Transpower sees no risk to credit metrics from incentive change

Monday 22nd July 2019

National grid operator Transpower says a further reduction signalled for its revenue during the next five-year regulatory period should not affect its key credit metrics.

The state-owned company today told investors that a draft decision by the Commerce Commission on the rolling incentive scheme Transpower works to could reduce its revenue by about $22 million a year from July 2020. That risk had not been included in the statement of corporate intent – SCI – the firm published earlier this month.

“Transpower does not anticipate any material decline in its key credit metrics as a consequence of the Commerce Commission’s draft decision. However, the board will evaluate the impact and advise any changes to the forecast and targets set out in the SCI once the Commission releases its final decision in November.”

The Commerce Commission polices Transpower's returns under an individual price path. In a draft decision in May, the regulator said lower interest rates meant Transpower’s revenue in the five-year period would fall to about $4.27 billion, $460 million less than in the current period.

It calculated the weighted-average cost of capital for the upcoming regulatory period at 5.13 percent, down from 7.19 percent in the current period.

Transpower, in its latest statement of corporate intent out to 2021-22, had noted that projections beyond 2020-21 would likely change once the commission issued its final decision in November.

Today, the company observed that while the potential impact on its revenue from a lower allowable rate of return had been noted in the SCI, the potential impact on its revenue from a “material” change in the incentive had not.

Using forward interest rates, Transpower had signalled in its SCI that annual dividends to its government shareholder would fall to $160 million in the 2020-21 year and to $150 million the following year, from $165 million in the current year and the June year just ended.

The dividend, as a percentage of free cash flow after maintenance spending, would decline to 61 percent in 2020-21, from 71 percent last year.

(BusinessDesk)

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