Fitch Ratings has affirmed the ratings of AquaSure Finance Pty Ltd's senior secured debt at 'A-'.

The Outlook is Stable. AquaSure Finance is the financing vehicle for Australia-based AquaSure Pty Limited.

The company's rated debt includes the following bonds:

USD310 million Series 2014A US private placement notes due 2024;

AUD100 million Series 2014B US private placement notes due 2024;

USD450 million Series 2015A US private placement notes due 2027;

AUD152 million Series 2015B US private placement notes due 2027; and

USD325 million Series 2018US private placement notes due 2034.

RATING RATIONALE

AquaSure's concession, ending in 2039, provides stable cash flow from the state of Victoria, its financially strong counterparty. AquaSure's contracts allow it to pass through operating and lifecycle costs and revenue abatement to an experienced contractor. The rated debt is senior and benefits from adequate covenants and reserving mechanisms. Fitch's rating case forecasts an average debt service coverage ratio (DSCR) of 1.39x and a minimum projected DSCR of 1.27x. The rating is further supported by a cost increase to DSCR breakeven in excess of 145% and a six-month debt service reserve.

KEY RATING DRIVERS

Revenue from Strong Counterparty: Revenue Risk - Stronger

The water desalination project does not face price or volume demand risk. AquaSure receives monthly payments from the state in return for operating and maintaining the project, regardless of whether the state calls upon the plant to produce water. Contractual provisions establish strong performance incentives for AquaSure, with robust cure periods for non-performance. The risk of revenue abatement due to a failure to meet water production or other requirements is effectively passed through to a third-party operator, subject to a cap.

Cost Risk - Midrange

Overall cost risk considers scope risk, cost predictability and volatility as well as structural protections. These are detailed below.

Moderately Complex Maintenance: Scope Risk - Midrange

The project is subject to full operation and maintenance (O&M) as well as lifecycle cost risks. However, this is mitigated by the moderate complexity of the maintenance required and the state absorbs the risk of non-performance by the electricity provider. Lifecycle costs are generally spread out over the concession term, with some periods of concentration during major maintenance. We believe continued involvement of Suez as the construction and operation contractor throughout the life of the project is positive.

Proven Technology and Experienced Operator: Cost Predictability - Stronger

The operator has strong experience of the same asset type and jurisdiction. The technology is established and performance has consistently been high, which mitigates the lack of benchmark analysis from a technical advisor (TA). The plant is built with 8% excess nameplate capacity above 150 gigalitre (GL) water requirement. Energy efficiency was also significantly better than target levels during the production period by around 20%. The TA advised that an O&M cost with around 25% of margin allowance is adequate to meet potential abatement and there is a large pool of experienced contractors available to step in, if necessary.

Cost Pass-Through Available: Cost Volatility and Structural Protection - Midrange

The project benefits from the allocation of O&M and lifecycle responsibility to a joint venture of Suez and Ventia Utility Services under a set-price contract with project specific indexation for the life of the concession. The joint-venture partners absorb the risk of cost overruns, with their obligations backed by security bonding and joint and several guarantees from investment grade-rated parents. AGL Energy, one of Australia's largest energy utilities, guarantees the fixed-price electricity contract. AquaSure holds a maintenance and repair account to meet budgeted asset replacement costs for the next 12 months.

State Support Reduces Refinancing Risk: Debt Structure - Midrange

AquaSure executed a refinancing package with the state in 2019, whereby the Treasury Corporation of Victoria (TCV) will lend around AUD1.2 billion across three tranches on a fully amortising floating-rate basis through to 2038. This arrangement reduces refinancing risk associated with an upcoming bullet debt maturity in 2024. Under the agreement, TCV also provides interest-rate swaps for TCV debt tranches as existing swaps expire as well as for the remaining unhedged position from 2027 to 2038, which eliminates interest rate risk for AquaSure.

AquaSure's strong access to debt markets is also evident from the AUD350 million raised via a 10-year fully amortising bank facility in January 2020, which was used to refinance existing debt facilities well in advance of maturity. It maintains structural protection, including a six-month debt service reserve account and distribution lockup if the DSCR falls below 1.20x. Its AUD434 million debt maturing in February 2024 will be repaid with the funding drawn from tranche three of the TCV facility. Its next and final refinancing requirement is AUD747 million maturing in July 2027 and there is an 18-month tail prior to concession maturity. All other existing debt and debt to be drawn (TCV facility) are fully amortising.

PEER GROUP

AquaSure Finance can be compared with two other Fitch-rated availability projects - Meridian Hospital Company PLC (senior secured debt: A-/Stable) and Derby Healthcare Plc (senior secured debt: BBB-/Stable). AquaSure has minimal refinancing risk, as it is protected by the state, assuming all base-rate risk and a 50-50 sharing with the state of any refinancing losses due to higher-than-expected margins. AquaSure also benefits from stronger cost protection from the full O&M and lifecycle cost risk pass-through as well as a higher all-cost break-even ratio.

Meridian has a similar cost risk assessment, but we assess cost predictability as 'Midrange' against 'Stronger' for AquaSure, due to the upward revision of the lifecycle profile highlights. AquaSure also has a substantially higher minimum and average rating-case DSCRs than Derby. These strengths result in a rating for AquaSure Finance's debt that is three notches above that for Derby and in line with Meridian, with Meridian having higher coverage than AquaSure.

The Carlsbad desalination plant (California Pollution Control Finance Authority (CA), senior secured bonds: BBB/Stable) has fully amortising debt, but experienced operational challenges and production shortfalls during the ramp-up period. However, cash flow volatility has been partially mitigated by pass-through provisions that transfer cost risk to the operator and provide for compensation by the off-taker.

AquaSure Finance's rating is supported by stronger contractual provisions that insulate it from revenue volatility arising from water production volume. AquaSure also benefits from an O&M agreement with a third-party operator, which absorbs the risk of cost overruns and provides protection on operating shortfalls, subject to a cap.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Inability to successfully deliver water orders to the state due to operational or other issues;

Projected average DSCR over the life of the debt consistently below 1.30x

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Debt amortisation occurring faster than Fitch expects, raising the projected average DSCR over the life of the debt above 1.40x.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

TRANSACTION SUMMARY

AquaSure designed, built, financed, operates and maintains a 150GL a year desalination plant located in the state of Victoria under a 30-year concession with the state.

CREDIT UPDATE

AquaSure successfully completed its water delivery requirement (125GL) for the financial year ended June 2022 (FY22) on time. In March 2022, the state placed a water order for 15GL for FY23. Production commenced in early September and deliveries totalled 4.1GL by late September 2022, which was also when the state requested for FY23 production to be ceased and confirmed that no delivery is required for the remaining period as Melbourne's water storage is at the highest level since January 1997 (98.4%).

FINANCIAL ANALYSIS

Fitch's base case assumes that the plant produces at full output and that minor revenue abatement is incurred at the P50 level, as advised by the technical consultant, but the abatement is fully passed through to the operator. AquaSure's assumptions are used for operating and capital expenditure. The base case results in an average DSCR of 1.42x during the debt life, with a minimum DSCR of 1.29x.

Fitch's rating case imposes more conservative assumptions, with no pass-through of abatement or higher costs to the operator. All operating and lifecycle costs are increased by 7.5% above the base-case assumptions for the life of the project, except the costs for power and renewable energy certificates, which are fixed under a contract with AGL Energy, with the state taking the risk of non-performance of the counterparty. The resulting DSCR is 1.39x on average, with a minimum of 1.27x.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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