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Announcement:

Moody's: State Grid International Development's overseas investments have no immediate rating impact

 The document has been translated in other languages

08 Jul 2016

Hong Kong, July 08, 2016 -- Moody's Investors Service says that State Grid International Development Limited's (SGID) potential acquisition of a 23% stake in CPFL Energia S.A. (unrated) in Brazil (Ba2 negative) and 14% stake in Eandis Assets (unrated) in Belgium (Aa3 stable), will have no immediate impact on its A1 issuer rating and negative outlook.

"The acquisition of CPFL Energia, if completed, will increase SGID's emerging market and business risk in Brazil, given the challenging operating environment in local power distribution and generation sectors," says Ivy Poon, a Moody's Assistant Vice President and Analyst.

"By contrast, the potential acquisition of Eandis Assets will enhance SGID's asset quality, owing to Belgium's developed regulatory regime and low business risk profile," adds Poon.

"We expect the company's overall financial profile will remain consistent with its current standalone credit profile, although its financial headroom will narrow after the acquisitions," says Poon.

On July 1, SGID signed a binding letter of agreement with the controlling shareholder of CPFL Energia to acquire a 23% stake in the company's capital. According to the announcement by CPFL Energia, the total consideration will be about USD1.8 billion. CPFL Energia is the largest private company in the Brazilian power industry engaged in power distribution, generation and commercialization. Its key renewable energy arm, CPFL Energias Renovaveis S.A., is rated Ba3 corporate family rating with a negative outlook by Moody's.

On June 29, SGID signed a subscription and shareholder agreement with Eandis Assets to acquire a 14% stake in the company's capital. The total consideration has not been disclosed. As reference, the net asset value of Eandis economic group -- Eandis Assets and its subsidiary, Eandis System Operator CVBA (A1 Negative) - was EUR 2 billion at end 2015. Eandis Assets mainly owns and operates, through its subsidiary, the regulated electricity and gas distribution grid covering around 78% of all Flemish municipalities.

Both transactions are subject to approval from the local regulators and shareholders. If the relevant approvals are obtained, Moody's expects the transactions will close by the end of this year.

The potential acquisition of CPFL Energia is the first attempt by SGID to diversify from power transmission to power distribution, along with generation, in Brazil. The acquisition will increase SGID's exposure to Brazil, whose country risk is higher and regulatory regime track record are shorter than those of the developed countries where SGID has invested.

Unlike power transmission, which is insulated from volume risk thanks to the long term concession agreements, power distribution and generation face greater business volatility from demand risk, volatile power costs, and hydrological risk. Brazil's economic recession and the challenging political dynamics further complicate the operating environment.

This increased business risk is partly mitigated by the fairly strong market position of CPFL Energia as the leading power distributor in the country, with a 12% of market share and status as the third largest private generation company at end-March 2016. The heighted hydrological risk resulted from the prolonged drought in past two years is also partially receded due to increasing water levels against the backdrop of more favorable raining seasons in 1H16. Furthermore, CPFL Energia's financial performance remains moderate, despite the weakened distribution volumes.

At the end of 2015, SGID's assets totaled HKD127 billion, of which its Brazilian operations constituted nearly 16%. Moody's estimates that emerging markets, mainly Brazil, account for 20%-25% of SGID's total assets, while developed countries, mainly Australia, account for 75%-80%.

On the other hand, the acquisition of Eandis Assets, if completed, will enhance the quality of SGID's investment portfolio through its low business risk profile, developed regulatory framework and dominant market position in Belgium.

The two transactions are broadly consistent with SGID's strategy to focus on acquiring transmission and distribution assets. If the acquisitions proceed as planned, Moody's expects they will be financed by equity and debt, likely 40%-50% from its parent company's equity injection and the remainder from debt, similar to the financing arrangement of SGID's previous acquisitions.

The company's adjusted fund from operation/debt and adjusted debt/capitalization will stay within Moody's expectations of 12%-15% and 35%-40%, although towards lower end of the range, compared to 14.7% and 40.6% in 2015, respectively.

The principal methodology used in these ratings was Regulated Electric and Gas Networks published in November 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

State Grid International Development Limited is a wholly owned subsidiary of State Grid Corporation of China. It is the sole investment platform for its parent's overseas investments in transmission and distribution business, covering five countries and one region.

State Grid Corporation of China is the largest public utility and power grid company in the world in terms of revenue. It is 100% owned by China's State-owned Assets Supervision and Administration Commission.

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: State Grid International Development's overseas investments have no immediate rating impact
No Related Data.
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