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Announcement:

Moody's: Gas tariff hike in Xining is credit positive for China Oil and Gas Group

05 Nov 2018

Hong Kong, November 05, 2018 -- Moody's Investors Service says that the regulator's decision to hike retail tariffs in Xining, effective 1 November, is credit positive for China Oil and Gas Group Limited (COG, Ba2 stable), a key gas distributor in the city.

"The tariff hike is credit positive for COG because it will improve its gas sales revenue and the average dollar margin of each volume sold, thereby improving its operation cash flow and credit metrics," says Ralph Ng, a Moody's Assistant Vice President and Analyst. "It will also build a track record of a timely cost pass-through mechanism in Xining, the capital of Qinghai province."

"We expect COG's three-year average retained cash flow/debt will improve to 17.4% in 2018-20 from previously 16.5%, after implementation of tariff hikes," says Ng.

COG has a significant gas distribution operation in Qinghai province, mainly in Xining, and Qinghai accounted for 45% of the company's total gas sales volume during the first six months of 2018.

Moody's conclusions are contained in its just-released report, "China Oil and Gas Group Limited: Retail tariff hike is credit positive".

On 30 October, the Xining City Development and Reform Commission announced the retail tariff hike for both residential and nonresidential gas users in the city.

The decision to increase the tariff was prompted by the city government's incentive to rationalize a gas cost pass-through mechanism in the city, which is consistent with the central government's objectives to promote a more market-oriented approach to gas tariffs.

The overall city-gate gas tariffs, representing gas procurement costs for gas distributors, have been increasing from 2016 until now. These costs compress dollar margins for gas distributors because retail gas tariffs remain unchanged. Retail gas tariffs are, effectively, the average selling price for gas distributors.

The announcement said that the gas tariff for residential users will be increased by RMB0.13 per cubic meter, which is equivalent to an increase of 9%-10%; and for nonresidential users, it will be increased by RMB0.2 per cubic meter, which is equivalent to an increase of 6.7%-17%, depending on the category of each user.

The tariff hike also highlights the intention of the local government to restore a timely cost pass-through mechanism, which is a key qualitative factor to evaluate the credit quality of a regulated gas utility. Despite the improvement in credit metrics, it will take time for the company to establish a track record of a cost pass-through mechanism under the evolving regulatory regime.

Subscribers can read the full report at:

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1148221

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

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
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
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

No Related Data.
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