Hong Kong, June 23, 2017 -- Moody's Investors Service says that China's (A1 stable) new policy paper
on the distribution tariff mechanism is credit positive for the city gas
distribution industry because it enhances the transparency of the regulatory
framework.
However, the new mechanism has no immediate rating impact on:
Beijing Gas Group Company Limited (A3 stable),
Binhai Investment Company Limited (Ba1 negative),
China Oil and Gas Group Limited (Ba2 stable),
China Resources Gas Group Limited (Baa1 stable),
ENN Energy Holdings Limited (Baa2 stable),
Kunlun Energy Company Limited (A2 negative),
Towngas China Company Limited (Baa1 stable),
Zhejiang Provincial Energy Group Co. Ltd (A2 stable).
On 22 June 2017, China's National Development and Reform Commission
(NDRC) released its latest policy paper on the distribution tariff setting
mechanism for city gas distributors. The Local Pricing Bureau will
roll out the new tariff mechanism by end of June 2018.
"The new regulatory directive will enhance the transparency of the
tariff setting mechanism, and thereby support predictable investment
returns for the Chinese city gas industry," says Ralph Ng,
a Moody's Analyst.
"We expect the negative impact on the rated city gas operators'
financial profile will be manageable, as their current investment
returns -- excluding connection fees -- are on average already
below the 7% cap," says Ivy Poon, a Moody's
Vice President and Senior Analyst.
Under the new mechanism:
• Permitted revenue will consist of permitted costs, permitted
returns, and taxes, minus any net profits derived from other
businesses.
• Permitted costs, which are audited and approved by the Local
Pricing Bureau, will include costs related to gas distribution,
depreciation and amortization expenses, as well as operating and
maintenance expenses.
• Permitted returns will be capped at an after-tax total return
of 7% on an effective regulated asset base.
• Regulated assets refer to the net book value of fixed and intangible
assets, to be audited and approved by the regulator. Regulated
assets include the pipeline network, storage facilities, and
the working capital related to gas distribution.
• The gas distribution tariff will be reviewed at least once every
three years and can be revised based on the economic conditions of each
province and its affordability relative to consumer incomes.
Currently, there is no clear tariff formula or disclosure on the
calculation of the distribution charge. Distribution charge is
included in the retail tariff charged by city gas operators to residential
customers and commercial and industrial users.
Under the new regulatory directive, tariffs for city gas distribution
will be based on a "cost-plus-reasonable return" approach,
which allows for a clear measurement of costs and predictable investment
returns.
As such, Moody's believes that the new tariff mechanism will help
increase the stability of investment returns for gas distributors --
a key rating factor for regulated gas utilities.
The policy paper is also in line with China's ongoing reforms in
the oil and gas sector. Specifically, it reflects the country's
continuous efforts to enhance the transparency of the tariff mechanism
for midstream gas transmission and distribution. The NDRC first
proposed new tariff regulations for midstream long-distance transmission
in October 2016.
The increased transparency of the midstream tariff will pave the way for
a gradual liberalization of the retail market, in particular through
the retail price setting mechanism.
Moody's expects the new mechanism will have a manageable financial
impact on the rated city gas operators, given the moderate headroom
in their current investment returns -- excluding connection fees
-- compared to the permitted return cap of 7%.
The norm for returns on investments in the gas distribution industry is
generally 3%-5%.
Moody's believes the implementation of the new distribution tariff
will take time, given the complexity of the audit process of regulated
assets and permitted costs across provinces.
Moody's will closely monitor the implementation of the reforms and the
associated credit impact on the rated gas distributors.
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.
Ralph Ng
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.)
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Client Service: 852 3551 3077
Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077