Outlook On Energy Partnership (Gas) Revised To Negative On Likely Weaker Financial Profile; 'BBB-' Rating Affirmed

Stocks and Financial Services Press Releases Thursday June 27, 2013 14:53
SYDNEY--27 Jun--Standard & Poor's

SYDNEY (Standard & Poor's) June 27, 2013--Standard & Poor's Ratings Services said today that it has revised its outlook on Multinet Group Holdings Pty Ltd.'s financing arm Energy Partnership (Gas) Pty Ltd. (Multinet) to negative from stable, and affirmed the 'BBB-' issuer credit rating on the company.

The outlook revision reflects our view that the allowed return on capital and revised tariff path stemming from recent regulatory determination mean Multinet is less likely to improve its financial metrics to a level we consider is consistent with the rating over the next one-to-two years. While we expect Mulitnet's 100% shareholder, DUET (BBB-/Stable), to mitigate this impact through greater equity contributions over time, Multinet nevertheless has virtually no headroom to withstand any underperformance at the current rating level.

In March 2013, the Australian Energy Regulator released its final decision for Multinet. In addition to a return on capital of just 7.0%, the structure of tariff path is to result in negative adjustments to the tariffs until 2014, when the tariffs will revert to a CPI-plus-trajectory. In response, DUET has indicated it will provide equity contributions progressively over the next few years. Even so, this action is expected to result in Multinet's ratio of FFO to debt being about 6%, which is at the very bottom of our expected range for the rating.

The rating on Multinet reflects our opinion of the company's "excellent" business risk profile, which is based on high cash flow certainty and stability from Multinet's regulated natural-monopoly operations. Multinet's gas networks are subject to low operational risk, given the group's underground pipes are less exposed to weather damage than competitors' are. Partially offsetting these strengths are the company's weak financial metrics and exposure to weather-driven volumetric risk.

"The negative outlook reflects the group's continuing weak financial metrics over the next two years, that fall short of our previous expectations, notwithstanding the planned equity support," said credit analyst Andrew Choi. "There is minimal financial headroom to withstand any underperformance, with FFO to debt forecast at about 6% over the next two years."

The rating could be lowered by at least one notch if we believed Multinet would be unable to achieve FFO to debt of at least 6% over the medium term. This could occur if there is an unexpected decline in gas volume or if the planned level of equity support from the shareholder did not occur or was delayed.

"The outlook may be revised to stable in the next 12-to-18 months if Multinet can show it has built adequate buffer against our minimum expected financial metrics," said Mr. Choi. "Such buffer may be indicated by the company achieving FFO to debt of at least 6.5% and achieving the expected FFO interest cover of about 2x."

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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