Fitch Ratings has affirmed Australia-based AusNet Services Limited's Long-Term Issuer Default Rating (IDR) at 'BBB+'.
The Outlook is Stable. Fitch has also affirmed AusNet Services Holdings Pty Ltd's Long-Term IDR at 'BBB+' with Stable Outlook and its senior unsecured rating at 'A-'.
The affirmation reflects AusNet's adequate financial metrics derived from its stable business profile, with more than 85% of its revenue being regulated. AusNet's unregulated assets have a risk profile similar to its regulated business, with long-term electricity and gas contracts with stable counterparties. The rating also reflects AusNet's ample liquidity to meet immediate funding needs with comfortable access to the international bond market and undrawn committed financing facilities.
KEY RATING DRIVERS
Regulated Revenue Supports Rating: Around 85% of AusNet's total revenue is generated by its regulated assets. AusNet's rating is supported by the predictable cash flows from its three regulated networks, which operate in a transparent and mature regulatory framework. The three regulated networks have staggered regulatory resets across the years, which provides diversification and reduces regulatory risk compared to peers. The distribution network will be reset from July 2021, with its gas and transmission networks set until 2022.
Continued Growth in Contracted Assets: AusNet continues to expand its unregulated contracted asset base, and management expects it to reach the target of AUD1.5 billion by 2024 (September 2020: AUD875 million). Policy and legislated targets, including Victoria's goal to have 40% of electricity generated from renewable sources by 2025, are driving investments in renewables across Australia.
AusNet's existing unregulated assets are largely core network assets that generate fixed revenue from long-term contracts with stable counterparties. Fitch expects the new contracts for AusNet's unregulated assets to provide largely similar risks as its regulated business. AusNet has indicated that it seeks bank or parent company guarantees during the construction and initial operation of these projects, which mitigates risks.
Stable Financial Profile: We expect AusNet's financial profile to remain largely stable in the financial year ending 31 March 2021 (FY21) through FY24, despite a reduction in revenue being phased in with the Australian Energy Regulator's (AER) calculated regulatory rate of return below AusNet's current determinations, and ongoing moderate capex to add contracted assets. We expect the group's ratio of net debt to regulated and contracted asset base (RAB) to increase to about 71.9% in FY24 from 67.4% in FY19.
Efficiency and Productivity Savings: Fitch expects AusNet's EBITDA margins across its regulated business to remain stable as management continues to focus on operating efficiencies despite reductions in regulated rates of return. AusNet's draft 2021-26 distribution determination includes incentive payments under the AER's Efficient Benefit Sharing Scheme and Capital Expenditure Sharing Scheme, reflecting AusNet's progress in improving operating efficiencies. Under both schemes, efficiency gains can be carried to the next regulatory period, giving incentive for efficiency improvements.
Uplift for Senior Debt: Fitch rates AusNet's senior unsecured debt at 'A-', one notch higher than the IDR, reflecting the agency's view that recovery on the senior unsecured debt would be higher than average in the event of a default, given the regulated utility nature of the group's assets
DERIVATION SUMMARY
AusNet's ratings are supported by its regulated assets across three network businesses in the Australian state of Victoria with staggered regulatory resets. AusNet is well-positioned relative to global peers like UK's National Grid Electricity Transmission plc (NGET, BBB+/Stable), Electricity North West Limited (BBB+/Stable) and London Power Networks plc (BBB+/Stable), particularly in terms of revenue diversity. AusNet's business profile compares well with the UK-based regulated networks given similarities in and strength of their economic regulation.
NGET, which is the monopoly electricity transmission owner and operator in England and Wales, compares well to AusNet in terms of business profile as a regional electricity transmission monopoly. We believe AusNet's business profile is slightly stronger as its revenue is sourced from electricity and gas distribution businesses. This is, however, offset by NGET's better financial profile in terms of the net debt to RAB. NGET's rating is constrained due to linkages to its parent, resulting in ratings at the same level as AusNet.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue of AUD2.0 billion in FY20, reducing in FY22 following regulatory reset of AusNet's distribution network, increasing thereafter as RAB growth and unregulated revenue offset declining regulatory returns.
EBITDA margin of around 60% over FY21-24
Total capex of AUD3.5 billion over FY21-24
Dividend of 9.5 cents per share in FY21, increasing to 10.8 cents by FY24
Regulatory asset base to increase by around 2% per year over FY21-24, and contracted asset base to grow to AUD1.5 billion by 2024
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Forecast net debt to regulatory and contracted asset base at below 65%
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Forecast net debt to regulatory and contracted asset base at above 75%
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Comfortable liquidity: AusNet has a very well-distributed debt maturity profile and good access to capital markets to counter any short-term liquidity shortfalls in the coming years. AusNet continues to access the international bond market, raising debt in multiple currencies. AusNet limits foreign-currency risk exposure by hedging non-Australian dollar debt at issuance. The company also has AUD1 billion of undrawn committed bank debt facilities at end-September 2020.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
AusNet Services Limited LT IDR BBB+ Affirmed BBB+
AusNet Services Holdings Pty Ltd LT IDR BBB+ Affirmed BBB+
senior unsecured
LT A- Affirmed A-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
The following issuer(s) did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure: AusNet Services Holdings Pty Ltd, AusNet Services Limited
AUSNET SERVICES 
