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Announcement:

Moody's: China's lowering of natural gas price is credit positive for city gas operators

 The document has been translated in other languages

19 Nov 2015

Hong Kong, November 19, 2015 -- Moody's Investors Service says the lowering of the wholesale natural gas price in China by the National Development and Reform Commission (NDRC) is credit positive for Moody's-rated city gas operators, because it will encourage natural gas consumption and slightly improve the operators' margins.

Also, the announced refinement of the natural gas pricing mechanism will support the government's market price reforms and introduce more transparency and market efficiency to the gas sector.

On 18 November, the NDRC announced that it would lower the wholesale price of natural gas for non-residential users by an average of RMB0.70 per cubic meter, equivalent to an average reduction of approximtately 28%, effective on 20 November.

The price adjustment is credit positive for Moody's-rated city gas operators; namely:

1) ENN Energy Holdings Limited (Baa3 positive),

2) China Resources Gas Group Limited (Baa1 stable),

3) The Hong Kong and China Gas Co. Ltd. (A1 stable),

4) Towngas China Company Limited (Baa1 stable),

5) Beijing Enterprises Holdings Limited (A3 stable),

6) Kunlun Energy Company Limited (A1 stable),

7) China Oil and Gas Group Limited (Ba1 review for downgrade), and

8) Binhai Investment Company Limited ((P)Baa3 stable).

The price adjustment was prompted mainly by: (1) the continuous fall in prices over the past eight months for fuel oil and liquefied petroleum gas; these prices serve as benchmarks for the price of natural gas, and (2) the stronger support by the government for the use of natural gas. The adjustment will not affect the gas price charged to residential users.

The latest price adjustment is more significant than the previous cut in April 2015, when the regulator lowered the wholesale gas price by RMB0.44 per cubic meter for incremental natural gas volumes and increased the price by RMB0.04 per cubic meter for existing volumes.

Moody's expects that the city gas operators' retail tariffs charged to affected users will likely follow the reductions in the wholesale price. Lower retail tariffs would increase the competitiveness of natural gas as against alternative fuel sources, and therefore stimulate demand. This development will help the city gas operators counterbalance the recent moderation in gas consumption.

The price cut will promote the use of compressed natural gas (CNG) and liquefied natural gas (LNG) as the preferred fuels for vehicles, because there will be a greater price incentive for diesel/gasoline-fueled vehicles to be converted into CNG/LNG-fueled vehicles, given the smaller price difference between CNG/ LNG and diesel/gasoline.

Industrial companies - customers of the city gas operators -- will also benefit from the lower prices of natural gas as they face reduced cost pressure with more financial flexibility to cope with the challenging operating environment against the backdrop of economic slowdown.

The growth of China's natural gas consumption has slowed from double-digit to single-digit rates in 2014 and 2015, mainly due to China's economic rebalancing and the slowdown in industrial activity.

According to the NDRC, natural gas consumption by non-residential users subject to the regulated gas price accounts for around 30% of total natural gas consumption in China.

On the other hand, the immediate financial impact on the city gas operators resulting from the price cut will be moderate.

Moody's estimates that average retail tariffs for the non-residential users after the cost pass-through will fall by around 20%. As a result, revenue growth will be affected accordingly in 2016, because lower retail tariffs will weigh on natural gas sales in absolute terms.

Nevertheless, Moody's expects most rated companies' EBITDA margin will improve by around three to four percentage points due to the improved cost structure, and their dollar margins in absolute terms will be likely maintained at current levels after the cost pass-through.

Furthermore, the latest price cut has strengthened the track record of China's gas tariff mechanism introduced in 2013.

Under the mechanism, price hikes were implemented in 2013 and 2014 to narrow the gap between higher imported gas prices and lower domestic gas prices. Prices were lowered twice in 2015, due to the drop in fuel oil and LPG prices.

Moody's expects that the government will continue to make adjustments for natural gas prices, in response to changing market conditions.

The announced refinement of the pricing mechanism demonstrates the Chinese government's (Aa3 stable) commitment to market price reforms and to improving the transparency of tariff levels.

The mechanism also removes the cap on the wholesale price for non-residential users and introduces a floating range on the wholesale price. Such a situation will provide flexibility for both the city gas operators and national oil companies in price negotiations, promote market efficiency through competition, and pave way for liberalization of gas price in the long term.

The new trading platform for petroleum and natural gas set up in July 2015 will further facilitate the market-based pricing mechanism for non-residential users.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ivy Poon
Asst Vice President - Analyst
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

Terry Fanous
MD-Public, Proj & Infstr Fin
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: China's lowering of natural gas price is credit positive for city gas operators
No Related Data.
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