Hong Kong, September 25, 2020 -- Moody's Investors Service has affirmed the Baa2 issuer rating and senior
unsecured ratings of ENN Energy Holdings Limited (ENN Energy).
The outlook on all ratings remains stable.
Moody's rating action follows ENN Ecological Holdings Co.,
Ltd's (ENN Ecological, Ba2 positive) completion of the acquisition
of 32.8% stake in ENN Energy for RMB25.8 billion
from ENN Group International Investment Limited (EGII) and Essential Investment
Holding Company Limited (Essential Investment).
All of the above entities are ultimately controlled by Mr. Wang
Yusuo, chairman for both ENN Ecological and ENN Energy, before
and after the transaction.
RATINGS RATIONALE
"The affirmation reflects our expectation that the reorganization will
not have any material rating impact on the company given that (1) Mr.
Wang will maintain ultimate control over ENN Energy, and (2) the
company's role as his downstream city gas platform will remain intact,"
says Boris Kan, a Moody's Vice President and Senior Credit Officer.
On 30 August 2019, ENN Energy announced that EGII and Essential
Investment have agreed to sell their combined and entire 32.8%
equity stake in ENN Energy to ENN Ecological. The transaction was
completed on 21 September 2020, making ENN Ecological the single
largest shareholder of ENN Energy. Mr. Wang maintains ultimate
control over ENN Energy through his 75.6% stake in ENN Ecological.
Moody's considers the impact of the transaction on ENN Energy to
be limited as Mr. Wang will maintain ultimate control over the
company. ENN Energy will continue to be the flagship company for
Wang's downstream energy business, with a strong market position
in the city gas sector that benefits from the supportive regulatory environment
under the Chinese government's (A1 stable) clean energy initiative.
Nonetheless, Moody's will monitor and assess the company's
on-going relationship, including synergies achieved or transactions
entered, with ENN Ecological and other group companies under Mr.
Wang following the reorganization.
ENN Energy's Baa2 issuer rating is underpinned by (1) the company's
established position in the piped-gas sector, with geographically
diversified operations, (2) its large market share that often involves
monopolistic positions in gas distribution, backed by long-term
concessionary agreements, and (3) favorable industry trends and
supportive government policies that offer good growth potential.
However, these strengths are counterbalanced by (1) the risks associated
with China's evolving regulatory framework in the gas sector; (2)
the company's moderate financial profile because of high capital
spending, and (3) the company's increasing exposure to unregulated
businesses, which entail higher business risk than its regulated
city gas business.
Moody's projects that the company's retained cash flow (RCF) to
debt ratio will moderately decline to about 24%-27%
in 2020-22 from about 30% in 2019, due to the high
capital spending on pipeline network construction and new project acquisitions,
but partly mitigated by continued gas sales volume growth. Such
credit metrics continue to support the company's current rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that over the next
12-18 months the company's credit profile and the regulatory
environment will remain stable.
Moody's could upgrade the rating if (1) favorable regulatory changes
significantly improve the company's ability to pass through costs,
or (2) there is a material improvement in ENN Energy's business
model and financial profile.
Financial metrics indicative of an upgrade include (1) RCF/debt above
28% and/or (2) debt/EBITDA below 2.2x on a sustained basis.
On the other hand, Moody's could downgrade the rating if (1)
unfavorable regulatory changes significantly reduce the company's ability
to pass through costs, (2) its credit metrics significantly weaken
due to, but not limited to, aggressive debt-funded
capital spending or acquisitions, (3) there is a material increase
in its risk exposure from the unregulated businesses, or (4) there
are material transfers of interests from ENN Energy to other investments
under Mr. Wang, including ENN Ecological.
Financial metrics indicative of a downgrade include (1) RCF/debt below
15% and/or (2) debt/EBITDA above 4.0x over a prolonged period.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
ENN Energy has low carbon transition risk within the utility sector in
China as the government aims to increase consumption of natural gas,
a cleaner fuel than coal, to control air pollution.
ENN Energy faces moderate social risk in terms of meeting worker health
and safety standards in relation to its construction and operation of
city gas projects.
ENN Energy's governance risk is moderate. Mr. Wang's
ultimate ownership in, and commitment to ENN Energy is a key consideration.
Also, the company's financial policy is characterized by high
capital spending and leverage.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
ENN Energy Holdings Limited (ENN Energy) (formerly known as Xinao Gas
Holdings Ltd.) constructs and operates facilities for the distribution
of piped natural gas to residential, commercial and industrial (C&I)
customers in China. The company also conducts wholesales gas business.
In addition, the company provides integrated energy solutions,
and other energy-related value added products and services to customers.
During the first six months of 2020, ENN Energy generated total
revenue of RMB31.5 billion, of which 58% was from
the retail gas sales, 8% from gas pipeline construction and
installation, 25% from wholesale of gas, 7%
from sales of integrated energy and services and 2% from value
added business.
On 21 September 2020, ENN Ecological completed the acquisition of
32.8% equity stake in ENN Energy from two investment vehicles
ultimately owned by Mr. Wang Yusuo, the founder, and
his concert parties under a group reorganization. After the transaction,
ENN Ecological is the single largest shareholder in ENN Energy and is
75.6% owned by Wang. The remainder of ENN Energy
is owned by financial institutions and the public.
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
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
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 61 2 9270 8141
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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
