OREANDA-NEWS. April 27, 2015. Fitch Ratings has affirmed Australia-based AusNet Services' Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. A full list of rating actions can be found at the end of this release.

KEY RATING DRIVERS

Transparent, Mature Regulation: AusNet Services' ratings are supported by its regulated business - electricity transmission, and electricity and gas distribution - and staggered regulatory resets across its three network businesses in Victoria which reduces regulatory risks. It benefits from a transparent and mature regulatory environment.

Limited Impact of Regulatory Changes: We expect the Australian Energy Regulator to have greater powers in determining future regulatory outcomes, resulting in a decrease in capex and operational expenditure allowances and a reduced rate of return earned on regulated assets, which will affect all regulated network companies over the medium term. These changes will apply to AusNet Services in January 2016, with the electricity distribution reset. The company's electricity transmission and gas distribution resets are not until April 2017 and January 2018 respectively. While we have factored into our forecasts some tightening of these allowances, significantly more adverse regulatory determinations could lead to pressure on ratings.

Stable Financial Profile: We expect AusNet Services' financial profile to remain stable in the financial year ended 30 March 2015 (FY15) through FY17, despite elevated capex and expected lower returns from regulatory changes, which will be phased in. Our base case scenario assumes the net debt/regulatory asset base (RAB) to increase from 69% in FY14 but remain below 75% and FFO interest coverage to remain above 2.5x.

Risk from Bushfire Compensation: Compensation issues from the 2009 Victoria bushfires have been resolved. In December 2014, the Supreme Court in Victoria approved AusNet Services' settlement of the East Kilmore class action of AUD378.6m, which was fully covered by the AusNet Service's insurance. In February 2015, the Murrindi class action was also concluded with an out-of-court settlement by AusNet Services of AUD260.9m, also fully covered by its insurance.

AusNet Services is currently a defendant in litigation related to the February 2014 bushfires in Yarram and Mickleham. We note that compensation issues could constrain the company's ratings should the amount of compensation exceed that covered by its insurance. However, AusNet Services' regulatory determination may mitigate these risks to an extent, by allowing the company to pass through certain costs and damages in excess of insurance pay-outs. We would treat any adverse outcome of the Yarram/Mickleham litigation as event risk, and take appropriate action at the time damages crystallise.

Resolution of Tax Dispute: AusNet Services had been in dispute with the Australian Tax Office (ATO) regarding its primary tax liabilities for prior years. An in-principle agreement was reached with the ATO for the company to make a primary tax payment of AUD23.5m and interest (tax-deductible) of AUD1.5m. Carried-forward tax losses of AUD507m will be cancelled, of which AUD393m was previously recognised and have therefore been written off. The resolution provides certainty as ATO concludes its audit activity for all years up to and including FY14.

Senior Debt Lifted By a Notch: 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.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Moderate revenue growth in FY15-17 (FY14: 9.8%)
- Stable EBITDA margins of around 56% in FY15-17 (FY14: 57%)
- Average annual RAB growth of 6% in FY15-17 (FY14: 6%)
- Annual capex above AUD900m in FY15-17 (FY14: 925m)

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- forecast net debt to Regulatory Asset Base at above 75% (FY14: 69%) and FFO interest coverage deteriorates at below 1.75x (FY14: 2.4x), both on a sustained basis

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 FFO interest coverage at above 2.75x, both on a sustained basis

The full list of ratings actions are:
AusNet Services: Long-Term IDR affirmed at 'BBB+', Outlook Stable
AusNet Transmission Group Pty Ltd: Long-Term IDR affirmed at 'BBB+', Outlook Stable
AusNet Services Holdings Pty Ltd: Long-Term IDR affirmed at 'BBB+', Outlook Stable; senior unsecured rating affirmed at 'A-'
AusNet Holdings (Partnership) Limited Partnership: Long-Term Foreign Currency IDR affirmed at 'BBB+', Outlook Stable; senior unsecured rating affirmed at 'A-'
AusNet Electricity Services Pty Ltd: Long-Term Foreign Currency IDR affirmed at 'BBB+, Outlook Stable; senior unsecured rating affirmed at 'A-'

AusNet Services' borrowings benefit from cross-guarantees by the principal asset-owning companies within the group. Hence, the agency also applies the IDR of AusNet Services to the group companies listed above.