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Rating Action:

Moody's affirms China Huaneng Group's A2 ratings, outlook remains stable

 The document has been translated in other languages

26 Mar 2020

Hong Kong, March 26, 2020 -- Moody's Investors Service has affirmed China Huaneng Group Co., Ltd.'s (CHGC) A2 issuer rating.

At the same time, Moody's has affirmed the A2 rating on the senior unsecured notes issued by China Huaneng Group (Hong Kong) Treasury Management Holding Limited and guaranteed by CHGC.

The outlook on all ratings remains stable.

RATINGS RATIONALE

"The ratings affirmation reflects our expectation that CHGG will manage the transition to a predominantly market-based tariff regime in a manner that will continue to support its rating," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

"However, business and financial risk will likely increase for CHGC under the market-based tariff regime, especially as China's economy slows amid the impact of the coronavirus pandemic globally," adds Kan.

CHGC's A2 issuer rating combines its baseline credit assessment (BCA) of ba1 and a five-notch uplift based on the very high likelihood of support from, and a very high level of dependence on, the Chinese government (A1 stable), under Moody's joint-default analysis approach for government-related issuers.

The five-notch uplift reflects CHGC's high systemic importance as one of the largest state-owned power generation companies in China, and its full ownership and direct supervision by the central government, with a strong track record of government support.

CHGC's ba1 BCA reflects its leading position as one of the largest power generation companies in China, with a diversified fuel mix and geographical spread. However, the company's BCA is constrained by its high financial leverage, the evolving regulatory regime, the challenging operating environment, and its moderate exposure to coal mining and financial services operations.

Moody's expects the transition to a predominantly market-based tariff regime will be manageable for CHGC because the new tariff mechanism -- if executed as planned -- will remove delays in passing through tariff adjustments, thereby reducing margin volatility.

Prolonged delays in tariff adjustments and the inability to pass through coal price increases in a timely manner were major weaknesses of the previous regulated tariff mechanism.

Nonetheless, while the share of market-based sales has been rising since China gradually opened its power generation market in 2016, tariffs under the new mechanism are lower than the current regulated tariffs, reducing profit margins for coal-fired power generators. In 2019, market-based power sales accounted for close to 40% of national power consumption.

Moreover, the gencos' increasing exposure to market-based power sales raises business risk and volatility. Moody's expects national power demand will slow to between flat to low single digit growth in 2020 from 4.5% in 2019, given the weaker economic conditions in China. The resultant intensifying market competition will pressure tariffs, particularly between coal-fired and renewable energy as the latter enjoys priority of dispatch.

Accordingly, Moody's has recalibrated the rating tolerance levels of CHGC to reflect the increased risk stemming from the new market-based tariff regime.

The stable outlook reflects Moody's expectation that (1) CHGC will maintain its current credit profile and financial metrics; (2) changes in the regulatory framework for China's power sector will remain largely manageable; and (3) support from the central government will remain intact over the next two to three years, given the company's systemic importance and status as one of the core central state-owned enterprises (SOEs).

CHGC's issuer rating could be upgraded if its BCA improves significantly. Moody's would raise CHGC's BCA if (1) it successfully deleverages, such that FFO/debt exceeds 13.5% or debt/capitalization falls below 65% on a sustained basis; or (2) the regulatory regime turns more predictable and supportive over time.

CHGC's issuer rating could be downgraded if (1) central government support weakens; (2) the company's BCA weakens because of a material deterioration in its business or financial profile, without any material change in the support assessment.

The company's BCA could be lowered as a result of (1) adverse changes in China's regulatory environment; (2) further aggressive debt-funded expansions or mergers, especially in renewable capacity; or (3) a significant rise in business risk from the development of its financial services and coal-mining businesses.

Financial metrics that could lead to a downgrade include FFO/debt below 6.0% or debt/capitalization above 80% over a prolonged period.

The ratings also consider the following environmental, social and governance (ESG) factors.

CHGC faces elevated carbon transition risk in its coal-fired generation and coal mining businesses. This risk is partially mitigated by CHGC's increased focus on renewable capacity expansion over the past three years and going forward.

CHGC faces moderate social risk in terms of worker health and safety in relation to its construction and operation of power projects.

In terms of governance risk, Moody's has considered CHGC's financial policy, which is characterized by high capital spending and financial leverage.

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in May 2017, and Government-Related Issuers Methodology published in February 2020. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

China Huaneng Group Co., Ltd. (CHGC) is one of the central government-owned power producers in China, accounting for 9% of national installed capacity. The company is 100% owned by the Chinese central government, supervised by the State-owned Assets Administration and Supervision Commission and its chairman was directly appointed by the Organization Department of the Communist Party of China.

CHGC had a consolidated installed capacity of 176.7 gigawatts (GW) as of the end of December 2018. In addition to power generation, which accounted for 80% of its revenue in 2018, CHGC also engages in coal mining and financial service businesses, which accounted for 5% and 4% of its revenue.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Boris Kan
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
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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