Moody’s says event risk remains high within the Australian and New Zealand utilities industry

SYDNEY, Australia, Feb. 8, 2001 à‚– Moody’s Investors Service says in a new special report that event risk within the Australian and New Zealand Utilities industry will remain high in 2001.

The rating agency believes ongoing restructuring and consolidation in the sector is inevitable. “Companies will need to reduce operating costs and achieve earnings growth when faced with the twin threats of incentive-based regulation and competition in supply of electricity,” Moody’s author and Senior Vice President, Brian Cahill, explains.

“After the Victorian regulator’s decision last year, we consider it highly likely that the need to reduce operating costs will lead to joint ventures, alliances or mergers in the Victorian distribution sector,” Cahill said. “Likewise in the supply of electricity economies of scale will become crucial as increasing competition threatens margins and deregulated power prices require high investment in risk management systems and personnel,” he added.

The Special Report “Rating Methodology: Australian and New Zealand Utilities,” also highlights the need for investors to focus very carefully on management strategy. “In the US last year we saw a lot of plans to separate regulated and unregulated utility businesses,” Cahill said.

“United Energy’s separation last year of its retail and distribution businesses is, we believe, a foretaste of what other companies in Australia may attempt in the near future.”

The Special Report outlines the factors that the rating agency takes into consideration when assessing utilities in Australia and New Zealand.

“Business risk profiles within the industry are vastly different,” Cahill said, “and clearly a company operating in the competitive generation and supply environment is at more risk than one in the regulated monopoly transmission and distribution business.”

“Risk profiles can also change as companies continue to diversify, divest or exit the ever-changing market,” Cahill added. However, Cahill believes that regulation remains the key driver of revenues for companies owning transmission and distribution networks. “While not without some risk, regulation usually provides a stable, relatively predictable source of revenues compared with other industries,” Cahill said.

Cahill said on the other hand that the electricity supply business is a high risk, low margin business with many unrated counterparties.

“Risk management strategies will be crucial to companies involved in this business,” he said, “and it will require substantial ongoing management time and investment in systems.”

“Faced with the need to do this in an increasingly competitive sector, some current players in the industry will exit or restructure,” he added.

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