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
