Meridian's $640m buy changes rating outlook

Standard & Poor's Rating Services yesterday affirmed its BBB+ long-term and "A-2" short-term ratings on state-owned Meridian Energy but revised its outlook to negative from stable.

S&P said the outlook was unlikely to return to stable until the company's financial profile rebounded and Meridian's plans for managing risks linked with its proposed Project Aqua on the Waitaki River became clearer.

The rating action results from Meridian's agreement to buy Victorian hydro generator Southern Hydro for $640 million - and its intention to largely debt fund the acquisition.

"Although the Southern Hydro acquisition will complement Meridian Energy's existing hydro operation in Australia and offer greater diversity and growth potential, the debt financing of the transaction will result in a change in debt commitments for the company and a weakening of its financial profile," said Laurie Conheady, associate director at S&P.

"The weakened financial position will be most evident over the next two years as the increased debt pushes gearing to more than 40 per cent from its current level of just under 30 per cent, with corresponding weakening in interest and debt coverages."

Meridian Energy's strong cash flows could support the increased debt commitments associated with the Southern Hydro acquisition.

But Conheady said the negative outlook rating was seen as appropriate because of the more immediate risks linked with integrating the new business and realising forecast cash flows, and the longer-term uncertainty Meridian faced in building and paying for Project Aqua.

S&P said the impact of the Southern Hydro acquisition on Meridian's business profile was marginally negative.

Although the Southern Hydro business is subject to higher risk than Meridian Energy's existing New Zealand operations, this risk is mitigated by the Australian operation representing only about 20 per cent of total assets, as well as the diversity and growth prospects the business provides.

-NZPA