Rating Action Overview

• Strong capacity utilization of the Dampier to Bunbury Natural Gas Pipeline (DBNGP) driven by increased capacity contracting will lift cash flow higher than we previously expected, at least until the next regulatory reset in January 2026.
• At the same time, a recently awarded regulatory determination has set regulation parameters for Energy Partnership (Gas) Pty Ltd. (EPG) for the next five years. This further supports the group's cash flow visibility.
• We therefore expect AGI Finance Pty Ltd. (AGIF) to sustain a strong ratio of funds from operations (FFO) to debt of 11%-12% over the next three years, at least.
• On Nov. 27, 2023, S&P Global Ratings raised its long-term issuer credit rating on the Australia-based financing vehicle to 'A-' from 'BBB+' on the back of the company's improved financial metrics. We also raised the long-term issue rating on the notes the company issued or guarantees to 'A-' from 'BBB+'.
• The stable rating outlook reflects our view that AGIF will manage its FFO-to-debt ratio within our rating tolerances over the next two to three years, given known regulatory parameters and stable contributions from its unregulated business.

Rating Action Rationale

Stabilizing absolute leverage funded by cash flow from an improved group operational performance will consolidate the FFO-to- debt ratio at 11%-12% over the next three years. S&P Global Ratings' adjusted debt will remain at A$3.6 billion-A$3.7 billion over the next three years, at least. This is attributable to strong cash flow from an improved operating performance, allowing increased equity funding of elevated capital expenditure (capex) as EPG undertakes its gas mains replacement program.

At the same time, AGIF will likely maintain dividends at A$235 million-A$255 million over this period. This reflects the intention of management and shareholders to maintain a stronger balance sheet to manage emerging government policies and regulatory responses to the future of gas in the state of Victoria.

AGIF will sustain increased capacity contracting and higher utilization at DBNGP as coal exits Western Australia's energy mix and gas picks up the slack.  This will increase the company's cash flow certainty, given the take or pay nature of these contracts. In our view, the company can maintain its high throughput of 2022-2023 on the back of demand for gas-fired electricity generation as 1,000 megawatts (MW) of coal-fired generation exits the market by 2030.

Gas shippers will likely increase their contracted capacity to secure supply as the DBNGP pipeline increasingly pushes capacity. This contrasts with shipper relinquishments of capacity during the 2021-2025 regulatory reset process. The pipeline has a current capacity of 845 Terajoules per day.

The regulatory reset at EPG provides regulatory parameter certainty until the end of June 2028, further bolstering cash flow visibility.  In June 2023, the Australian Energy Regulator (AER) handed down its five-year determination for the 2023-2028 (year-end June 30) period, setting the regulatory parameters for EPG. It further awarded EPG accelerated depreciation of its regulated asset base, boosting the near-term recovery of capital costs for EPG.

This resulted from the regulator's acknowledgement of some uncertainty regarding the future of gas following the Victorian government's publication of its Gas Substitution Roadmap in July 2022. The process also reset the weighted average cost of capital (WACC) for EPG to 5.48% from 5.67% at commencement of the prior regulatory period in 2018. This is higher than the WACC that the regulator awarded to peers in recent years, given higher interest rates.

Regulatory response to gas policies in Victoria will emerge over the next two to three years. Subsequent to the EPG determination for the 2023-2028 period, the Victorian government announced a ban on new gas network connections in July 2023. This will prevent gas connections in new approved developments from Jan. 1, 2024, curtailing the company's network growth prospects.

AER has yet to announce a reopening of its current determination to revise awarded parameters in light of this development. A regulatory response could emerge over the next three years, leading up to the 2028-2033 regulatory period.

Unregulated opportunities are limited and AGIF is not expecting a step change in new investments or cash flow from this segment over our forecast period. This represents a decline in the level of risk that the company's unregulated businesses poses to its overall business mix from recent years. In our view, management will prudently assess and fund new unregulated opportunities that may emerge with equity.

We also do not expect the unregulated business to contribute more than 20% of EBITDA over our forecast period. We capture this risk, along with AGIF's exposure to gas and volume risk, in our negative comparable rating modifier.

Outlook

The stable rating outlook on AGIF reflects our view that the group has high cash flow certainty from its regulated and contracted revenues with known tariffs for the bulk of its cash flow over the next three to five years. This will allow the company to operate with a strong FFO-to-debt ratio of 11%-12%, with adequate buffer to accommodate the next reset.

In addition, we expect management to appropriately balance shareholder expectations against group capex demands, any potential growth in its midstream business, and future regulatory outcomes, in order to maintain metrics consistent with current ratings.

Downside scenario

Rating downside could occur if AGIF's ratio of FFO to debt were to fall below 9% on its current business mix profile, with no remedial action forthcoming to restore the metrics. This could occur if the company does not adjust its distribution profile against capex needs or tariff resets, or if volume risk puts pressure on cash flow.

Rating downside could also emerge if the group's industry risk profile were to diverge materially from its current dominant regulated nature, without a compensating improvement in the financial risk profile. For example, this could happen if the group were to undertake a significantly large midstream project with a higher risk profile than its current dominant regulated business.

In addition, rating downside could occur if we were to lower the rating on the parent entity CK Infrastructure Holdings Ltd. (CKI; A/Stable/--) by one notch.

Upside scenario

Upside for our assessment of AGIF's stand-alone credit profile (SACP) is possible, depending on the extent to which management balances future distributions against deleveraging. An FFO-to-debt ratio of above 12% on a sustained basis could lead to a one-notch improvement in our assessment of the company's SACP.

Even then, this will not affect the ratings, given they are capped by the group credit profile.

We see limited rating upside, given the trend line in the metrics and potential modest growth in the midstream segment.

Company Description

AGIF is the common funding vehicle of Australian Gas Infrastructure Holdings Pty Ltd. (AGIH), which consists of three operating subsidiaries:

• EPG (not rated), one of the three gas distribution networks in the state of Victoria;
• DBNGP Trust (not rated), the sole gas transmission pipeline in the commodity-rich state of Western Australia; and
• AGI Development Group Pty Ltd. (not rated), a midstream asset owner and developer mainly in Western Australia.

AGIH owns 100% of AGIF, which we consider to be core to AGIH.

CKI owns 40% of AGIH; CK Asset Holdings Ltd. (A/Stable/--) owns 40%; while Power Assets Holdings Ltd. (PAH; A/Stable/--) owns 20%. The three shareholders, collectively the CKI group (CKI also owns 38% of PAH), control AGIH's business and financial strategies and direction.

Our Base-Case Scenario

Assumptions

• EBITDA of A$520 million-A$540 million in 2023, A$530 million-A$550 million in 2024, and A$545 million-A$565 million in 2025. Our forecasts reflect known regulatory parameters at both EPG and DBNGP, in addition to persistently strong DBNGP volumes.
• Unregulated EBITDA to trend at 13%-15% of group EBITDA, reflecting current committed projects such as the Tubridgi gas storage expansion.
• EBITDA margins of 77%-78% over 2023-2025.
• Capex of A$200 million-A$220 million in 2023-2024, declining to A$170 million-A$190 million in 2025.
• Annual dividends of A$235 million-A$255 million over our forecast period.
• No cash taxes over our forecast period.
• All-in weighted average cost of debt of 3.0%-3.2%.

Liquidity

We assess AGIF's liquidity as adequate, based on our expectation that over the next 12 months, the company's liquidity sources will likely cover uses by more than 1.1x. Sources should remain sufficient even if EBITDA were to decline by 10%.

Our assessment also considers AGIF's prudent risk management, well-established relationships with banks, and generally strong standing in credit markets. Furthermore, the company enjoys some flexibility in the timing and amount of capital spending, enabling it to manage its liquidity if need be.

We estimate the following sources and uses of liquidity for the 12 months to Oct. 31, 2024.

Principal liquidity sources:

• Cash on hand of about A$49.1 million as of Oct. 31, 2023.
• Undrawn bank lines of about A$460 million maturing beyond the 12 months to Oct. 31, 2024.
• Cash FFO of A$420 million-A$440 million.
• Working capital inflow of A$19.5 million.

Principal liquidity uses:

• Capex of A$200 million-A$220 million (excluding customer contributions).
• Dividends of A$235 million-A$255 million, balanced against liquidity needs.
• Debt maturities of A$144 million.

Environmental, Social, And Governance

We view social factors as an important credit factor for the regulated utilities network industry, given the importance of providing satisfactory customer service and a safe and viable network. We consider AGIF's operations to be broadly consistent with rated Australian gas distributors and transmission operators. The company manages its customer service and safety obligations appropriately and in line with industry standards.

Environmental factors are neutral for AGIF, given the company operates primarily as a regulated gas distributor and transmitter. It therefore does not have direct exposure to emissions from the production of natural gas.

We assess governance factors as neutral, since AGIF's governance practices are consistent with those of other utilities.

Issue Ratings - Subordination Risk Analysis

Capital structure

As of Oct. 31, 2023, AGIF's consolidated capital structure consisted of A$2.51 billion of senior secured medium-term notes and A$1.11 billion of drawn bank facilities.

Analytical conclusions

We rate AGIF's senior secured debt 'A-', in line with the issuer credit rating. This is given no significant elements of subordination risk present in the capital structure.

We equalize the ratings on the existing issuances of DBNGP and EPG with the issuer credit rating on AGIF. This is given the cross guarantees that the entities have put in place among themselves through a suite of common security and trust deed documents upon the establishment of AGIF. The group's debt currently comprises all senior secured debt with equal ranking.

Ratings Score Snapshot

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: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | Utilities: Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, 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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