Advance Energy Local Currency Rtg on S&PWatch Neg.

MELBOURNE, Australia--(BUSINESS WIRE)--Standard & Poor's CreditWire 6/25/98--Standard & Poor's today placed its double-'A'-plus long-term local currency corporate credit rating of Advance Energy on CreditWatch with negative implications, and affirmed the 'A-1'-plus short-term rating.

The CreditWatch reflects Standard & Poor's opinion that increased regulatory uncertainty has weakened the underlying credit profile of Advance Energy. Unless the review of franchise distribution boundaries, currently being undertaken by the New South Wales state government, results in significant changes to Advance Energy's business and financial profiles, a rating downgrade of one notch to double-'A' is highly likely. The resultant downgrade would reflect increased regulatory pressure rather than a deterioration in Advance Energy's financial profile or reduced support from its shareholder, the government of New South Wales.

Advance Energy's corporate credit rating reflects its monopoly position in the electricity network business, a very strong financial profile, and ownership by the State of New South Wales. These factors are offset to some extent by increasing regulatory uncertainty within the electricity industry.

In its role as an electricity distributor, Advance Energy has a natural monopoly within its service area in central New South Wales. Revenue derived from its network business represents more than 85% of net profit, and, although the retail operations are subject to contestability, Advance Energy will continue to receive network access charges. The utility therefore will remain largely protected in a nationally competitive market.

Advance Energy has a very strong financial profile, with funds flow from operations (FFO)-to-gross interest of 12.3 times (x) in fiscal 1997, and forecast to remain above 12.0x in the next five years. Advance Energy's gearing level (total debt-to-total capital) is low at about 12% in fiscal 1997, and, while debt levels are anticipated to increase in the near term, this is not expected to exceed 20%. Net debt payback (net debt-to-FFO) is forecast to range from 0.2 years-1.2 years in the next five years from 0.9 years in fiscal 1997.

Advance Energy benefits significantly from government ownership, and from the government's provision of almost all the company's financing requirements. As well as holding all equity, the government borrows from capital markets through the New South Wales Treasury Corp. on behalf of Advance Energy.

Regulatory uncertainty within the electricity industry could place some demands on Advance Energy's future cash flows. While recent draft determinations released by regulators on the returns in the gas industry do not directly affect Advance Energy, regulatory pressure is likely to increase for network businesses generally, Standard & Poor's said. ---CreditWire

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