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Announcement:

Moody's: ElectraNet's Baa1 rating unaffected by regulatory revenue decision

Global Credit Research - 01 May 2013

Sydney, May 01, 2013 -- Moody's Investors Service says the Australian Energy Regulator (AER)'s final determination for the 2013-18 regulatory control period for ElectraNet Pty Limited (Baa1, stable) does not impact its rating.

"Notwithstanding the reduction in the regulated rate of return and the lower capital expenditure allowance for the period, we believe the final credit impact will be manageable within ElectraNet's Baa1 rating, due to the underlying rationales behind these cuts" says Spencer Ng, a Moody's Analyst and Assistant Vice President.

In its final decision, the AER reduced the regulated rate of return for ElectraNet from 10.65% in the previous regulatory period to 7.5%. In addition, the regulator had also provided for a forecast capex allowance of $690.7 million, which is materially lower than the company's initial proposal of $894 million.

The reduction in return outlined in the decision is primarily driven by the low prevailing risk free rate of around 3.51%, substantially lower than the 6.2% observed at the previous reset in 2008. The lower risk free rate will reduce the regulatory return and revenue of ElectraNet over the five-year period.

However, we believe the company has the ability to recover a majority of the lost revenue through interest savings. These interest savings result from ElectraNet locking in a lower base interest rate via interest rate derivatives which replace the more costly interest rate derivates executed at the last revenue determination.

At the same time, we believe ElectraNet would have the capacity to manage its capital program in accordance with the reduced capex allowance approved by the AER. Despite the substantial reduction, Moody's notes that more than half of the cut is relating to a change in demand forecasting approach -- as prescribed by the AER -- which will reduce both the capex allowance as well as the actual investment ElectraNet is required to undertake.

Other allowance reduction relative to the revised proposal include lower allowances for land and easements, prudency adjustment and other adjustments totaling at around $60 million. Moody's understands that ElectraNet will aim to fine-tune its investment program in order to avoid material overspending or compromising its operating reliability requirements. ElectraNet has a track record of keeping its actual capital investment spending within its approved allowance.

Moody's will continue to work closely with ElectraNet to consider the full impact of the regulatory decision, as well as its strategies to manage the impact on the company's credit profile.

The principal methodology used in the ratings was Regulated Electric and Gas Networks published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

ElectraNet is based in South Australia and is the lessee of South Australia's high voltage electricity transmission network.

Spencer Ng
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Terry Fanous
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's: ElectraNet's Baa1 rating unaffected by regulatory revenue decision
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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