Victoria Power Networks (Finance) Pty Ltd. Ratings Affirmed At #A-#; Outlook Stable

Stocks and Financial Services Press Releases Thursday June 28, 2018 11:28
MELBOURNE--29 Jun--S&P Global Ratings

MELBOURNE (S&P Global Ratings) June 28, 2018-- S&P Global Ratings said today that it has affirmed its 'A-' long-term issuer credit rating on Victoria Power Networks (Finance) Pty Ltd. (VPNF) and issue rating on the company's senior unsecured debt. The outlook on the long-term rating remains stable.

We affirmed the rating on VPNF to reflect our expectation that the company's currently strong financial metrics will remain consistent with the rating despite some weakening in the medium term. The metrics will likely dilute upon the next reset in 2021 and commencement of tax payments.

Also, we believe the company is unlikely to operate materially above its policy target on an ongoing basis. As such, we expect that VPNF will operate with some headroom above its current policy levels.

VPNF's solid business profile and stable regulated cash flows until calendar year ending 2020 present minimal downside risk to cash flows. Both CitiPower and Powercor are operating under their regulatory determination for the five-year period to December 2020. We expect network distribution revenue to increase gradually to about A$1 billion by 2020. Modest unregulated revenues and efficient operations should support modest growth in EBITDA over this period. Citipower and Powercor's business risk profile also benefit from high operating efficiency compared with peers.

Based on VPNF's track record, we expect the company to outperform the operating and capital expenditure allowances provided by the regulator through cost savings and efficiency measures. We expect the incentives from these efficiencies will largely offset any slower growth in regulated asset base or higher operating expenditure benchmark in the next reset. As such, we believe the current operating efficiencies will support the financial profile in the medium to long term.

We expect the company's FFO to debt to track at about 13%-14% over the next two to three years. Over 95% of VPNF's cash flows will continue to come from regulated operations. Supporting revenue growth during the next two years would be semi-regulated income and some unregulated services, including grid connections mainly for renewable projects and electrification for tram and rail projects. The capital expenditure would be higher compared with the past few years, at about A$480-A$500 million. Meanwhile, we expect the company's shareholder distributions to remain consistent with previous years.

Although the ratios are trending higher for the current rating, we expect the impact of the next reset and commencement of cash tax payments anticipated from 2021 may likely bring the FFO-to-debt metrics back to the 11%-12% range in the outer years. The regulator is reconsidering certain aspects of the revenue building-block parameters including the rate of return. While lower returns on equity and a gradual impact of decline in the trailing average cost of debt may occur, we believe that VPNF's metrics have sufficient buffer to withstand the impact.

Furthermore, supporting the current rating is the management's financial policy of running the business with an FFO-to-debt of at least 11% and the shareholder's commitment to the current credit profile. In our view, once the next determination has been implemented, VPNF may look at passing the benefits of any additional headroom to the shareholders.

The stable outlook on VPNF reflects our expectation of continued stability in the company's underlying cash flows over the next three years, its timely debt refinancing, and no fundamental change in its business operations. We also expect its funds from operations (FFO) to total debt to remain about 13%-14% over the next two to three years, providing significant buffer above the management's financial policy target and shareholders' commitment of 11%.

We believe the management will run the business to maintain the company's current credit quality, with the current buffer in metrics being absorbed as part of the next tariff reset and the balance passed to the shareholders.

As such, any upside in the rating would require a step change in the financial policy consistent with a higher rating (such as an FFO to debt of greater than 13%) and a commitment by the company in maintaining a buffer against such a policy. We believe the likelihood of this occurring is limited.

Given the company's financial policies and metric trend-line, downside risk is very limited. Nonetheless, the rating could come down by one notch if the company's FFO to total debt were to approach 10%, thus deviating from its policy levels. This could most likely occur from greater debt funding of its shareholder distributions or higher capital expenditure compared with our base case, signaling an increase in the group's risk appetite.


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