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

KEY RATING DRIVERS

Regulated Network, Stable Cash Flows: 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 risk. It benefits from a transparent and mature regulatory environment.

Limited Impact from Regulatory Changes: Fitch Ratings expects the Australian Energy Regulator (AER) to have greater powers in determining future regulatory outcomes, resulting in lower 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 applied to AusNet Services in January 2016, when the regulatory framework for electricity distribution was reset for a new five-year term. The company's electricity transmission and gas distribution resets are not until April 2017 and January 2018, respectively. We have factored into our forecasts some tightening of these allowances, although significantly more adverse regulatory determinations could lead to pressure on the ratings.

Stable Financial Profile: We expect AusNet Services' financial profile to remain stable in the financial year ended 30 March 2016 (FY16) through FY19, despite relatively high 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 slightly to around 70% in FY16 (FY15: 68%) and FFO interest coverage to remain close to 2.5x (FY15: 2.8x).

Reduced Risk from Bushfire Compensation: Compensation issues from the 2009 Victoria bushfires were resolved in 2015, with the settlements of the East Kilmore and Murrindi class action lawsuits fully covered by AusNet Services' insurance. There remains the litigation from the February 2014 bushfire in Yarram and Mickleham. We generally treat any adverse outcome of bushfire litigation as event risk, and would take appropriate action at the time damages crystallise, but AusNet Services' ratings could be constrained if the amount of compensation for bushfire litigation exceeds that covered by the company's insurance.

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 in March 2015. The resolution provides certainty, as the ATO concludes its audit activity for all years up to and including FY14. Two additional tax disputes with the ATO have also been settled, one of which has led to increased cash tax paid in 1HFY16, and which we have factored into our FY16 forecasts.

One-Notch Boost for Senior Debt: Fitch rates AusNet Service'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 FY16-17 (FY15: 2%)
- Stable EBITDA margins of around 56% in FY16-17 (FY15: 58%)
- Average annual RAB growth of around 4% in FY16-17
- Annual capex of averaging AUD850m in FY16-17 (FY15: AUD801m)

RATING SENSITIVITIES

Positive: While considered less likely due to tightening regulatory allowances and uncertainty around upcoming regulatory resets, future developments that may, individually or collectively, lead to positive rating action include:
- Forecast net debt to regulatory asset base at below 65% (FY15: 68%) and FFO interest cover at above 2.75x (FY15: 2.8x), both on a sustained basis

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 cover at below 1.75x, both on a sustained basis

FULL LIST OF RATING ACTIONS

AusNet Services Limited:
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-'
Guaranteed notes affirmed at 'A-'