(The following statement was released by the rating agency) Fitch Ratings-Sydney-March 20: 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. AusNet Services Holdings Pty Ltd; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; A- AusNet Services Limited; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta Key Rating Drivers Regulated Revenue Set Till 2021: Around 85% of AusNet's revenue is locked-in until July 2021. AusNet's ratings are supported by the predictable nature of cash flows from its three regulated networks that operate in a transparent and mature regulatory framework. AusNet's three regulated networks have staggered regulatory resets across the years, which provide diversification and reduce regulatory risk compared to peers. Continued Growth in Contracted Assets: AusNet continues to expand its unregulated contracted asset base, and is on track to reach its target of AUD1.5 billion by 2024 (September 2019: AUD779 million). Policy and legislated energy targets are driving investments in renewables in Australia, including the Victorian government's aim to generate 40% of electricity from renewable sources by 2025. AusNet's existing unregulated assets are largely core network assets, which generate fixed revenue from long-term contracts with stable counterparties. Fitch expects contracts for AusNet's new unregulated assets to provide largely similar risks as Ausnet's regulated business. AusNet has indicated that it seeks bank or parent company guarantees during the construction and initial operation of these projects, which also mitigate risks. Efficiency and Productivity Drive: We expect EBITDA margins in the regulated businesses to remain largely flat, as AusNet's focus on improving efficiency offsets decreases in revenue after the latest regulatory determinations. AusNet focuses on bringing and maintaining its electricity distribution network into the top-quartile of the industry efficiency benchmark in line with its electricity transmission and gas distribution networks. Under the Australian Energy Regulator's (AER) Efficiency Benefit Sharing Scheme, AusNet can carry over efficiency gains from one regulatory period to the next, giving it incentive to make efficiency improvements. Stable Financial Profile: We expect AusNet's financial profile to remain stable in the financial year ending 31 March 2020 (FY20) through FY23. This is despite a reduction in revenue being phased in, as the AER's latest rate of return instrument is lower than AusNet's current regulatory determinations, and moderate capex as the company continues to expand its contracted assets. We expect the group's ratio of net debt to regulated and contracted asset base (RAB) to increase to about 70% in FY23 from 67.1% in FY19. 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 business across three network businesses in the Australian state of Victoria with staggered regulatory resets. AusNet is well-positioned relative to its global peers like UK's National Grid (LON:NG) Electricity Transmission plc (NGET, A-/Stable), Electricity North West Limited (BBB+/Stable) and London Power Networks plc (BBB/Stable), notably in terms of revenue diversity across three network businesses in Victoria. 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 to be slightly stronger due to its revenue diversification from its electricity and gas distribution businesses. This is however offset by NGET's better financial profile in terms of the net debt to RAV and expectations of outperforming the regulatory allowance during our forecast period, justifying a notch differential in their ratings, in our view. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue growth of 2.9% in FY20, reducing following regulatory resets in AusNet's regulated networks. - EBITDA margins of around 60% over FY20-23 - Capex of AUD900 million in FY20, reducing to AUD700 million in 2023. - Dividend growth of 5% per annum - Regulatory asset base to increase by around 3.5% per year and contracted asset base to grow to AUD1.5 billion by 2024. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Forecast net debt to regulatory and contracted asset base at below 65% Developments That May, Individually or Collectively, Lead to Negative Rating Action - Forecast net debt to regulatory and contracted asset base at above 75% Liquidity and Debt Structure Comfortable Liquidity: Ausnet has a very well distributed debt maturity profile and good access to the 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 AUD750 million of undrawn committed bank debt facilities at end-September 2019. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Contacts: Primary Rating Analyst James Hollamby, Associate Director +61 2 8256 0347 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Muralidharan Ramakrishnan, Senior Director +65 6796 7236
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 Criteria Corporate Rating Criteria (pub. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Country-Specific Treatment of Recovery Ratings Rating Criteria (pub. 27 Feb 2020) https://www.fitchratings.com/site/re/10111386 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10114752 Solicitation Status https://www.fitchratings.com/site/pr/10114752#solicitation Endorsement Policy https://www.fitchratings.com/regulatory 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. 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