RPT-Fitch downgrades SP Ausnet to 'BBB+'; off RWN, stable outlook

Thu Jan 9, 2014 4:21am EST

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Jan 9 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded Australia-based SP Ausnet's Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Rating Watch Negative (RWN) on all the ratings has been removed, and a Stable Outlook has been assigned to the Long-Term IDR. A full list of rating actions can be found at the end of this release.

The rating actions follow the reduction of Singapore Power Ltd's (Singapore Power; A/RWP) stake in SP Ausnet with the sale of a 19.9% interest to State Grid International Development Limited (SGID), a wholly owned subsidiary of the State Grid Corporation of China (SGCC; A+/Stable) for AUD824m, which was completed on 3 January 2014. The sale has reduced Singapore Power's stake in SP Ausnet to 31.1% from 51%. SGID also purchased 60% of SPI (Australia) Assets Pty Ltd (SPIA), Singapore Power's wholly owned subsidiary that holds its Australian infrastructure and energy assets other than SP Ausnet.

The downgrade results from the removal of the one-notch rating uplift previously accorded to the ratings of SP Ausnet on account of Singapore Power's majority 51% ownership in SP Ausnet and the sizeable earnings contribution from SP Ausnet to Singapore Power.


Transparent and Mature Regulation: SP Ausnet's revised ratings continue to be supported by the regulated nature of its business (transmission, electricity and gas distribution), the staggered regulatory resets across its three network businesses in Victoria state, which reduces regulatory risk, and a transparent and mature regulatory environment under which it operates. The ratings also reflect the relatively good level of interest coverage (2.7x in FY13), which compares well with Australian utility peers rated in the high-BBB and low-A category levels. However, the company's leverage as measured by net debt to Regulatory Asset Base is expected to remain at around 70%, which is high relative to peers rated at the 'A-' level.

Risk from Bushfire Compensation: Compensation issues resulting from the 2009 Victorian bushfires could be a risk to SP AusNet's standalone credit profile over the medium term should the amount of compensation exceed that covered by the company's insurance, although we believe that SP AusNet's regulatory determination may mitigate these risks to some extent by allowing SP AusNet to pass through certain costs and damages in excess of insurance payouts. As it is not possible to determine the extent of the potential liability at present, we would treat any material adverse outcome as an event risk and take appropriate rating action at the time the damages crystallise.

Tax Dispute: A further potential risk over the medium term relates to primary tax liabilities for prior years under dispute with the Australian Taxation Office. As at 30 September 2013 SP Ausnet's net additional cash exposure is approximately AUD83m, although this amount is not significant considering the scale of SP Ausnet's earnings and its asset base.

Potential Regulatory Changes: All regulated utilities in Australia - including SP AusNet - over the medium term are faced with proposed changes aimed at increasing the efficiency of the regulatory process. We expect the Australian Energy Regulator to have increased power in determining future regulatory outcomes, which could lead to a reduction in capital and operating expense allowances and the rate of return earned on the regulated assets by the utilities. These changes would apply to SP Ausnet's business in 2016, with the electricity distribution reset.

Fitch rates SP AusNet's senior unsecured debt 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.


Positive: While considered less likely due to significant capex over the medium term, future developments that may, individually or collectively, lead to positive rating action include:

- forecast net debt to Regulatory Asset Base at below 65% and funds from operations (FFO) interest coverage at above 2.75x, both on a sustained basis (69% and 2.7x respectively in FY13).

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- forecast net debt to Regulatory Asset Base at above 75% and FFO interest coverage deteriorates at below 1.75x, both on a sustained basis

The ratings actions are:

SP AusNet: Long-Term IDR downgraded to 'BBB+', Outlook Stable

SPI PowerNet Pty Ltd : Long-Term IDR downgraded to 'BBB+', Outlook Stable

SPI Electricity & Gas Australia Holdings Pty Ltd : Long-Term IDR downgraded to 'BBB+', Outlook Stable; senior unsecured rating downgraded to 'A-' SPI Australia Holdings (Partnership) Limited Partnership: Long-Term Foreign Currency IDR downgraded to 'BBB+', Outlook Stable; senior unsecured rating downgraded to 'A-'

SPI Electricity Pty Ltd : Long-Term Foreign Currency IDR downgraded to 'BBB+, Outlook Stable; senior unsecured rating downgraded to 'A-'

SPI Australia Finance Pty Ltd : senior unsecured rating downgraded to 'A-' SP Ausnet's borrowings benefit from cross-guarantees by the principal asset-owning companies within the group. Hence, the agency also applies the IDR of SP Ausnet to the group companies listed above.

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