Port of Newcastle Investments (Financing) Pty Ltd. Upgraded To 'BBB' On Higher Cash Flow; Outlook Stable
- Port of Newcastle Investments (Financing) Pty Ltd. (PONF), the Australia-based financing vehicle of the Port of Newcastle (PON) group, will sustainably increase its cash flow.
- We expect strong improvement in PONF's ratio of funds from operations (FFO) to debt to about 10.7% in fiscal 2025 (ending Dec. 31) and 14.9% in fiscal 2026.
- We therefore revised our long-term issuer credit and issue credit ratings on PONF to 'BBB' from 'BBB-'.
- The stable outlook reflects likely stabilization of PONF's FFO-to-debt ratio, with an adequate buffer above our rating threshold.
MELBOURNE (S&P Global Ratings) June 4, 2025-- S&P Global Ratings today took the rating actions listed above.
PONF's cash flow is set to increase due to a rise in wharfage charges in January 2025. This follows the introduction of a new pricing approach to the wharfage tariff in April 2024. We forecast EBITDA will rise to A$174 million in 2026, up from A$139 million in 2024, which will positively affect the company's FFO-to-debt ratio. Additionally, we anticipate cash flow will become more stable and predictable compared with recent years due to the new annual true up mechanism that took effect this year. This mechanism will help PONF maintain a higher FFO-to-debt ratio than in recent years.
The new pricing system is based on regulatory pricing principles and offers good visibility of cash flow. The annual true up mechanism adjusts the following year's price based on the difference between forecasted total volume, which includes input from port users on trade volumes, and the actual volumes. This protects PON from the risk of a revenue shortfall due to lower trade volumes and commenced in 2025. Starting on Jan. 1, 2025, wharfage charges rose to $0.4053 from $0.2903 in 2024, with $0.025 relating to the revenue shortfall from 2024.
Under the new pricing system, prices are set to recover efficient costs for providing services and to ensure a return on investment for the port. Rising interest costs will be partially offset through application of the weighted average cost of capital to the port's regulated asset base when calculating the hypothetical maximum allowable revenue for services. Pricing model parameters will be updated every five years to reflect changes in costs and the risk-free rate. This flows into revenue and protects PONF from any rise in interest rates.
Glencore PLC's (BBB+/Stable/A-2) legal challenge to the new pricing system can be managed as long as it is within our expectations. Glencore has filed a lawsuit against PON to contest whether it can access a 2022 determination of the Australian Competition Tribunal only in respect of wharfage charges. Glencore and PON are the parties to the determination. We believe Glencore currently pays lower charges instead of the new higher ones pending resolution of the legal proceedings. Our forecasts incorporate the revenue impact of this short payment, which we estimate to be A$15 million-A$17 million per year over the next three years. We do not anticipate any further challenges to the pricing regime from other port users in our base case.
Clarity around cash flow will allow PONF to revisit its capital expenditure (capex) plans and shareholder distributions. We believe the company will look to prioritize growth investments to diversify trade and strengthen its business over the next three to five years.
The company will likely gradually and prudently resume shareholder returns. These could exceed our base-case estimates. However, we believe the company will maintain a buffer in its FFO-to-debt ratio against our downside rating threshold.
Ordinary dividends and interest payments on shareholder loans have been suspended since 2022 due to reduced earnings from flooding and severe weather, with the exception of an incremental amount to fund withholding tax. We anticipate the company will likely review the suspension of shareholder loan interest after refinancing its 2026 maturities and further strengthening the ratings buffer.
Similarly, capex has been curtailed in recent years, with spending of A$18.4 million in 2023 and A$21.3 million in 2024. Our base case incorporates an increase in capex to A$47 million-A$61 million annually over the next three years. This will be primarily for development of the port's Mayfield berth and multipurpose terminal. The ultimate amount and timing of spending will depend on shareholder approval and any desire to catch up on deferred expenditures in recent years.
We capture the potential for a slight reduction in financial strength coupled with management's commitment to a minimum 'BBB' rating through our financial policy modifier.
The stable outlook on PONF, the financing vehicle for the wider PON group, reflects our expectation that its FFO-to-debt ratio will improve to above 10% in fiscal 2025 and strengthen to about 14% thereafter, up from 9.2% in 2024. We anticipate PON will have an adequate cushion against our downside ratings threshold to weather earnings volatility, showing the company's commitment to maintain at least a 'BBB' rating. We expect shareholder payouts to be restrained in the next few years to prioritize growth capex to diversify trade and maintain a buffer in the rating.
We could lower the rating if FFO to debt was to fall below 10% with no prospect of recovery in subsequent years. This could occur if:
- The current pricing regime proves to be unsustainable, resulting in a deterioration in earnings compared with our forecast. This could arise from implications of Glencore's ongoing litigation; or
- Dividends and capex are substantially higher than our base-case assumptions.
We could consider upgrading the company if it were to keep its FFO-to-debt ratio well above 14%, backed by supportive financial policies. Additionally, we would need to see progress in PON's capex pipeline to increase the proportion of revenue from sources other than coal.
Related Criteria
- Criteria | Corporates | General: Methodology For Assessing Financing Contributed By Controlling Shareholders, May 15, 2025
- Criteria | Corporates | General: Sector-Specific Corporate Methodology, April 4, 2024
- Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
- Criteria | Corporates | General: Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
- 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
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Port of Newcastle Investments (Financing) Pty Ltd., Oct. 11, 2024
- Port of Newcastle Investments (Financing) Pty Ltd. Upgraded To 'BBB-' On Stronger Financials; Outlook Positive, Aug. 29, 2024
- Port of Newcastle Investments (Financing) Pty Ltd. Outlook Revised To Positive; 'BB+' Ratings Affirmed, April 3, 2024
- Port of Newcastle Investments (Financing) Pty Ltd., Oct. 2, 2023
- Port of Newcastle Investments (Financing) Pty Ltd. Downgraded To 'BB+' On Weaker Financials; Outlook Stable, Sept. 7, 2023
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