CEB’s cashflow sufficient for debt servicing despite tariff cut: Fitch Ratings

The 22.5 percent electricity tariff cut, effective July 16, won’t hurt the Ceylon Electricity Board’s (CEB) cashflows, and will remain sufficient for debt servicing, Fitch Ratings confirmed.

The rating agency said it does not expect the latest cut to affect the Sri Lankan electricity distributor’s payments to independent power producers (IPPs). 

“Lower tariffs are supported by falling generation costs from CEB’s higher mix of hydropower and lower coal prices Year-on-Year (YoY). Financing costs will also fall amid lower market interest rates,” Fitch said in a commentary released yesterday.

The Public Utilities Commission of Sri Lanka’s (PUCSL) instruction on the 22.5 percent average tariff cut, made during the regulator’s quarterly tariff review, was larger than the 10 percent proposed by CEB. 

However, generation costs have fallen in tandem with the rise in hydropower to 31 percent of the generation mix in 1H24 (1H23: 23 percent), while prices of coal, which fuels over 36 percent of the country’s generation mix, have dropped 32 percent YoY. 

Fitch expects thermal coal prices to fall 20 percent and 10 percent in 2024 and 2025, respectively.
 “Following the tariff cut and assuming unchanged tariffs and costs for the rest of the year, we estimate CEB’s EBITDA margin will narrow to about 11 percent in 2024, from the 26 percent in 2023 reported in its preliminary accounts,” Fitch said.

EBITDA interest coverage will fall but remain sufficient at 1.8x (2023: 3x), helped by declining market interest rates. Fitch said that if required, CEB has the flexibility to reduce annual capex by about Rs. 20 billion, to Rs. 70 billion during 2024-2025, in line with the previous three years, to mitigate the impact of lower tariffs. This will help maintain EBITDA net leverage at a healthy 3x it said.

”We understand that CEB is targeting further reductions in operating costs in the near-to-medium term, although implementation is subject to execution risk,” Fitch said.

The agency went on to note that deviating from the current cost-reflective tariff structure is a key risk to CEB’s balance sheet and the long-term health of Sri Lanka’s power generation sector. A weakening in CEB’s cash flow could lead to delays in settling IPP payments and weigh on the IPPs’ financial profile and liquidity.