OREANDA-NEWS. Fitch Ratings has affirmed New Zealand-based Contact Energy Ltd.'s Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook is Stable. Contact Energy's Short-Term IDR and commercial paper programme have been affirmed at 'F3'.

KEY RATING DRIVERS
Solid Business Profile: Contact Energy's ratings reflect its leading position as an integrated utility in the fragmented electricity generation and electricity and gas retail sectors in New Zealand. It benefits from a diversified generation portfolio (32% hydro, 50% thermal and 18% geothermal by installed capacity) and a large and diverse customer base. Exposure to wholesale electricity prices, volume risk and high competition in both the generation and retail segment constrain the ratings.

Enhanced Operational Flexibility: Contact Energy's investments in the Stratford gas-fired peaking plant and Ahuroa gas storage facility have increased its operational flexibility and reduced generation costs, as has the re-negotiation of gas contracts on better and more flexible terms than its legacy take-or-pay contracts, which expired in December 2014. The commissioning of the 166MW Te Mihi plant in May 2014 adds further diversity to the generation portfolio, decreasing its reliance on thermal generation. These factors reduce Contact Energy's sensitivity to weather risk in the hydro-generation-dominated New Zealand electricity market.

Lower Capex: We expect capex over our forecast period of FY15 (year ending 30 June 2015) to FY18 to be moderate, decreasing from FY14 levels, following the completion of a substantial capex programme over the last few years. Even after assuming higher dividends, we expect this to contribute to positive free cash flow.

Competitive Retail Market: Contact Energy continues to face a competitive electricity and gas retail market, characterised by high customer churn, particularly across mass-market electricity customers. The company's focus on maintaining volumes and increasing its share of the growing small-business segment is aimed at stabilising margins.

Stable Financial Profile: We expect Contact Energy's solid cash flow from operations and moderate capex to contribute to a stable financial profile in FY15-FY18, commensurate with a 'BBB' rating level. We expect FFO net leverage to remain below 3x and FFO net interest cover above 5x in our base case scenario.

Acquisitions as Event Risk: Contact Energy recently said that it could invest in growth opportunities, including outside of New Zealand. We would treat any acquisitions as event risk, assessing the impact on the company's business and financial profile as and when it occurs.

Adequate Liquidity: Contact Energy had committed undrawn facilities of NZD415m and unrestricted cash of NZD6m against short-term maturities of NZD241m as of 1HFY15. The company enjoys proven access to banks and capital markets.

ASSUMPTIONS
Fitch's key assumptions within our ratings case for the issuer included:
- Modest or flat revenue growth in FY15-FY17
- Stable EBITDA margins above 20% in FY15-FY17
- Capex/revenue of 5%-6% in FY15-FY17
- Increasing dividends

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- FFO net leverage above 4.0x on a sustained basis (FY14: 2.3x)
- FFO net interest cover below 4.0x on a sustained basis (FY14: 5.6x)

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- Fitch considers a positive action unlikely in light of Contact Energy's business profile and within the context of the competitive New Zealand market.