dps (interim) 2009-10, page-27

FYI

Below taken from JPMorgan 22nd Mar. Their valn of $2 is second lowest I have found. Over the last 3 months >5M day has heralded a change in trend. Hope today was the same though it could eqeually reflect a breaking of support. Gotta love this game don't ya.

Credit downgrade

Moodys has downgraded by one notch the credit rating of UED from Baa1 to Baa2. Similarly the credit ratings for DBNGP and Multinet have been downgraded from Baa2 to Baa3.

The announcement brings Moodys ratings for these three assets in line with the equivalent S&P ratings.

FnThe rationale for downgrading UED and Multinet is due to total debt levels exceeding the RAB.

FnDBNGP was downgraded off the back of credit concerns about certain customers eg Alcoa and a lack of cushion in its credit metrics.

FnFor Multinet if a sustained de-leveraging trend occurs as shown by Total Debt/RAB falling below 85% and FFO/Total Interest improving to 1.8x or above, Moody's would consider this to be a potential catalyst for a ratings upgrade. Similarly for United Energy there could be an
upward trend if there is consistent improvement in gearing levels with Total Debt/RAB falling towards 80%-85% and FFO/Total Interest improving to 2.3x-2.5x or above.

FnDBNGP could see a ratings improvement if a) Stage 5B is completed on time and within budget and b) FFO/Total interest coverage increasing to 1.8x-1.9x and FFO/Total Debt rising above 8-10%.

FnIn the following pages of this note we provide our forecast credit metrics for each of these assets over the medium term.

FnImportantly the Moodys revisions will not impact the cost of funding for any of DUETs businesses as they are based on the S&P ratings.

No change to our Recommendation

We retain our Overweight Recommendation with a December 2010 Price Target of $2.00 for DUET. With a solid yield of ~11%, good organic growth and little regulatory or refinancing risk within the portfolio, we believe DUET is one of the most attractive regulated utilities in our space

Whilst DUET surprised the market with their capital raising in March 2009, its capital position is now fairly sound despite large amounts of future organic growth
capex. With $132m of forecast growth capex over the next 6 month period we believe DUET has sufficient cash to fund this growth. Proportionate gearing (total net debt/proportionate total assets) as at 31 December 2009 was 66.6%, a minimal decrease over the pcp.

Our December 2010 Price Target of $2.00 is based on a SOTP DCF of $2.10 and the FY10E distribution of 20cps. In arriving at our Price Target we have adjusted our SOTP DCF to reflect a discount for the level of gearing. Our SOTP DCF valuation assumes a WACC of ~6% (based on an average discount rate of 6% and on asset lives of 25-30 years for the individual businesses). The main risks to our Price Target are rising interest rates, lower gas and electricity volumes, refinancing and regulatory risk.

Our Price Target also reflects a 10% yield which is towards the top end of the range which we believe regulated utility stocks should trade. Given DUET has a diversified portfolio of assets with a diverse range of regulatory reset periods and sufficient cash at the parent level to undertake a de-gearing exercise at the asset level, we do not consider a high yield is warranted.