Electricity sector reforms support growth, fair return on invested capital: SEC chief executive

The recently-introduced reforms to Saudi Arabia’s electricity sector will help Saudi Electricity Company (SEC) operate more efficiently and achieve a fair return on its invested capital, Chief Executive Officer (CEO) Fahad Al-Sudairi told Argaam in an exclusive.

The reforms will also restructure the government support for the essential services that the company has been providing since its inception into a more direct and transparent mechanism with the balancing account, which will help achieve financial balance for the sector as a whole.

In addition, the utility provider will be able to operate commercially as an entirely profit-based entity as of 2021 and enjoy resilience to invest in critical projects, to meet the ever-growing national demand for electric power.

SEC is working on multiple initiatives that will help improve the quality, efficiency and reliability of the service, Al-Sudairi pointed out.

Here’s the full interview:

Q: How will the recently endorsed regulatory reforms and the agreement with the Ministry of Finance help work out unpaid financial liabilities to the government?

A: The recently endorsed regulatory reforms in the national electricity sector and the agreement between the utility provider and the Ministry of Finance are part of a larger drive by the government to develop the national economy as a whole – and specifically the electric energy sector – to keep up with the Kingdom’s Vision 2030.

One of these reforms was to cancel the fees owed by the company to the government. In its place, and as of Jan. 1, 2021, the Electricity and Cogeneration Regulatory Authority (ECRA) will apply a new mechanism to set the revenue required from the company, so as to enable it to operate more efficiently and recoup the financial liabilities incurred by its services and achieve a fair return on the capital invested in offering these services.

The government support for the company, on the other hand, will continue through the balancing account created specifically for this purpose earlier this year.

These reforms will also reclassify the SAR 167.92 billion in unpaid government fees settled into a financial instrument with an open-ended maturity date and have it listed as part of shareholder value in its balance sheets.

Undoubtedly, all of this is part of the support lent to the company by government under the leadership of Custodian of the Two Holy Mosques, King Salman Bin Abdulaziz, and His Royal Highness Crown Prince Mohammad Bin Salman, to help it provide quality, reliable service to citizens and residents.

Q: What are the expected results from the agreement with the finance ministry, and what does the settlement of the government’s unpaid fees entail?

A: The agreement signed with the Ministry of Finance on behalf of the government to settle unpaid government fees will bolster the company’s financial standing and add sustainability to its capital structure. Those unpaid fees, worth SAR 167.92 billion, or about 33.4% of the value of the company’s total asset base, will be reclassified into value for the shareholders without affecting their actual stakes, deleveraging these debts and ending their contribution to the company’s liabilities.

Given its unprecedented value, the agreement is a landmark deal that further boosts the Kingdom’s leading status in the world of Islamic finance.

The deleveraged financial liabilities to the government to become part of the financial instrument include government loans and net government credit after the government’s liabilities to the company have been deducted, as per the company’s balance sheets as of 2019. Additionally, an SAR 3.35 billion settlement have been set aside to settle due profits to Saudi Aramco – booked under the Ministry of Finance – out of profits on its stake in the company from its establishment in 2000 to the end of fiscal year 2017. Aramco settlement being labelled as part of the financial instrument’s asset is up to the company’s general assembly.

Q: What benefits do you expect from these reforms?

A: These reforms, which are in line with global best practices, will enable the company to recoup the entire cost of its offering of its service as per the targeted efficiencies set by ECRA. The company will also be able to achieve a fair return on invested capital, thus enabling it to operate entirely on a profit-driven basis as of 2021. This, of course, will bolster business ties with other parties operating in the sector and make it even more attractive to investors. The regulatory framework sees the company achieving an anticipated average capital cost of 6%, which is in the ballpark of similar companies around the world.

Moreover, the financial, structural, and regulatory reforms also restructure the longstanding government support for the essential service that the company has been providing since its inception into a more direct, more transparent mechanism with the balancing account, which is set to help achieve financial balance for the sector as a whole.

As such, the company will certainly enjoy the resilience it needs to invest in critical projects that would help improve service quality and meet the ever-growing demand for electric power across the Kingdom.

Q: What is the company’s strategy to improve its service?

A: The company is working on multiple initiatives to improve the quality, efficiency and reliability of its service. These initiatives include a smart infrastructure, such as smart transmission grids, automated distribution grids and power metering equipment. The company is pressing on with its digital transformation to automate customer services and take them online.

SEC is expanding its grids as and where needed to meet the growing demand for electricity incurred by 400,000 new customers being plugged into the grid every year. The utility’s power plants are now far more efficient at 40%, compared to a mere 31% as recently as 2010. The reforms and the settlement will enable the company to invest in critical projects and bring its strategy of bettering the quality and reliability of the service to fruition, especially given the anticipated economic diversity and urbanization brought about by Vision 2030.

Q: What do these reforms mean to the company’s shareholders?

A: The shareholders will see their value bolstered by an open-ended, SAR 167.92 billion financial instrument. The instrument, however, is not part of regular stock, and therefore the stakes that shareholder own and the value attached to them will not be affected.

The instrument will also boost the company’s financial standing and add sustainability to its capital structure, which will help it continue to grow and achieve a fair return on investment, further upholding its financial standing and its general investment status.