Ratings agency Standard & Poor's expects that electricity retailer Synergy will maintain its dominant market share in the medium term, but its performance is likely to deteriorate in the long term.
Ratings agency Standard & Poor's expects that electricity retailer Synergy will maintain its dominant market share in the medium term, but its performance is likely to deteriorate in the long term.
S&P made the comments when assigning a AA- credit rating to the state-owned company, which it said held implied support of its government owner, creating a challenging commercial environment for potential competition.
The full text of a company announcement is pasted below
Standard & Poor's Ratings Services today said that it had assigned its 'AA-' long-term corporate credit rating to Synergy, a Western Australia (WA) state-owned electricity retailer that operates in the Perth metropolitan area. The outlook is stable.
The rating on Synergy reflects the implied support of its government owner, supportive regulated pricing contracts, and the company's strong competitive position as the region's main electricity retailer. Offsetting these strengths are the competitive pressures likely to arise as the WA government pursues full retail contestability (FRC) in the electricity retail market and Synergy's exposure to generation power purchase agreements (PPAs).
"Although the WA government doesn't explicitly guarantee Synergy's financial obligations, the rating is underpinned by our expectation of the government's willingness to provide timely support in order to maintain Synergy's business and financial objectives," Standard & Poor's credit analyst Tammy Garay said. "The strong support of the government is evidenced by the structure of the vesting contracts between Synergy and Verve Energy, the WA state-owned electricity generator, which provides a 1.5% profit margin to Synergy."
Ms. Garay added: "The existing vesting contracts, coupled with the current tariff levels, create a challenging commercial environment for potential competitors. Therefore, it is unlikely Synergy's market share of more than 80% of the retail electricity and gas market in southwest WA will change significantly in the short-to-medium term. However, the WA government's strong support of FRC means there is a strong likelihood of deterioration in Synergy's market share in the long term, allowing competitors to become countervailing powers in the market."
Factored into the current rating is a significant weakening of Synergy's balance sheet and deterioration of cash-flow metrics beginning in 2009 due to the company's substantial participation in the PPAs. Moreover, due to the tight operating margins inherent in the electricity retail industry, as well as the pending further implementation of FRC, Synergy's business and financial profile are likely to deteriorate in the long term.
