Hong Kong, November 18, 2022 -- Moody's Investors Service has affirmed China Three Gorges Corporation's (CTG) A1 issuer rating, baa2 Baseline Credit Assessment (BCA) and the A1 senior unsecured rating of the notes issued by Three Gorges Finance I (Cayman Islands) Ltd. and Three Gorges Finance II (Cayman Islands) Ltd., which are both wholly owned subsidiaries of CTG. The notes are unconditionally and irrevocably guaranteed by CTG.
The rating outlook remains stable.
"The rating affirmation reflects CTG's sound standalone credit profile, underpinned by its position as the world's largest hydropower company by installed capacity and our expectation of a very high likelihood of support for CTG from the Chinese government, if needed," says Ada Li, a Moody's Vice President and Senior Credit Officer.
RATINGS RATIONALE
CTG's A1 issuer rating primarily combines its BCA of baa2 and Moody's assessment of a very high likelihood of support from and a high level of dependence on the Government of China (A1 stable), which results in four notches of rating uplift.
CTG's baa2 BCA reflects the company's leading position in the Chinese and global hydropower industries, a domestic policy framework that favors renewable energy, the stable cash flow from the company's large-scale operating assets and its good access to capital markets and banking credit facilities.
CTG's BCA also considers the social and environmental risks associated with the company's large-scale hydroelectric and water conservancy projects; the financial strain and execution risks related to the company's greenfield projects and overseas investments; and the concentration risks in the company's domestic hydropower generation assets.
The support assessment reflects CTG's 100% government ownership; the company's high strategic importance to China's clean energy development, ecological conservation and environmental protection; and the government's history of providing support. The assessment also factors in the Chinese government's strong ability to provide support, as reflected in its A1 sovereign rating.
Moody's expect the company to focus on domestic renewable power and environmental protection projects, following the completion of large-scale domestic hydropower expansion plans along Jinsha River in 2022. The solid cash flow from hydropower generation provides CTG comparatively solid financial metrics among state-owned enterprises to support its expansion plans. CTG also demonstrated a balanced financing approach through a combination of debt- and equity-funded expansions.
Moody's expects CTG's average annual capital spending, including overseas acquisitions, to be around RMB100 billion over 2022-24. Therefore, Moody's estimates that CTG's funds from operations (FFO) to debt, including pro-rata consolidation of its 20.2% owned affiliate EDP - Energias de Portugal, S.A. (EDP, Baa3 positive), will be around 12% and FFO interest coverage will be around 4 to 5 times over the next 12-18 months.
CTG's rating also considers the following environmental, social and governance (ESG) factors.
CTG has neutral to low environmental risks. The company benefits from carbon transition risks, underpinned by China's preferential policy toward hydro and renewable power. This is offset by CTG's moderately negative exposure to physical climate risks and water management, in terms of the impact of extreme weather patterns to its flagship large-scale cascade hydropower generation assets.
CTG has a moderately negative exposure to social risks. Its hydropower facilities also perform flood control functions, which can increase public concern over environmental, social, or affordability issues that could lead to regulatory or political intervention.
Governance is broadly in line with other utilities and does not pose specific risks. CTG has a solid track record in maintaining its financial strategy amid its full government ownership and concentrated board structure.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on CTG's rating reflects the company's BCA, which remains appropriately positioned at baa2; and the Chinese government's ability to maintain policy and regulatory support, and its ownership of the company.
A rating upgrade is unlikely because the rating is already at the same level as the sovereign rating.
Moody's could raise CTG's BCA if China's regulatory framework significantly improves, with an established track record of a favorable tariff-setting mechanism. Credit metrics that Moody's would consider for a BCA upgrade include the agency's adjusted FFO to debt, including pro-rata consolidation of EDP, above 20% on a sustained basis. Moody's would also upgrade the rating if the Chinese government's ability to provide support strengthens, which would be illustrated by an upgrade of the sovereign rating.
Moody's could downgrade CTG's rating if the company's BCA deteriorates; and there is any weakening in the company's relative importance in the implementation of strategic national policy goals, which would be indicated by a lowering of the central government's willingness to provide support. CTG's rating could also be downgraded if China's sovereign rating is downgraded.
CTG's BCA could be lowered if the company incurs significant cost overruns or delays in its projects; it is unable to obtain sufficient external funding to support capital spending or refinance maturing debt; social and environmental events lead to significant liabilities; CTG engages in large-scale debt-funded mergers and acquisitions; or changes in the current supportive government policies weaken CTG's profitability and debt-service coverage.
Credit metrics that Moody's would consider for a BCA downgrade when CTG's adjusted FFO to debt, including pro-rata consolidation of EDP, below 10%, on a sustained basis. However, a lowering of CTG's BCA (other things being equal) might not immediately weaken its rating because of the very high likelihood of support expected from the Chinese government.
The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017 and available at https://ratings.moodys.com/api/rmc-documents/68547, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.
China Three Gorges Corporation (CTG) is a wholly state-owned enterprise directly under the Chinese central government. It was 90% owned by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and 10% owned by the Social Security Funds as of the end of 2021.
As of the end of 2021, CTG had a total installed capacity of 109.4 gigawatts (GW), comprising 11.0 GW in overseas projects, including Brazil (Ba2 stable) and European countries. As of the end of 2021, its domestic hydropower accounted for 67.2 GW, and domestic wind and solar capacity accounted for 26.5 GW. CTG reported RMB136 billion in revenue in 2021, up 21.8% from that a year earlier, comprising 54.62% from hydropower, 14.52% from renewables, and the rest from other businesses including electricity distribution, contracting and finance.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
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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.
Ada Li
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
Yian Ning Loh
Associate Managing Director
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
