Moody's Investors Service downgraded the debt ratings of Israel Electric (IEC) by two notches to Baa2 from A3 and assigned a negative ratings outlook.
The rating action concludes the review that was initiated on November 12, 2002 due to the company's very high debt levels and weak financial profile, which have progressively worsened as the company continued its extensive capital expenditure program.
The standalone financial profile of Israel Electric is not characteristic of investment grade rated utilities, as the debt protection measures are extremely weak. Whilst the rated debt is not guaranteed by the government, Moody's has factored into its debt ratings the importance of the company to the State of Israel.
The company is owned by the Government and is the monopoly electricity generator and supplier. Moody's notes, however, that any support is implicit, and does not include legally binding protection, unlike the situation with some higher rated utilities.
Notwithstanding the intangible support, under the previous tariff structure the debt protection measures of the company deteriorated significantly. The tariff structure has recently been revised, and should enable a modest improvement in debt protection measures but Moody's expects these to remain weak. The company will be highly reliant on external financing in order to meet ongoing debt maturities as well as capital expenditure.
Moody's notes that the rating outlook could stabilize if the Government and/or the Public Utilities Authority take tangible steps to improve the financial profile of the company. Options may include a further restructuring of the tariff to improve free cash flow generation; a restraint on capital expenditure; or the Government directly taking on some of the future funding needs of the company.
Further rating pressure may develop over the course of the year if none of these measures are taken and the debt protection measures of the company deteriorate further. One of the measures that Moody's expects the company to meet for 2003 to maintain the rating at the Baa2 level is a retained cash flow of seven percent to debt.
Israel Electric is the monopoly electricity utility in Israel. It is owned 99.8 percent by the Government, and in 2001 reported a loss of about $11 million. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
