Ratings agency Standard & Poor's has suggested that state-owned energy retailer Synergy 's credit rating is likely to come under pressure when the government proceeds with changes to its power purchase contracts.
Ratings agency Standard & Poor's has suggested that state-owned energy retailer Synergy 's credit rating is likely to come under pressure when the government proceeds with changes to its power purchase contracts.
S&P said the details on the proposed changes to market rules and the vesting contracts will be important to the ratings on Synergy.
"In our view, there is likely to be negative pressure on the Synergy ratings if changes to the vesting contract increase Synergy's market risk and/or exposure to competitive forces in the near term," S&P said in a statement.
Full anouncement below:
Synergy Ratings Are Not Immediately Affected By Potential Changes To Electricity Market Rules In Western Australia
Melbourne, Sept. 1, 2009 -- The Western Australian government (AAA/Stable/A-1+) has announced that significant changes to the state's electricity market rules and vesting contract structure are required. The announcement has no immediate implications for the ratings on the 100% state-owned energy retailer Synergy (A+/Stable/A-1). Although the government has announced that it will not merge Synergy with the state-owned generator Verve Energy (not rated), details on the proposed changes to market rules and the vesting contract have not been made public. Nevertheless, any changes to the market rules and vesting contract, and how these will be managed, will be important to the ratings on Synergy. Standard & Poor's Ratings Services will focus on, among other things, the following factors:
- The form of changes to the existing vesting contracts between Verve and Synergy;
- Any changes to displacement under the existing vesting contract;
- Implications of any changes for Synergy's pricing mechanism; and
- Transition risk to the new operating environment of the carbon pollution reduction scheme (CPRS) and meeting new renewable energy targets (RET).
In our view, there is likely to be negative pressure on the Synergy ratings if changes to the vesting contract increase Synergy's market risk and/or exposure to competitive forces in the near term.
The existing vesting contract is a supportive factor for the Synergy ratings because it provides Synergy with revenue reliability by hedging market risk; it also places price-fluctuation risk with Verve Energy. The vesting contract was established as part of the disaggregation of the then integrated energy utility Western Power. Given a significant proportion of Synergy' retail load represents small users or non-contestable consumers that are supplied at non-cost-reflective prices, the existing vesting contract provides Synergy with assured retail margins.
Any potential changes to Synergy's pricing mechanism will be an important credit factor. In Standard & Poor's opinion, the existing pricing mechanism for Synergy provides an assured retail margin; therefore, the market risk is fully borne by Verve. This is unlike most other energy markets, where significant market risk is borne by the retailer. With Western Australian retail energy prices currently not cost-reflective (with tariffs expected to increase toward cost-reflective pricing over the next few years), any exposure to market risk or a contraction of margins to Synergy would heighten the company's credit risk.
The existing vesting contract provides for a phased displacement of energy provided by Verve. However, in the absence of cost-reflective pricing in the short term, the ratings on Synergy could be pressured if the level of supply from vesting contracts diminishes below our expected range and Synergy were required to purchase higher-cost energy (compared with Verve). The stable rating outlook on Synergy reflects our expectation that the company will maintain its dominant market share in the state over the next two-to-three years; the outlook also assumes that the vesting contracts will cover 40%-60% of wholesale supply.
The existing flexible displacement mechanism of Synergy's vesting contract, which was put in place to enable Synergy to operate in an evolving competitive environment, has been another supportive factor for the ratings on the company over the past three years. Indeed, the phased displacement of the vesting contract supports the Synergy credit rating in the short term and has enabled Synergy to procure alternate energy via power purchase agreements to position itself for a more competitive environment.
Similar to many of its counterparts on the eastern seaboard of Australia, Synergy's operation and balance sheet also faces the risk of transition to complying with a potential CPRS by July 2011 and new renewable energy targets (RET). These schemes may affect the type of energy sourced by Synergy. What's more, given the legislative prohibition on the company entering into generation, the schemes may heighten Synergy's risk of transition.
