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Announcement:

Moody's: CLP Holdings' rating unaffected by weak 2012 results

 The document has been translated in other languages

26 Feb 2013

Hong Kong, February 26, 2013 -- Moody's Investors Service says the weak full-year (January to December) 2012 results reported by CLP Holdings Limited (CLPH) have no immediate impact on the company's A2 issuer rating.

The rating outlook remains stable.

While CLPH reported moderate revenue growth of 14%, the company's recurring earnings fell by 9%, after the exclusion of one-off items, which were mainly Yallourn's mine flooding cost of EnergyAustralia and impairment provision of Jhajjar plant in India.

"CLPH's weak performance was the result of the overall challenging operating environment in Australia and the severe coal shortages in its Indian Jhajjar plant," says Ivan Chung, a Moody's Vice President and Senior Credit Officer and also Lead Analyst for CLPH.

The earnings from the company's Australian operations fell by 42% to HKD1.7 billion, and accounted for only 18% of the company's total earnings before one-off items. By contrast, its Australian operations contributed 28% of the company's total earnings before one-off items in FY 2011.

In addition, CLPH's Indian operations reported a net loss of HKD182 million from a profit of HKD154 million a year ago.

CLPH's Australian operations faced numerous challenges in 2012. The operating expenses, for instance, costs of rebranding and marketing its New South Wales operations acquired in early 2011, were higher than last year.

At the same time, electricity demand in Australia has declined due to: 1) the country's slower economic growth, 2) changing consumer energy usage patterns, 3) milder weather, and 4) the popularity of solar panel installations in households. The lower demand for electricity has in turn intensified competition in the retail market and suppressed wholesale prices.

In addition, damage from the flooding of CLPH's Yallourn mine in Victoria in June 2012, cost the company HKD790 million after tax.

In India, CLPH's coal-fired power plant in Jhajjar was affected by severe coal shortages as well as by the poor quality of coal from its suppliers. The plant was running at 33% plant commercial availability over the period from August 2012 to January 2013, which is far below forecast of 86% .

As a result, CLPH obtained approval for imported coal arrangement from Haryana State offtaker, representing 15% of its total annual coal demand. Jhajjar plant received the first delivery of imported coal in late 2012. While the CLP group expects, to further increase the volume of imported coal, it is unclear at this stage, by how much the limit will be increased.

CLPH has said it expects a gradual improvement in the coal supply as well as operating performance of Jhajjar over the next 6 to 18 months. However, the reliability of the new coal supply arrangements are untested and thus Jhajjar's ability to meet its targeted capacity level is uncertain.

"CLPH's credit metrics are not expected to materially improve in 2013 given the difficult operating environment in Australia and the uncertainty related to coal supplies to its Jhajjar plant," says Chung.

"Moreover, its leverage will remain high, due to its large capex needs to support its expanding operations, and also because of the delays in its IPO plans for EnergyAustralia. Nevertheless, Moody's expects CLPH to maintain its prudent financial management as evidenced by the share placement exercise in late 2012 to enhance financial flexibility," adds Chung.

"Nevertheless, we expect CLPH's credit metrics in the next two to three years to be consistent with its A2 rating, albeit at the low end of the rating range," says Chung.

Moody's expects CLPH's average free flow of funds (FFO)/ interest coverage to be around 4x-5.5x in the next two to three years. Its FFO/debt is likely to be around 18%-24%, and its debt/capitalization should be around 45%-48%.

"We expect CLPH's Hong Kong electricity business will remain the foundation of group, given that the segment accounted for 71% of total operating earnings in 2012," says Chung.

The Interim Review of the current Scheme of Control of Hong Kong will be conducted in 2013. CLPH and the government will reassess the tariff level in view of the uptrend gas costs and increasing capital investments to meet Hong Kong's economic development and the government's fuel mix target which is currently under review. Although the group is facing increasing pressure in raising tariff due to the political and social climate, any modification on the current scheme will require mutual agreement.

"In addition, the prospects for its operations in China remain positive. Both CLPH's Hong Kong and China operations will provide the company with buffers against adverse development overseas," adds Chung.

CLPH's businesses outside Hong Kong and China will be under pressure owing to its expansion into higher risk, non-regulated electricity wholesale and retail businesses in the Asia Pacific region.

Nonetheless, the company's ratings outlook is stable, reflecting Moody's expectation that CLPH will successfully integrate the NSW business, thereby gradually improving CLPH's financial profile.

The stable outlook also reflects Moody's expectation that CLPH will make no major overseas acquisitions in the next 12 months.

The possibility of an upgrade in the company's rating is limited in the near-term, given the weakness in its credit metrics, as a result of the increased volatility in its overseas businesses.

Downward rating pressure will emerge if the overseas operations perform materially below Moody's expectations, or if CLPH makes any additional majority debt-funded acquisitions, such as to increase its business and financial risk.

The key credit metrics that Moody's would consider for a downgrade include FFO/debt falling below 15-20%, debt/capitalization rising above 50%, FFO/interest falling below 4-4.5x (consolidated), or CLP Power's cash flow contribution falling below 50% of the group total.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

CLP Holdings Ltd, headquartered and listed in Hong Kong, operates its electric utility business through its wholly owned subsidiary, CLP Power Hong Kong Ltd. The group also has a growing portfolio of electricity generation investments across Asia Pacific.

CLP Power Hong Kong Ltd is a vertically integrated electricity generation, transmission, and distribution company. It is regulated by the Hong Kong SAR Government under the Scheme of Control Arrangement and accounts for the majority of CLPH's operating cash flow. The company has a de facto monopoly over Kowloon and the New Territories, which together account for over 80% of Hong Kong's population.

Ivan Chung
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Patrick Mispagel
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: CLP Holdings' rating unaffected by weak 2012 results
No Related Data.
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