Ratings On DBNGP Trust And DBNGP Finance Affirmed At 'BBB' On Improved Financial Headroom; Outlook Stable

  • The financial headroom of DBNGP Trust and its financing arm, DBNGP Finco, has improved on the back of stable operations, small reduction in debt, and lower interest costs.
  • We forecast its funds flow from operations (FFO) to total debt would be about 6.5% over the next two to three years, which will consolidate the ratings at the current level and provide some buffer to withstand the tariff reset due from January 2021.
  • We are affirming the 'BBB' ratings on DBNGP Trust, its finco, and its secured debt.
  • The stable outlook reflects DGNBP's strong competitive position, low capital expenditure profile, and our view that the company will manage its capital structure as part of the tariff reset process to minimize the impact on its current credit profile.
MELBOURNE (S&P Global Ratings) Nov. 19, 2018-- S&P Global Ratings said today 
that it has affirmed the 'BBB' long-term issuer credit ratings on DBNGP Trust 
(DBNGP) and the company's financing arm, DBNGP Finance Co. Pty Ltd. (DBNGP 
Finco). The rating outlook remains stable. 

At the same time, we affirmed the 'BBB' issue ratings on DBNGP Finco's secured 
debt. DBNGP Trust is the owner-operator of the sole gas-transmission pipeline 
between the north-west shelf and the Perth region in the State of Western 
Australia.

We affirmed the ratings to reflect DBNGP's improved financial headroom, which 
we expect the company to maintain. While DBNGP's operations have been stable, 
cost efficiencies and better funding costs relative to our expectation have 
supported the company's outperformance against our forecasts. Still, the 
metrics remain at the lower end of the range for the company's credit profile 
and rated peers in the market.  

We now expect DBNGP's funds from operations (FFO) to debt to track around 6.5% 
for the next two to three years compared with the management's threshold of 
6%. Downside risk to cash flows and metrics during this period is low, in our 
view, because of tariff certainty through to December 2020. In addition, about 
80% of the company's revenues are derived by way of "take or pay" 
arrangements. Further, debt is likely to remain steady or drop marginally 
given that DBNGP's operating cash flows should cover the nominal annual 
capital expenditure (capex) of about A$30 million and dividends. 

Demand for the company's gas pipeline capacity remains strong.  Apart from 
high utilization of the full haul contracted capacity (85%), demand for spare 
capacity has also been good. The majority of the customers are contracted to 
at least 2025, although there is some nominal volume relinquishment rights in 
2021. The next scheduled tariff reset is due from January 2021. 
 
We expect the company to engage with its shippers/customers over the next 
12-15 months for the tariff reset process as well as to manage the tenor of 
the capacity contracts. Customers have an option to wait for the tariff 
determined by the regulator closer to January 2021 or seek an opportunity to 
negotiate with DBNGP provided majority shippers agree to the process. 

Similar to the most recent reset in 2016, the company could negotiate with its 
customers and bring forward the start of the tariff reset. Even in such a 
scenario, DBNGP will manage the swaps on its debt book in line with its 
expected returns to reduce its interest costs. This, together with the current 
buffer in the financials, should reduce any risk to the forecast metrics.

The stable outlook on DBNGP reflects the strong demand for capacity on the 
company's gas pipeline, its significant proportion of contracted revenues and 
known tariffs until December 2020, and low capital-expenditure profile. In 
addition, we expect the management to appropriately manage the tariff reset 
due January 2021 and DBNGP's capital structure so as to minimize the impact on 
the credit profile. We expect the company to maintain positive free operating 
cash flows and operate with FFO to debt just above its policy threshold of 6%.

Ratings downside could occur if a material adverse change to tariffs or 
capacity demand were to occur as part of the contract negotiation with 
customers. An FFO to total debt below 5.5% with no remedial action forthcoming 
to restore the metrics back to policy levels would place pressure on the 
ratings. While a low risk scenario, any substantial change to the contracted 
profile of the pipeline or level of secure "take or pay" profile could affect 
our view of DBNGP's earnings quality.

Although we forecast the FFO to debt would be above 6% in the near term, 
rating upside is fairly limited over the next two to three years until there 
is visibility on the tariff reset. Nonetheless, an FFO to debt well above 7% 
and a commitment to maintaining such a profile could lead to a one-notch 
uplift on the rating.
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