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Research Update: Transpower New Zealand Rating Raised To 'AA' From 'AA- After Sovereign Action; Outlook Stable

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Research Update: Transpower New Zealand Rating Raised To 'AA' From 'AA- After Sovereign Action; Outlook Stable

Rating Action Overview

  • On Feb. 22, 2021, we raised the long-term local currency sovereign credit rating on New Zealand to 'AAA' from 'AA+'. The outlook is stable.
  • As a result, we are raising our long-term issuer credit rating on Transpower New Zealand Ltd. (TNZ) to 'AA' from 'AA-'. The company continues to benefit from a very high likelihood of extraordinary government support and oversight.
  • The stable outlook reflects the regulated and monopoly nature of TNZ's business, its visible cash flow profile until 2025, and continued government support.

Rating Action Rationale

The upgrade on TNZ reflects a similar sovereign rating action on New Zealand.  TNZ is the sole owner and operator of New Zealand's transmission network, an essential infrastructure for the entire country. The government's continued 100% ownership and reasonable oversight on TNZ underpin our view of a very high likelihood of extraordinary financial support, should the company need it.

We expect continued stable operations of TNZ, and the regulated revenue cap mechanism underpins its cash flow stability. The latest regulatory control period (RCP3), applicable since April 2020, provides cash flow visibility for the next five years. We expect somewhat lower cash flow this fiscal year ending June 2021 and beyond as the post-tax weighted average cost of capital (WACC) has reduced to 4.23% (from 6.44% earlier) for the current regulatory period. Still, we expect TNZ's funds from operations (FFO)-to-debt ratio will remain strong at 14%-15% over fiscals 2021 and 2022. As capital expenditure steps up, the ratio is likely to decline to 13.0%-13.5% with some moderation in dividends, but remains above TNZ's policy level of a minimum of 12.5%. At this stage, we are not aware of any major change in the company's capital works program or financial strategy that would alter our view on the stand-alone credit profile of the company.

Outlook

The stable outlook reflects that on New Zealand and our continued expectation of a very high likelihood of extraordinary support for TNZ from the government. The rating also benefits from the regulated nature of TNZ's business, its monopoly position, and visible cash flow profile until 2025 following the recent regulatory reset. As a result, we project its ratio of FFO to total debt at 14%-15% over the next two years and decline somewhat after that, but remain above its minimum policy level of 12.5%.

Downside scenario

Downside risk to the rating is a low probability, given that the company continues to benefit from very high likelihood of government support, which in turn, provides significant buffer to the downside metrics. Nonetheless, we may lower the rating if:

  • TNZ's FFO-to-debt ratio falls below 9%, possibly through increased leverage that causes a two-notch deterioration in the stand-alone credit profile; or
  • We lower our sovereign rating on New Zealand or our view on the level of government support.
Upside scenario

All else being equal, a two-notch improvement in TNZ's stand-alone credit profile will lead to a higher rating. While this scenario has a low likelihood, it could occur if the FFO-to-debt ratio improves above 23% and the company is committed to maintaining that profile.

Company Description

TNZ owns and operates New Zealand's National Grid, which is the physical link between electricity generators, distributors, and direct supply customers. The grid comprises high-voltage alternating current transmission lines, as well as a high-voltage direct current link across the Cook Strait, which lies between New Zealand's North and South Islands. TNZ's role of system operator involves real-time coordination of the country's power supply and demand under a bilateral contract with the Electricity Authority of New Zealand. The company is 100% owned by the New Zealand government.

Ratings Score Snapshot

Issuer Credit Rating: AA/Stable/A-1+

Business risk: Excellent

  • Country risk: Low
  • Industry risk: Very low
  • Competitive position: Excellent

Financial risk: Intermediate

  • Cash flow/Leverage: Intermediate

Anchor: a+

Modifiers

  • Diversification/Portfolio effect: Neutral (no impact)
  • Capital structure: Neutral (no impact)
  • Liquidity: Adequate (no impact)
  • Financial policy: Neutral (no impact)
  • Management and governance: Satisfactory (no impact)
  • Comparable rating analysis: Negative (-1 notch)

Stand-alone credit profile: a

  • Sovereign rating: AAA/Stable/A-1+
  • Likelihood of government support: Very high (+3 notches from SACP)

Related Criteria

Ratings List

Ratings Affirmed

Transpower New Zealand Ltd.

Commercial Paper A-1+
Upgraded
To From
Senior Unsecured AA AA-
Upgraded; CreditWatch/Outlook Action; Ratings Affirmed
To From
Issuer Credit Rating AA/Stable/A-1+ AA-/Positive/A-1+

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Sonia Agarwal, Melbourne + 61 3 9631 2102;
sonia.agarwal@spglobal.com
Secondary Contacts:Parvathy Iyer, Melbourne + 61 3 9631 2034;
parvathy.iyer@spglobal.com
Harshvardhan D Sathe, Melbourne + 61 (3) 96312118;
Harshvardhan.Sathe@spglobal.com

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