Fitch Affirms AquaSure's Debt at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney/Singapore-17 November 2020: Fitch Ratings has affirmed the ratings of AquaSure Finance Pty Ltd's senior secured debt at 'A-'. The Outlook is Stable. AquaSure Finance is the financing vehicle for Australia-based AquaSure Pty Limited. The company's rated debt includes the bank debt issued by AquaSure Finance, the Treasury Corporation of Victoria (TCV) facility debt and the following bonds: AUD150 million Australian medium-term notes due 2020; USD310 million Series 2014A US private placement notes due 2024; AUD100 million Series 2014B US private placement notes due 2024; USD450 million Series 2015A US private placement notes due 2027; AUD152 million Series 2015B US private placement notes due 2027; and USD325 million Series 2018A US private placement notes due 2034. RATING RATIONALE AquaSure's concession, ending in 2039, provides stable cash flow from the state of Victoria, its financially strong counterparty. AquaSure's contracts allow it to pass through operating and lifecycle costs and revenue abatement to contractors. The rated debt is senior and benefits from adequate covenants and reserving mechanisms. Fitch's rating case forecasts an average debt service coverage ratio (DSCR) of 1.39x and a minimum projected DSCR of 1.27x. The outbreak of the coronavirus and related government containment measures worldwide create an uncertain global environment for availability payment projects. AquaSure's performance data through the most recently available issuer data may not have indicated impairment, but material changes in revenue and cost profile are occurring across the sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch's ratings are forward-looking in nature, and Fitch will monitor developments in the sector as a result of the coronavirus outbreak for their severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on our expectations for future performance and assessment of key risks. KEY RATING DRIVERS Revenue from Strong Counterparty: Revenue Risk - Stronger The water desalination project does not face price or volume demand risk. AquaSure receives monthly payments from the state in return for operating and maintaining the project, regardless of whether or not the state calls upon the plant to produce water. Contractual provisions establish strong performance incentives for AquaSure, with robust cure periods for non-performance. The risk of revenue abatement due to a failure to meet water production or other requirements is effectively passed through to a third-party operator, subject to a cap. Cost Risk - Midrange Overall cost risk takes into account scope risk, cost predictability and volatility as well as structural protections. These are detailed below. Moderately Complex Maintenance: Scope Risk - Midrange Operation and maintenance (O&M) and lifecycle cost risk is passed through to AquaSure rather than retained by the public sector, although the state absorbs the risk of non-performance by electricity provider AGL Energy, one of Australia's largest energy utilities. Most other risks are passed through to the O&M joint venture (see Cost Pass-Through Available below). Lifecycle costs are generally spread out over the concession term, with some periods of concentration during major maintenance. Proven Technology and Experienced Operator: Cost Predictability - Stronger The plant's design is based on proven technology, with 8% excess nameplate capacity above the highest potential water requirement. The plant passed performance tests at the time of commissioning and performed strongly over the period that it has been operating during 2020, consistently producing water at a rate above nameplate capacity. Energy efficiency was also significantly better than target levels during the production period. Cost Pass-Through Available: Cost Volatility and Structural Protection - Midrange AquaSure has contracted with a joint venture of Suez and Ventia Utility Services to perform O&M, including asset replacement, under a set-price contract for the life of the concession. The joint venture partners absorb the risk of cost overruns, with their obligations backed by security bonding and joint and several parent-company guarantees from Suez Environment S.A. and CIMIC Group. AGL Energy guarantees the fixed-price electricity contract. AquaSure holds a maintenance and repair account to meet budgeted asset replacement costs for the next 12 months. Refinancing Risk Well-Mitigated: Debt Structure - Midrange Refinancing risk of the outstanding AUD3.4 billion senior debt is mitigated through a broad spread of debt maturities and equal sharing with the state of any losses due to higher refinancing margins. AquaSure Finance has consistently demonstrated strong access to debt markets; it raised AUD350 million of debt via a 10-year fully amortising bank facility in January 2020, which was used to refinance existing debt facilities well in advance of maturity. In 2019, AquaSure executed a refinancing package with the state whereby TCV will lend a total of circa AUD1.2 billion across three tranches on a fully amortising floating rate basis through to 2038. This arrangement significantly reduces refinancing risk associated with upcoming bullet debt maturities through to 2024. Refinancing risk is now present on only around 20% of outstanding senior debt, with the next refinancing due in 2027. Under the agreement, TCV also provides interest rate swaps for TCV debt tranches, as existing swaps expire, plus remaining unhedged position from 2027 to 2038. AquaSure maintains structural protections which include a six-month debt service reserve account and distribution lockup if the DSCR falls below 1.20x. Financial Profile Fitch's rating case produces an average DSCR of 1.39x over the remaining forecast amortisation period for the senior debt, with a minimum of 1.27x. Average DSCR has improved by around 6bp versus the last review due to a reduction in debt servicing, driven by lower actual swap rates compared to the previously modelled unhedged cost of debt. PEER GROUP AquaSure Finance carries refinancing risk, albeit largely de-risked, while two other Fitch-rated availability projects - Meridian Hospital Company PLC (senior secured debt: A-/Stable) and Derby Healthcare Plc (senior secured debt: BBB-/Stable) - have fully amortising debt. However, AquaSure is protected by the state assuming all base-rate risk and a 50-50 sharing with the state of any refinancing losses due to higher-than-expected margins. AquaSure also benefits from stronger cost protection from the full O&M and lifecycle cost risks pass-through as well as a higher all-cost break-even ratio. AquaSure also has substantially higher minimum and average rating-case DSCRs than Derby. These strengths result in the rating for AquaSure Finance's debt that is three notches above that for Derby and in line with Meridian, which has substantially higher coverage than AquaSure. The Carlsbad desalination plant (California Pollution Control Finance Authority (CA)'s senior secured bonds, BBB/Stable) has fully amortising debt, but has encountered operating problems and production shortfalls since its start-up in late 2015. Carlsbad has more recently seen some improvement in its operation and finances and is implementing a capital improvement plan, but the difficulties continue to weigh on its credit profile; as a result, its debt is rated two notches lower than that of AquaSure Finance. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Debt amortisation occurring faster than Fitch expects, raising the projected average DSCR over the life of the debt above 1.40x. Factors that could, individually or collectively, lead to negative rating action/downgrade: - Inability to successfully deliver water orders to the state due to operational or other issues; - Projected average DSCR over the life of the debt consistently below 1.30x. Best/Worst Case Rating Scenario International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three 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]. TRANSACTION SUMMARY AquaSure designed, built, financed, operates and maintains a 150 gigalitre (GL) a year desalination plant located in the state of Victoria under a 30-year concession with the state. CREDIT UPDATE In March 2020 the state placed a water order for 125GL for the financial year ending June 2021. Production commenced on 1 July 2020 with the plant ramping up to two streams (out of three) within a few days. The state advised that August was a constrained month so the plant operated with two streams during July and August before moving into full production. The plant has continued to operate at full capacity, with production averaging 457 megalitres (ML) a day as of 4 October (3% above nameplate capacity of 444ML a day); this is consistent with 2019 production levels while operating at capacity. The operator has not experienced any significant operational issues in the re-start process or through production. Delivery of the 125GL water order is planned to be completed by mid-April 2021. FINANCIAL ANALYSIS Fitch's base case assumes that the plant produces at full output and that minor revenue abatement is incurred at the P50 level, as advised by the technical consultant, but the abatement is fully passed through to the operator. AquaSure's assumptions are used for operating and capital expenditure. The base case results in an average DSCR of 1.41x during the debt life, with a minimum DSCR of 1.28x. Fitch's rating case imposes more conservative assumptions, with no pass-through of abatement or higher costs to the operator. All operating and lifecycle costs are increased by 7.5% above the base-case assumptions for the life of the project, except the costs for power and renewable energy certificates, which are fixed under a contract with AGL Energy, with the state taking the risk of non-performance of the counterparty. The resulting DSCR is 1.39x on average, with a minimum of 1.27x. 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 AquaSure Finance Pty Ltd ----AquaSure Finance Pty Ltd/Debt/1 LT; Long Term Rating; Affirmed; A-; Rating Outlook Stable Contacts: Primary Rating Analyst James Hodges, Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Aseem Modwal, Associate Director +65 6796 2713 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Third-party Model(24 March 2020 (https://www.fitchratings.com/site/re/969858)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10143420) Solicitation Status (https://www.fitchratings.com/site/pr/10143420#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10143420#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10143420#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. 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