Aquasure Finance Pty Ltd. Outlook Revised To Stable On Strong Operating P #BBB+# Debt Rating Affirmed

Stocks and Financial Services Press Releases Thursday July 13, 2017 09:35
MELBOURNE--13 Jul--S&P Global Ratings

MELBOURNE (S&P Global Ratings) July 13, 2017--S&P Global Ratings said today that it had revised the outlook to stable from negative on the senior secured debt issued by Aquasure Finance Pty Ltd. At the same time, we affirmed the 'BBB+' rating on the senior secured debt.

Aquasure Finance is the financing vehicle of Aquasure Pty Ltd. (Aquasure), the project company that is responsible for the design, construction, financing, operations, and maintenance of the Victorian Desalination Plant under a public-private partnership (PPP) with the Australian State of Victoria.

We affirmed the rating following the plant's production of 46.14 gigaliters (GL) of water over the year ended June 30, 2017, which was higher than our previous expectations. This production level was 1.65 GL ahead of the production target used to size the financial deductions that the Victorian government imposed in March, which were based on the desalination plant's design capacity.

Over the June quarter, Aquasure operated at about 5% above its design capacity, producing 468 million liters (ML) of water per day on average. This compares with its design capacity of 444 ML and the 410 ML daily rate required to achieve 150 GL per year of contracted capacity. The stronger-than-expected performance means that Aquasure will be able to recover around A$17.8 million of the A$59 million of financial penalties deducted in March 2017, and avoided

having an additional deduction imposed by the state government.

Despite operating above design capacity over an extended period, the plant's power usage was some 1,400 megawatt hours (MHh) per GL produced under the contracted target. This means the plant is operating at a level that is around 25% more efficient than permitted. We further understand that the plant is likely to maintain full production over the next few weeks, and will therefore deliver the water order for fiscal 2018 during the first quarter ending Sept. 30, 2017.

We have excluded from our analysis the financial deduction in March 2017 because we consider it to be a one-off event. We note, however, the deduction will weaken the debt service coverage ratio (DSCR) over the next nine months. In addition, we expect the plant to complete its water order for fiscal 2018 without further financial penalty. As a result, excess cash flow retained to date is now available for distribution.

The 'BBB+' rating reflects our expectation that Aquasure's availability-based revenues and the experience and expertise of the project partners will maintain stable cash flows for the project. Despite the recent operational difficulties, the project produced in excess of design capacity over a quarter, while using less energy than it expected at present.

We consider it unlikely that a similar operational issue would recur. In addition, the plant has reviewed all decisions made during the rectification works and is confident that a faster rectification period could be achieved in future if required. Excluding the one-off impact of the deductions imposed in March 2017, we forecast a minimum DSCR of 1.32x and robust performance under our downside scenario.

We assess Aquasure's liquidity as neutral, based on a six-month, cash-funded, debt-service reserve (currently A$170 million) that we consider appropriate for a project of this type. The transaction also benefits from a maintenance reserve account with a minimum requirement to cover the next 12 months of lifecycle maintenance. Given that the plant was only recently opened, the reserve is currently funded to approximately A$19 million.

Furthermore, Aquasure had an additional A$130 million as of June 30, 2017, for working capital earmarked in part to cover its July debt service payments.

The stable rating outlook on the senior secured debt issued by Aquasure Finance reflects our view of the likely stability and predictability of the project's cash flows following resolution of the recent electricity supply issues. The outlook also reflects our expectation that Aquasure and the operations and management (O&M) joint venture will appropriately manage future water order requirements in line with contractual requirements.

We believe any positive rating movement is unlikely until Aquasure has established and maintained a solid track record of operating and managing the project. In our view, the plant's sustainable long-term delivery of future water orders at a significant proportion of design capacity and a continued cooperative relationship with the state would strongly demonstrate this track record and could moderate our downside case assumptions.

We also believe that continued conservative and proactive management of its ongoing debt-refinancing task will further enhance Aquasure's credibility and support any positive rating movement.
The debt rating could come under negative pressure if either:

Following a water order from the state, the plant underperforms and we have concerns that Aquasure may be unable to deliver the required water volumes by the end of the supply period; orThe plant's electricity consumption is at least 10% greater than we forecast.

Although this is a pass-through cost to the plant operator, it would lead to an upward revision in our downside case assumption, resulting in further weakening of the cash flows under the downside case; orSignificant water-quality issues were to arise; orDebt refinancing costs were to rise materially above our expectations, resulting in the minimum DSCR dropping below 1.25x.


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