TEXT-Moody's release on Envestra Ltd

(The following statement was released by the ratings agency)

Sept 15 - Moody's Investors Service has today affirmed Envestra Ltd's (ENV.AX) ("Envestra") Baa2 underlying senior secured rating. At the same time, the outlook on the rating has been revised to negative from stable.

"The change in outlook reflects Envestra's weakened position within the Baa2 rating," says Spencer Ng, a Moody's Analyst, adding "this is evidenced by its consolidated financial profile relative to the tolerance metrics set for the rating, and compared with similarly-rated regulated utilities". The change in outlook also incorporates a degree of uncertainty surrounding Envestra's capital expenditure plan in the current regulatory period, following the company's recently annouced plan to cut capital spending. "Such situation raises some uncertainty about Envestra's financial profile over the medium term", Ng, adds.

Envestra's Baa2 rating continues to reflect its low business risk profile, given its ownership of regulated gas networks in South Australia, Queensland and Victoria. Cash flows generated from these assets are stable and predictable. When assessing the financial profile of Envestra, Moody's considers both the standalone financial metrics of Envestra Limited and its consolidated metrics with Envestra Victoria Pty Ltd (EnVic), due to the strategic importance of EnVic's Victorian gas network.

Moody's understands that Envestra and EnVic plan to consolidate their respective security arrangements, so as to provide a more simplified financing and security structure. To the extent that this plan proceeds, the consolidated credit profile will be constrained by EnVic's more aggressive capital structure. Over the next 2-3 years, Moody's expects Envestra to maintain FFO coverage of 1.6x-1.7 times (on a consolidated basis). These metrics incorporate Envestra's plan to raise equity of around $100 million in the near term. The outlook on Envestra's Baa2 rating could return to stable if there is evidence of consistent improvement in the financial profile as demonstrated by the following consolidated financial metrics: FFO/Interest of 1.8 - 2.0 times, Debt/RAB remaining below 100% and FFO/Debt above 10%. In addition, Moody's would also look for the following standalone indicators: FFO/Interest over 2.2-2.4 times and Debt/RAB remains below 100%.

On the other hand, further downward pressure could emerge if Envestra's consolidated financial metrics weakens to: FFO/Total Interest falling to 1.6-1.7 times and Total Debt/RAB rising above 100%. On a standalone basis, Moody's will look for the following breaches: FFO/Interest falling near 1.8-1.9 times and Debt/RAB rising above 100%.