RPT-Fitch Revises Stanwell's Outlook to Negative; Affirmed at 'AA'

Tue Jun 24, 2014 2:57am EDT

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June 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has today revised the Outlook on Stanwell Corporation Limited's (Stanwell) Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable. The agency has simultaneously affirmed Stanwell's Long-Term and Short-Term IDRs at 'AA' and 'F1+' respectively.

KEY RATING DRIVERS

Outlook Revision: The revision in Outlook to Negative from Stable follows the inclusion of proceeds from sales of state-owned generation companies in Queensland, including Stanwell, in the state budget in June 2014, increasing the possibility of privatisation of these entities. The rating of Stanwell is currently closely linked to the ratings of the state of Queensland.

Weakening Linkages with State: The Outlook revision reflects a weakening in the strategic linkages between the State of Queensland (QLD, 'AA'/Stable) and the company, should the entity be privatised, as viewed under Fitch's parent-subsidiary rating methodology. The proposed timing of this transaction is, however, only likely after the next state election due in mid-2015, given the state government's commitment to seek a public mandate through the state election. A sale of the assets can lead to a material weakening of the rating linkages with the state leading to a multiple-notch downgrade of Stanwell's ratings to a level consistent with its stand-alone credit profile.

Integrated with the State: Queensland Treasury Corporation (QTC, 'AA'/Stable) - the state borrowing authority, provides Stanwell with long-term funding and short-term liquidity. The state also effectively controls the appointment of Stanwell's board, and its capex and dividend policies.

Standalone Credit Profile: Stanwell's standalone credit profile reflects its largely merchant generation business and substantial generation capacity in Queensland. Improved financial performance in the financial year to end-June 2013 (FY13) reflects the benefit of portfolio restructuring as well as access to competitive fuel supply sources. Its credit profile also benefits from an incremental revenue stream from coal exports, direct sales to large industrial customers and gas sales, which provides some cushioning to its variable merchant generation revenue.

Higher Future Plant Utilisation: Stanwell's generation mix comprises predominantly of coal-fired generation. Higher domestic gas prices and lower emissions-related costs expected over the medium-term, enhance the considerable cost advantage of coal-fired generation over competing gas-fired generation. As such, Stanwell will benefit from higher coal-fired generation plant utilisation over the medium-term. The improving cost advantage is also reflected in Stanwell's decision to mothball its Swanbank E gas-fired generation plant and recommission two (previously mothballed) units of its Tarong coal-fired generation plant, announced on 5 February 2014. Future revenue growth will benefit from direct gas sales at higher expected gas prices.

Stanwell is a Queensland state-owned power generator, with a total generation capacity of 4,178 megawatts across 10 generation sites, from a mixture of hydro, coal- and gas-fired power generation.

RATING SENSITIVITIES

Positive: Considered unlikely given the likely announcement of sale/lease of these assets at the next state election

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-Downgrade in Queensland's ratings

-Sale of the company will likely result in a multi-notch downgrade

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