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S&P changes Energy Partnership Gas outlook to negative

by Gavin Madson | Jul 03, 2013

Last week international ratings agency Standard and Poor’s revised its outlook for Energy Partnership Gas (EPG), the Multinet Group to negative from stable. This was in response to the group’s recent regulatory determination which places pressure on the group’s credit metrics.

Following the Australian Energy Regulator’s (AER) most recent determination on EPG, which saw a decrease in the return on capital allowed, and a declining tariff path through to 2015, the rating agency felt the potential for weakening in credit metrics over the short-to-medium term would be more reflective of a rating one notch lower than its current ‘BBB-’. S&P highlighted that should the FFO (funds from operations) to debt ratio fall below 6% (without a forecast short-term return above this level), the rating would be downgraded. At the same time they noted a FFO to debt ratio of 6.5% would be required for the stable outlook to be reinstated.

For its part, the 100% shareholder DUET noted it would undertake measures to ensure the maintenance of EPG’s investment grade rating. These measures would include lower capex and operational expenses and is consistent with DUETs actions with other wholly owned infrastructure assets within its structure including Dampier Bunbury and United Energy.

With limited headroom remaining in EPG’s credit metrics, the rating agency noted any operational or demand issues which resulted in below forecast earnings may affect the rating outcome. This included a possible decrease in gas demand as the economy slows and as wholesale gas prices increase. However we note that beyond the current short term declining tariff path, revenues will revert to increasing in line with CPI from 2015 under the regulatory determination.

More broadly, this latest determination, and in particular the low return on capital of 7.0% allowed would be of concern for operators within the AER regulatory universe. We would expect to see significant push back from operators across the sector at a regulated return on capital of this level – which ultimately may result in a capital strike of some sort. The AER appear to be reacting to retail political pressure on energy pricing, however with the need for investment in the energy sector continuing in coming years, the current regulatory environment does not appear overly favourable to private investment.