Rating Action Overview

• Predominantly Australia-based Energy Developments Pty Ltd.'s (EDL) contracting profile and good plant availability should derive cash flow benefits from expected high wholesale electricity prices and favorable green prices over the next two to three years.
• This, along with earnings from new projects, should improve EDL's EBITDA to about A$300 million-A$350 million over the next two to three years, absent any acute operational issues. As a result, we have revised our assessment of EDL's liquidity to strong from adequate.
• On Aug. 30, 2022, S&P Global Ratings affirmed its 'BBB-' issuer credit rating on EDL and 'BBB-' issue rating on its senior secured debt.
• The stable outlook reflects our view that EDL will manage its capital expenditure (capex) pipeline and distributions to maintain its ratio of debt to EBITDA at 3.0x-3.3x.

Rating Action Rationale

EDL's portfolio remains stable with no major fuel supply or operational issues.  The company continues to be supported by its policy of having a high proportion (75%-80%) of contracted, and hence stable, revenues. Contracts are rolled forward every 12 months, with some exposure to price on uncontracted output. Due to high wholesale electricity prices, as well as favorable green prices, we expect EDL's EBITDA to improve to A$280 million-A$350 million over the current year and next one to two years.

EDL has a significant capex pipeline of about A$850 million-A$950 million over the next three years, which will support earnings growth. This primarily includes investment toward converting some of its U.S. assets to produce renewable natural gas and the balance toward remote energy and hybrid renewables. We expect these projects to be largely debt funded and no further equity contributions to come in from CK Infrastructure Holdings Ltd. (CKI), beyond the committed amount in fiscal 2022. We also believe that dividend levels will remain moderate in the current fiscal before increasing to between A$50 million-A$150 million in subsequent years.

Consequently, we expect EDL to maintain its debt-to-EBITDA ratio between 3.0x-3.3x over the next one to two years.  This strengthening in credit metrics is driven by high wholesale prices, contributions from parent toward capex investment in the U.S. and lower distributions. We believe that the company remains committed to the current rating levels and will look to operate the business with a debt to EBITDA of about 3x-3.5x. In our view, the company is likely to use any upside from the currently favorable conditions toward upcoming capex projects or other capital management initiatives.

After completing recent refinancing, we now view EDL's liquidity position to be strong. In May 2022, EDL refinanced about A$520 million in facilities maturing over 2022 and 2023. This has extended the next maturity date to October 2024. As a result, we expect liquidity sources over uses to comfortably exceed 1.5x over the next 12 months and exceed 1.0x for the subsequent 12 months. We believe that EDL will remain prudent in managing future refinancing and its capex pipeline, particularly given the increasing opportunities in renewables in Australia, with any material upside passed onto shareholders.

Outlook

The stable outlook on EDL primarily reflects our expectation that the company will use any benefit gained from high energy prices for future capex projects or returns to shareholders, such that the company's debt to EBITDA remains between 3x-3.3x. The outlook also reflects EDL's significant proportion of contracted, and hence stable, revenues. We also expect the company to continue growing in a disciplined manner with a focus on cost and earnings predictability.

Downside scenario

The rating would come under pressure if EDL's stand-alone credit profile were to weaken. This could occur if:

• Debt-funded investments exceed our expectations, worsening the adjusted debt to EBITDA to closer to 4x with no remedial action forthcoming to restore metrics back to within rating expectations.
• Management were to revise its leverage target to greater than 4x.
• A significant deterioration in operating performance were to occur, impairing EDL's ability to re-contract, or significantly affecting revenue growth or profitability.

Upside scenario

An upgrade is unlikely given management's target gearing range and our expectation that the company is unlikely to operate with debt to EBITDA below 3x on a sustained basis.

Company Description

EDL operates in the unregulated power and gas industry as a merchant generator with a capacity of 1,088 megawatts. The company has contracts for 75%-80% of its generation and no retail operations. Its key business segments include:

• Remote energy--providing power to sites that are not connected to the grid.
• Clean energy--generating electricity through waste gas from landfill and coal mine sites.
• Liquefied natural gas and compressed natural gas-based energy solutions, mainly for remote energy.
• Wind power generation.
• Renewable natural gas production in the U.S.

Although EDL operates primarily in Australia, it also has a presence in the U.S., U.K., Canada, and a joint venture in Greece.

Liquidity

We consider EDL to have strong liquidity given we expect the company's sources-to-uses ratio to be greater than 1.5x over the next 12 months and above 1.0x for the subsequent 12 months. We expect liquidity sources to remain sufficient even in an event of 30% lower EBITDA levels, particularly driven by the absence of any debt maturities till October 2024. EDL has well established relationships with banks, and benefits from CKI's ownership. Furthermore, the company displays generally prudent risk management and sufficient headroom in its covenants should enable it to withstand a 30% decline in the EBITDA over the medium term.

Principal liquidity sources for the 12 months ending June 30, 2023:

• Cash and cash equivalents of about A$100 million, as of June 30, 2022;
• Undrawn Bank lines maturing beyond 12 months of approximately A$320 million.
• Cash from operations of about A$260 million over the period.
• Equity contributions from CKI of approximately A$40 million.

Principal liquidity uses over the same period:

• No debt maturities during the period.
• Capex of about A$300 million-A$330 million for the 12 months ending June 30, 2023.
• Dividend distribution of about A$90 million-A$110 million in the next 12 months.

Ratings Score Snapshot

ESG credit indicators: E-3, S-2, G-2

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria | Corporates | Industrials: Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

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