OREANDA-NEWS. Fitch Ratings says that Australian power and utilities companies have benefitted from cheaply available surplus gas, ahead of the start-up of liquefaction projects, in Queensland. Margins of Australian integrated utilities, namely, Origin Energy Ltd (Origin, BBB+/Stable) and AGL Ltd, have recovered in the first half of the financial year ending 30 June 2015 from higher gas volume sales, higher gas-fired generation using cheaply available third-party surplus gas and from accessing markets with favourable electricity prices. However, intense retail competition and weak electricity demand across Australia have increased challenges for utilities companies, although integrated utilities are better placed to handle these challenges.

Gas supply shortages at some of the Queensland liquefaction facilities will drive further gas volume sales in the short term. Margins will however remain under pressure over the medium term due to difficult operating conditions, including high retail competition and declining electricity demand.

Customer switching remains high and accelerated in late-2014, reversing the declining trend in the previous 12 months. Competitive activity will remain high among incumbent integrated retailers. The entry and growth of standalone retailers will further add to the intensity, as these operators benefit from low volatility in wholesale electricity prices. Utilities are faced with significant and unprecedented changes in electricity consumption, as demonstrated by lower generation volumes from increased use, and the rising popularity of energy-efficient appliances and solar photovoltaic installations.
The overall credit profile of integrated utilities, however, benefits from the strength and flexibility of their business profile, including equity in upstream gas assets. Fitch expects utilities with equity in upstream gas will see a significant step-up in their earnings following the start-up of their liquefaction capacity in 2H15. East coast gas prices reflect an increasing linkage to oil-linked prices from significant gas production earmarked for sizeable export liquefaction capacity. Although the low oil prices will result in weaker earnings from LNG exports, Fitch expects these earnings to still remain substantial and mitigate negative earnings pressures across their traditional utilities operations.

In a report published today, Fitch also discusses the Australian Energy Regulator's approach to forecast expenditure assessments and returns on capital in its draft determination in November 2014, the first such determination under the new rules for electricity network utilities. Fitch expects the regulator's new debt-cost approach will minimise the need to have lumpy debt maturities at future regulatory resets. This should provide higher financial flexibility to regulated networks and result in improved debt maturity profiles. Lower equity returns will be earned on these businesses, although there is no immediate rating impact as a result of the new rules.