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29 Jul 2004
MOODY'S UPGRADES RATINGS OF TXU AUSTRALIA TO A3 ON EXPECTED COMPLETION OF ITS ACQUISITION BY SINGAPORE POWER
Approximately A$2.5bn of securities affected
Sydney, July 29, 2004 -- Moody's Investors Service has upgraded the long-term senior
unsecured ratings of TXU Australia (TXUA) to A3 from Baa2 upon the expected
completion of Singapore Power Limited's (SP) purchase of the company.
The Aaa ratings of TXUA's AUD MTN programs - wrapped by MBIA
Insurance Corporation - remain unchanged.
The outlook for the rating is stable. This concludes the review
for possible upgrade commenced on 26 April 2004.
The acquisition was announced on April 26, 2004 and financial close
is expected on July 30, 2004. The TXUA businesses will supplement
the activities of SPI Powernet (Aaa, wrapped), the Victorian
electricity transmission company already owned by SP.
After the acquisition, SP is expected to make only minimal changes
to TXUA's business model and plans to keep key personnel.
The ratings consider that 60% of TXUA's EBITDA is generated
from its stable and predictable gas and electricity network businesses.
For the latter, revenue levels are set by the Victorian regulator,
the Essential Services Commission, for 5-year periods.
The remainder of TXUA's business is the Merchant Energy Business
which comprises electricity generation, gas storage, hedging
and retail energy sales.
TXUA has a portfolio of assets which allows for effective hedging against
the volatility evident in wholesale electricity prices and Moody's
acknowledges the conservatism of this strategy. SP has indicated
that this conservative strategy will continue and has instigated a new
risk committee to oversee the hedging business.
Furthermore, the ratings are enhanced by the influence which can
be exerted on TXUA by SP - as its new parent - and the potential
support which it may provide if TXUA were to encounter financial difficulties.
In this respect, Moody's believes that SP has both the willingness
and ability to support TXUA. TXUA will represent around 25%
of the EBITDA of the new SP group, while the entire Australian operations,
including SPI Powernet, will contribute 40% of SP's
On the other hand, tempering the rating are the expected slightly
lower financial metrics, a result of the additional debt which TXUA
will take on after the acquisition. However, over the next
four years, SP has indicated that it is committed to debt reduction
at the expense of dividend pay-outs.
In addition, Moody's understands that SP has made various
confidential undertakings to the Australian regulator, the Australian
Competition and Consumer Commission. If these undertakings concern
its Merchant Energy Business and thereby disrupt the balance between its
generation and retail businesses, then negative ratings pressure
could emerge if a similar risk profile is not reinstated. However
the stable outlook reflects Moody's view that TXUA management -
coupled with the financial flexibility SP ownership brings - will
be able to manage any such process smoothly .
Positive rating pressure could evolve over time if material deleveraging
occurred. Indicators that Moody's would look for in this respect
are the following financial metrics : FFO/Senior Interest approaches
4 times, Debt/EBITDA at or near 4 times and debt/capitalisation
equals 55%. On the other hand, the rating will come
under negative pressure if FFO/Senior Interest falls below 2.5
times, Debt/EBITDA is more than 6 times and debt/capitalisation
exceeds 70%. In addition negative ratings pressure will
result if there is a renegotiation of the hedge book which materially
increases risk or if SP pays material dividends prior to 2008.
Ratings upgraded are
TXU Australia Holdings (Ptnrshp) Ltd. Ptnrshp
TXU Electricity Limited
TXU Australia Holdings Pty Limited
TXU Australia is an integrated energy company based in Melbourne.
Two-thirds of its assets and 60% of its earnings are generated
from its ownership and operation of gas and electricity distribution networks,
and the remainder from gas storage, electricity generation and retail
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
No Related Data.
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