggressive" based on our expectations of negative free operating cash flow, due to high ongoing capital expenditures, some refinancing risk in the short to medium term, and relatively weak cash flow credit metrics,” said S&P.
The stable outlook reflects S&P’s view of the credit quality of the Emirate of Dubai, along with their expectation that there will be no change in the level of extraordinary support that the emirate would provide to DEWA in the event of financial distress.
Such a change could follow, for example, a revision in S&Ps view of the "very strong" link between the emirate and the company resulting from any dilution of the emirate's ownership in DEWA (although there is no such proposal at present), or a significant change in the competitive environment in the power and water sector in Dubai, said the report.