(The following statement was released by the rating agency) Fitch Ratings-Sydney-April 12: Fitch Ratings has affirmed the 'BBB-' rating on the senior secured debt issued by DBCT Finance Pty Limited, the financing vehicle for Australia-based DBCT Management Pty Limited, which operates the Dalrymple Bay Coal Terminal (DBCT). The Outlook is Stable. KEY RATING DRIVERS The rating reflects the ongoing stable cash flow provided by DBCT's take-or-pay contracts, mainly with low-cost metallurgical coal mines, and the ability to socialise revenue losses from a user default or non-renewal of a contract. DBCT's fee structure allows a regulated return on capital and pass-through of operating and maintenance costs to users. DBCT's narrow franchise and current year net debt/regulated asset base (RAB) of 77% position the rating at the lower end of the 'BBB' category. Low-Cost Coal Mine Customers - Revenue Risk (Volume): Midrange DBCT is the most competitive coal terminal serving the central Bowen Basin in Queensland in terms of location and port fees. Mines in the DBCT catchment area are mainly in the lower half of the global seaborne export metallurgical coal cash-cost curve. We perceive the metallurgical coal market as more stable than the thermal coal market. DBCT's coal exports are diversified across Asia and Europe; China accounts for less than 25% of exports, limiting DBCT's exposure to a slowdown in Chinese demand. Stable Regulation; Cost Pass-Through - Revenue Risk (Price): Midrange DBCT benefits from 5.4-year weighted-average life take-or-pay contracts with 17 coal mines. Revenue associated with a defaulting or non-renewing contract are socialised immediately across the remaining customers on a pro rata basis via increased fees. The fees are composed of a regulated terminal infrastructure charge (TIC) and a handling charge. The TIC allows DBCT to earn a market rate of return on its RAB and is reset every five years, with the last reset effective on 16 February 2017 with pricing backdated to 1 July 2016. The handling charge fully passes through DBCT's operation and maintenance costs. Fitch views the regulation as transparent and predictable, with changes in borrowing rates taken into account. Customer associates, who represent around 95% of contracted capacity, own the operator of DBCT, limiting the risk of dissatisfaction with the handling charge. Rigorous Capital Planning - Infrastructure Development and Renewal: Midrange DBCT has a strong capital expenditure process that is initiated by the management of the user-owned operator. A capex project requires review and approval by the operator board, the user group and the board of DBCT. Completed projects are submitted to the regulator - the Queensland Competition Authority - for approval and inclusion in the RAB, which allows DBCT to earn the regulated rate of return on the investment. The regulator has never rejected a capex application by DBCT, although it can do so if prior approval from the operator board or user group is not received. The financial forecasts used by Fitch do not require any expansion of the port's 85 million tonne per annum (mtpa) capacity; planned expenditure is for items such as replacement capex, improvements to port operations, safety enhancements and compliance with environmental regulations. Well-Managed Maturity Profile - Debt Structure: Midrange DBCT is financed with senior secured bullet debt. Variable rates are approximately 82% hedged, with hedges aligned with the five-year regulatory periods to minimise the risk of a mismatch with regulated revenue. Lenders benefit from a six-month debt-service reserve account as well as lockup and default gearing levels (debt/RAB) and debt-service coverage ratios (DSCR) in the debt covenants. Foreign-currency debt is fully swapped back to Australian dollars. Refinancing risk is managed through a well-laddered maturity profile and proactive refinancing in advance of maturities. Financial Profile Due to the regulation of DBCT, the most relevant metric in our rating case is the net debt/RAB ratio, which averages 78.2% over the next five years. This is higher than for some similarly rated issuers with regulated revenue streams, but Fitch believes DBCT's financial covenants and the full pass-through of operation and maintenance costs mitigate leverage risk. The rating case average DSCR through the forecast period to 2053 is 1.44x. Overall, Fitch sees the above metrics to be appropriate for the 'BBB-' rating in light of the midrange assessment of the key rating drivers and the narrowness of the franchise. PEER GROUP Fitch compared DBCT with two other publicly rated coal-export terminals in Australia: Newcastle Coal Infrastructure Group Pty Ltd (NCIG; senior secured debt: BBB-/Stable) and Adani Abbot Point Terminal Pty Ltd (AAPT; senior secured debt: BBB-/Stable). NCIG has longer-term contracts than DBCT, with 10-year rolling terms, but is largely tied to its existing user group. DBCT has a larger number of potential users in the Bowen Basin and has demonstrated its ability to take business from other coal-export terminals. DBCT ships mostly metallurgical coal used for steel-making, while NCIG is more dependent on thermal coal, which Fitch views as having greater risk due to the global political and environmental pressures on the power-generation sector. AAPT's users also have take-or-pay contracts, but with a weighted-average term of around eight years, longer than DBCT's 5.4-year weighted-average life. Both terminals have a similar mix of users without parent-company guarantees and some concentration. DBCT has a better competitive position than AAPT with regard to location and pricing, helping it take throughput from AAPT in the past. Both issuers have high leverage, with AAPT's debt/EBITDA reaching a maximum of 10.0x in 2022 in Fitch's rating case, similar to DBCT's current-year leverage of 9.9x. We have also compared DBCT's net debt/RAB to that of two regulated utility networks rated by Fitch, including AusNet Services Limited (BBB+/Stable) and a similarly rated issuer, due to the regulated nature of part of DBCT's revenue. The net debt/RAB ratios for the networks ranged from 67% to 73% in 2018, indicating that DBCT's rating is well positioned with its net debt/RAB of 77%. RATING SENSITIVITIES Future Developments that May, Individually or Collectively, Lead to Negative Rating Action: - a sustained increase in the Fitch rating case net debt/RAB ratio materially above 80%; or - DBCT's contracted capacity falling due to a customer default or non-renewal of contract, resulting in higher customer fees that negatively affect its competitive position among Queensland coal-export terminals. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - a sustained rise in coal prices and production in DBCT's catchment area, accompanied by fully contracted capacity at DBCT; and - the Fitch rating case net debt/RAB ratio dropping and staying below 75%.
CREDIT UPDATE Performance Update Prices for metallurgical and thermal coal have been sustained at well above 2015-2016 lows over the past year, with the spot price for metallurgical coal ranging at USD170-230 a tonne and thermal coal fluctuating between USD75-120 a tonne.
Financial results for 2018 were in line with management plans. EBITDA was about 4% above Fitch's rating case forecast for last year, due partly to corporate overhead costs that were lower than our expectations. DBCT had a number of capacity contracts expiring during 2017 and 2018, but has seen strong demand from existing users to renew their contracts as well as new users wishing to secure capacity. This has allowed DBCT to extend its weighted-average contract life to 5.4 years, from five years at the time of Fitch's last review in May 2018 and three years in 2017. Higher contracted capacity does not directly affect DBCT's financial performance, but could lower cost for users per tonne of contracted capacity, improving DBCT's competitive position among coal-export terminals. Fitch Cases Fitch's base case assumes an average contracted capacity over the next five years of 81.8mtpa and inflation of 1.8% in 2019, 1.9% in 2020 and 2.0% thereafter. For borrowing costs, it assumes a current base rate of 2.0% and a refinancing margin of 2.4%. Fitch's base case results in the DSCR averaging 1.58x over the forecast period to 2053 and an average net debt/RAB of 78% over the next five years. Fitch's rating case makes the following adjustments to the base case: - debt base rate: 100bp increase, which affects the unhedged portion of DBCT's debt until the 2021 regulatory reset - refinancing margin: 100bp increase, which assumes that the regulator does not recognise the increase and therefore does not reflect it in regulated TIC revenue - operating unit costs: 5% increase passed through to users, which affects DBCT's competitive position - contracted capacity: we assume the next 10mtpa of expiring contracts are not renewed, which increases charges for remaining users. Asset Description DBCT's nameplate capacity of 85mtpa makes it the largest and lowest-priced coal-export terminal serving the Bowen Basin, which has the country's highest-quality metallurgical coal and low average costs relative to other coal-producing regions globally. The terminal is located at the Port of Hay Point in Queensland, Australia. The Queensland government leases it to DBCT Management under a 50-year lease with a 49-year extension option. Criteria Variation The analysis includes a variation from the Ports Rating Criteria. The criteria do not specify metrics to be used for regulated ports and therefore do not indicate rating thresholds for net debt/RAB. However, they do indicate that relevant metrics may be used. Fitch has therefore utilised net debt/RAB as the primary metric in the financial analysis, as it is the most relevant for regulated assets such as DBCT. In addition, Fitch has referred to regulated utility networks in addition to Australian unregulated coal-export terminals in the peer comparison. Contact: Primary Analyst David Cook Director +61 2 8256 0363 Fitch Australia Pty Ltd 77 King Street, Sydney NSW 2000, Australia Secondary Analyst James Hodges Associate Director +61 2 8256 0377 Committee Chairperson Ian Dixon Managing Director +44 203 530 1815 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. 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