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Moody's Comments On NZ Commerce Commission's Pricing Decision

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Fuseworks Media
Fuseworks Media
Moody's Comments On NZ Commerce Commission's Pricing Decision

Sydney - Moody's Investors Service has noted the New Zealand Commerce Commission's interim decision on allowable rates of return and pricing inputs for the 2011/2012 financial year (the transition year).

Moody's says that the Aa3 rating of Transpower New Zealand Ltd is not immediately affected by the decision.

The interim decision requires Transpower to use a post tax weighted average cost of capital (WACC) of 7.06% in calculating its maximum allowable revenue (MAR) for the transition year. This outcome has negative implications for Transpower as it is significantly lower than the company's currently assumed WACC of 7.7%.

The ultimate impact on Transpower's rating or outlook will be dependent on the outcome of the Commerce Commission's final determination, which will set the allowable rates of return and pricing inputs for the remainder of the regulatory control period (RCP). If the current parameters are maintained in the final determination and apply for the remaining three years of the RCP there would likely be negative pressure on Transpower's rating or outlook. Transpower does maintain some flexibility to offset an unfavorable outcome in its ability to reduce or eliminate dividend payments over the period.

Moody's will continue to monitor the evolving regulatory environment and the resulting impact on Transpower's ratings as decisions are announced. A final determination is expected before December 31, 2010. The outcome of the decision final decision will also apply to the transition year retrospectively.

As a Government Related Issuer (GRI), Transpower's Aa3 rating reflects its baseline credit assessment (BCA) of 6 - which is broadly consistent with an underlying rating of A2 - plus a 2-notch uplift reflecting the likely strong support from N.Z. government (rated Aaa) given Transpower's government ownership and its national strategic importance.

The BCA is underpinned by Transpower's low business risk and relatively stable and predictable cash flows. Transpower's credit profile is tempered by its multi-billion dollar grid investment program which will weigh on financial metrics over the medium term.

The last rating action for Transpower was taken on the 19th of March 2009 when Transpower's rating was downgraded to Aa3 with a stable outlook.

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