Scheme Financial Vehicle Pty Ltd -- Moody's assigns first time Aa3 rating to Scheme Financial Vehicle; outlook stable

Rating Action: Moody's assigns first time Aa3 rating to Scheme Financial Vehicle; outlook stableGlobal Credit Research - 15 Aug 2022Sydney, August 15, 2022 -- Moody's Investors Service has today assigned an issuer rating of Aa3 to Scheme Financial Vehicle Pty Ltd (SFV). This is the first time Moody's has rated SFV. The rating outlook is stable."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."SFV will be a proprietary limited company to be set up under the Electricity Infrastructure Investment Act NSW 2020 (the Act), and will have an essential role in facilitating the transition of the state of New South Wales' (rated entity New South Wales Treasury Corporation - Aaa stable) energy sector to renewable generation, through SFV's intermediary role. Whilst SFV has not yet been constituted, the rating is based on a high expectation that such will occur by October 2022, reflecting Moody's understanding that the remaining steps are currently being progressed and mechanistic in nature.SFV will play a key facilitation role in the state's electricity infrastructure roadmap by acting as a counterparty to eligible energy-related projects and entering into agreements with market participants.AEMO Services Pty Ltd, an independent subsidiary of the Australian Energy Market Operator (AEMO), will be appointed as the consumer trustee under the Act. Under the Act, the consumer trustee is to appoint the financial trustee..A financial trustee will hold SFV's shares on trust and administer SFV.SFV's board will be appointed and periodically renewed by the financial trustee in accordance with its constitution, and comprise a minimum of three independent directors. SFV's shares will be held in a statutory trust, independent of the state.Environmental, social and governance (ESG) considerations were material factors in the rating. SFV's credit profile will benefit from its role in managing environmental risk exposure, reflecting its role in facilitating NSW's transition to a low carbon energy generation sector. SFV has moderately negative exposure to social risks, reflecting both its role in facilitating the energy transition as a foundation for a stable and reliable electricity supply for NSW, and the possibility that energy consumers may negatively associate SFV with any increase in energy prices (perceived to be a consequence of the investment that it will facilitate). Moody's assesses SFV as having neutral to low exposure to governance risk, reflecting the limitation of its activities and corporate governance protections under the Act, the enshrined independence of its board, and the requirement for regulatory approval of its risk management framework and contribution determinations. Furthermore, the consumer trustee will draw on the expertise of AEMO, where appropriate, to provide benefit to the SFV's corporate governance.RATINGS RATIONALE"SFV's Aa3 rating reflects its essential nature in facilitating the transformation of the state's energy generation sector to one anchored by renewables and the requisite firming capacity ? particularly their location in large renewable energy zones - and the supportive regulatory and legal framework under which SFV will operate," says Arnon Musiker, a Moody's Senior Vice President.Moody's assesses SFV as having a high likelihood of recovering its costs on a timely basis, which flows from SFV's statutory right to recover cash deficits from distribution network service provider (DNSPs) operating in the state. These distribution providers include Ausgrid (rated entity Ausgrid Finance Pty Ltd - Baa1 stable) and Endeavour (rated entity Network Finance Company Pty Limited - Baa1 stable)."We assess SFV's cash flows from the DNSPs as being highly predictable, reflecting our understanding that they will be paid under regulatory instruments that are formulated on a largely mechanistic basis, and consequently will not be subject to regulatory discretion," adds Musiker.Moody's assesses SFV's main credit challenge as managing potential cash flow variability from temporary timing mismatches. Such mismatches reflect that SFV's cost recovery from the DNSPs is partially set on the basis of its projections (particularly of future power prices) that may be subject to material inaccuracies, particularly in the early years of operations as the NSW government policy is implemented under the Act and the SFV establishes and refines its management systems.SFV's rating consequently incorporates (i) SFV's proposed approach to frequently monitoring its liquidity requirements, (2) the certainty of initial liquidity conferred by a repayable cash grant to SFV, (3) SFV's ability to recoup cash losses on an ex-post basis from the DNSPs under the contribution determinations via a true-up mechanism and (4) Moody's expectation that the consumer trustee will draw on the expertise of its parent (AEMO) in ensuring the SFV implements a system to accurately and completely execute settlements on a timely basis if needed.The rating reflects Moody's understanding that SFV's debt will be limited to short-term senior unsecured liquidity facilities and general obligations to its various counterparties, and will not entail the issuance of longer term financing facilities.Australia's energy transition has taken on an increased urgency following unprecedented disruptions to its National Electricity Market (NEM ? of which NSW is a major part) during the winter of 2022, leading to AEMO temporarily suspending the market's operation to mitigate the risk of blackouts. Given the importance of SFV to the rollout of new generation, storage, transmission and firming infrastructure to replace ageing coal-fired generation, Moody's expects that SFV will receive the requisite support to ensure financial viability under downside scenarios (such as through additional liquidity).FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable outlook reflects Moody's expectation that SFV's various stakeholders (particularly the state, consumer trustee and financial trustee) will deploy the necessary resources to ensure SFV operates as envisaged by the state's electricity infrastructure roadmap.An upgrade in the near term is unlikely given the newly established nature of the framework under which SFV operates. Over time, Moody's could upgrade SFV's rating if it exhibits a track record of avoiding cash flow mismatches and ensuring ample liquidity in general, subject to no material weakening in the state's credit profile.SFV's rating could be downgraded if, in Moody's assessment, the company is experiencing cash flow volatility of a magnitude that is affecting its ability to meet its payment obligations. A weakening (in Moody's assessment) of the regulatory or legal framework under which SFV operates could also result in negative rating pressure, and could be indicated by (1) the regulator having greater discretion in formulating contribution determinations, which lessens their predictability or (2) a reduced likelihood of the state implementing necessary measures to ensure that payment flows continue in the highly unlikely event of a DNSP failing. A material weakening in the state's credit profile would also result in negative credit pressure.The principal methodology used in this rating was Regulated Electric and Gas Utilities published in June 2017 and available at https://ratings.moodys.com/api/rmc-documents/68547. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.SFV will be a proprietary limited company to be set up under the Electricity Infrastructure Investment Act NSW 2020 (the Act), and will have an essential role in facilitating the transition of the state of New South Wales' energy sector to renewable generation, through SFV's intermediary role.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.At least one ESG consideration was material to the credit rating action (s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Arnon Musiker Senior Vice President/Manager Project & Infrastructure Finance Moody's Investors Service Pty. Ltd. 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