Fitch Ratings has affirmed CK Infrastructure Holdings Limited's (CKI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'A-'.

The Outlook is Stable.

CKI's IDR reflects its Standalone Credit Profile (SCP) of 'a-', which is at the same level as the rating of its 75.7% parent, CK Hutchison Holdings Limited (CKHH, A-/Stable). CKI's IDR also reflects its record of operating and financial resilience through the cycle, underpinned by a prudent strategy and consistently strong execution, as evident amid the coronavirus pandemic. We believe CKI's level of financial resilience offsets moderate, yet stable, leverage and is commensurate with 'A-' rated global companies.

CKI's IDR will remain unchanged even if the SCP deteriorates to 'bbb+', reflecting our assessment of 'Medium' operational and strategic incentives for CKHH to provide support under Parent and Subsidiary Rating Linkage Criteria.

Key Rating Drivers

Regulatory Resets Mostly Complete: The more stringent regulatory resets that came into effect over the past few years, especially in the UK and Australia, are mostly complete except for UK electricity operators, whose upcoming new price periods begin in 2023. We believe these changes are likely to result in weaker cash flow generation for the operators and squeeze their ability to pay dividends.

However, the impact on CKI's dividend inflow is being staggered over several years given its diversified investment portfolio. We expect the company to continue generating stable cash flow after the regulatory resets. Furthermore, we believe cash flow visibility over the next few years has improved with only UK electricity operators left in the current round of regulatory resets. We also believe rising inflation in the UK and Australia could benefit the regulated utilities' asset base and revenue.

Robust Operating Performance: We expect the cash flow contribution from CKI's investment portfolio to fall slightly in 2022 on recent and upcoming regulatory resets, but remain largely stable over the next two to three years. Fitch-adjusted funds from operations (FFO) rose by 20% in 2021. This was partially due to a low base in 2020 but also the higher operating cash flow from CKI's focus on its regulated utility businesses, providing stable returns on a regulated asset base. We believe the contribution from non-regulated but stable businesses such as ista continued to improve, too.

Steady Financial Profile: CKI's net debt fell to HKD31.6 billion in 2021, from HKD33.8 billion in 2020, on improving FFO. We expect net debt to rise slightly over coming years but remain relatively steady, reflecting stable cash flow generation. Interest coverage should fall over the next two to three years in a higher interest rate environment. Even so, we expect overall financial profile to remain steady with EBITDA/interest coverage sustained over 6.0x (2021: 9.6x) and net debt/EBITDA around 4.0x (2021: 3.7x).

Stable, Diversified Cash Inflow: CKI's ratings are underpinned by stable and predictable income from a diverse portfolio of regulated utilities and infrastructure investments.

A large portion of its cash inflow comes from its regulated gas and electricity network and water assets: Power Asset Holdings in Hong Kong; UK Power Networks Holdings, Northumbrian Water Group, Northern Gas Networks and Wales & West Gas Networks in the UK; and SA Power Networks, Victoria Power Networks, Australian Gas Networks, United Energy, Multinet Gas and Dampier to Bunbury Pipelines in Australia.

Structural Subordination Risk: CKI's FFO is derived largely from dividends and interest from shareholder loans. However, CKI invests with partners - typically Power Asset Holdings, in which CKI has a 36% stake, and other affiliates in the Cheung Kong group, including CKHH and CK Asset Holdings Limited. This effectively gives it majority control over its investments. Furthermore, CKI's dividends and interest on shareholder loans are well diversified across companies and regions, and also provide healthy interest cover, with FFO interest cover of 9.7x in 2021.

Derivation Summary

CKI's IDR is supported by a stable and predictable income stream from a diversified portfolio of investments, mainly regulated utilities but also in infrastructure assets. The IDR also takes into account factors such as structural subordination and strong financial flexibility. These are underpinned by a strong management team with a record of financial discipline and execution, and a demonstrated resilient performance amid the pandemic and regulatory resets.

The company has few peers in terms of its business model. State Grid International Development Limited (SGID, A+/Stable, SCP: bbb-) has a similar business model, as it receives stable cash dividends from its equity stakes in electricity-transmission system operators in Europe and Brazil. SGID is larger in scale, but we believe CKI has higher-quality cash flow, as a large portion comes from investment-grade investments, while Brazil accounts for around 60% of SGID's cash inflow. We believe CKI's financial profile is also superior, with stronger financial flexibility and lower leverage.

CLP Holdings Limited (CLPH, A/Stable) is similar to CKI in that it has stable, predictable cash flow, as it derives around 70% of its EBITDA from regulated assets in Hong Kong. CLPH's business is less diversified than that of CKI, but it does not have any structural subordination issues and has a much stronger financial profile, which justifies the one notch differential from CKI's SCP.

CKI's IDR is also somewhat comparable with the profiles of 'BBB+' rated regulated utilities in the UK such as Electricity North West Limited (ENW, BBB+/Negative). ENW does not face structural subordination risks, unlike CKI, while CKI benefits from its investment portfolio. The portfolio is diversified geographically and in terms of regulatory risk, spanning regulated electricity and gas distribution, gas transmission and water assets in the UK, Australia, New Zealand and Hong Kong, with staggered regulatory resets. CKI's financial profile is also slightly stronger and it has structurally positive free cash flow compared with typical utilities because of limited capex requirements, with most of its cash flow coming from dividends or investment returns.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Cash inflow from associates, joint ventures and investments declining by 4% in 2022, before remaining stable in 2023;

Dividend payout consistent with historical levels;

Additional acquisitions of HKD1.5 billion a year in 2022-2023.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

We do not expect positive rating action in the short to medium term, unless there is significant improvement in cash flow quality or an upgrade in the ratings of its parent, CKHH.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Multi notch downgrade of CKHH's rating;

EBITDA/gross interest and Fitch-adjusted FFO interest cover below 4.5x for a sustained period;

Net debt/EBITDA and FFO net leverage above 6.0x for a sustained period;

Weaker quality cash-inflow from investments due to significant acquisitions in the non-regulated sector that undermine cash flow quality to CKI.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: CKI had cash and cash equivalents of HKD8.1 billion at end-December 2021 (2020: HKD13.5 billion), against HKD10.4 billion of short-term maturities (2020: HKD 4.7 billion) and total debt of HKD39.7 billion (2020: HKD47.3 billion). This includes HKD9.9 billion of perpetual securities, for which Fitch does not give any equity credit. Debt maturities are well laddered. We believe liquidity is adequate despite the shortfall, as the company has strong and proven access to banks and debt capital markets.

Issuer Profile

CKI is a global infrastructure company with diversified investments in energy, transportation and water infrastructure, waste management, energy-from-waste and infrastructure-related businesses. It operates mainly in the UK, Australia, New Zealand, Canada, Europe, Hong Kong and mainland China.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

CK Infrastructure Holdings Limited

LT IDR

A-

Affirmed

A-

senior unsecured

LT

A-

Affirmed

A-

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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