Hong Kong, March 26, 2020 -- Moody's Investors Service has today affirmed the ratings of six
Chinese coalfired generation companies (gencos) and their rated subsidiaries
following a change in the methodology it uses to analyse these companies.
The outlook on all ratings are maintained.
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_206110
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_206110
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
Principal Methodologies
Local Market Analyst
"The rating affirmation reflects our expectation that the credit
profiles of most rated coal-fired gencos in China will continue
to support their ratings during the transition to a predominantly market-based
tariff regime," says Ivy Poon, a Moody's Vice
President and Senior Analyst.
"However, business and financial risk will likely increase
for the gencos under the market-based tariff regime, especially
as China's economy slows amid the impact of the coronavirus pandemic
globally," adds Poon.
Given the transition to a market-based tariff regime, Moody's
has changed the applicable rating methodology used to rate each of the
six coal-fired gencos to "Unregulated Utilities and Unregulated
Power Companies" published in May 2017 from "Regulated Electric
and Gas Utilities" published in June 2017.
The change in methodology is driven by the increasing exposure of coal-fired
gencos to market-based pricing, particularly since the implementation
of a new coal fired tariff mechanism on 1 January 2020.
Moody's expects the credit impact on the six rated coal-fired
gencos will be manageable as the new tariff mechanism --
if executed as planned -- will remove delays in passing
through tariff adjustments, thereby reducing margin volatility.
Prolonged delays in tariff adjustment 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 most gencos. 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 these rated coal-fired gencos to reflect the increased
risk stemming from the market-base tariff regime.
That said, most rated coal-fired gencos hold strong market
positions to withstand the increase in market competition, while
their reducing financial capacity resulting from slowing power demand
and margin compression will be partly compensated by the declining coal
prices. As such, Moody's expects the rated coal-fired
gencos' financial profiles will continue to support their current
ratings over the next 12-18 months.
The negative outlook for Beijing Energy Holding Co., Ltd.'s
(BEH A3 negative) reflects Moody's consideration that the company's
credit profile will weaken over the next 12-18 months, because
the new investment in Panda Green Energy Group Limited (Caa1 stable) further
raises BEH's already weakly positioned financial leverage.
The outlook could return to stable if BEH is able to integrate the new
investment and achieve operational synergies, and its adjusted funds
from operations (FFO) interest cover and FFO/debt improve to above 2.5x
and 7.5% respectively on a sustained basis.
Positive rating movement is unlikely given the negative rating outlook.
The rating could be downgraded if (1) the likelihood of support for the
company decreases; (2) adverse policy changes by the government hurt
the company's business or financial risk profile; or (3) its
credit profile weakens, such that adjusted FFO interest cover falls
below 2.5x and FFO/debt falls below 7.5% on a sustained
basis.
The stable outlooks for the remaining five rated coal fired gencos reflect
(1) the consideration that these companies' BCAs or standalone credit
profiles are appropriately positioned at their current levels, (2)
Moody's expectation of continued support from their respective parent
companies or owner governments, and (3) Moody's expectation
that the transition to a predominantly market based tariff regime in China's
power sector will have a mostly manageable impact on credit metrics.
China Huadian Corporation LTD.'s (CHD, A2 stable) upward
rating potential is limited, given the very high level of government
support already incorporated into the rating.
The company's BCA could be upgraded if (1) it deleverages successfully,
such that its adjusted FFO/debt exceeds 13.5% or its debt/capitalization
falls below 65% on a sustained basis, or (2) we see continuation
of a predictable and supportive regulatory regime over time.
Moody's would downgrade CHD's ratings if 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 BCA could be downgraded because of (1) adverse changes in China's
regulatory environment (including tighter emissions standards for coal-fired
units), (2) further aggressive debt-funded expansions or
mergers, or (3) a significant rise in the level of risk for CHD's
business profile from the development of its overseas and coal-mining
operations.
Credit metrics indicative of downward pressure on the company's BCA include
adjusted FFO/debt below 6% or debt/capitalization above 80%
for a prolonged period.
CHD's ratings could also be under downgrade pressure, without downgrading
its BCA, if the central government support weakens.
China Resources Power Holdings Co., Ltd's (CR Power,
Baa2 stable) standalone credit profile could be improved if (1) the company
improves its financial profile to the extent that its adjusted funds from
operations (FFO) interest cover exceeds 4.0x-5.0x
and retained cash flow (RCF)/debt exceeds 15%-20%,
both on a sustained basis; or (2) there is proven timely cost pass-through
tariff adjustment mechanism and an improvement in the regulated environment
for coal-fired power producers.
CR Power's rating could be upgraded if the support from the central
government or China Resources (Holdings) Co., Ltd.
(CRH) becomes stronger, aided by CR Power's greater strategic importance.
The company's rating could be downgraded if its standalone credit
profile deteriorates, such that (1) the company takes on aggressive
debt-funded expansion projects or acquisitions; or (2) there
are adverse regulatory changes in the coal-fired power sector,
or both.
Credit metrics that indicate a deterioration in CR Power's standalone
credit profile include adjusted FFO interest cover below 2.5x and
RCF/debt below 10%, both on a sustained basis.
The company's rating could be downgraded if the support from the
central government or CRH weakens in the event that CR Power's strategic
importance to its support provider diminishes.
Shanghai Electric Power Company Limited's (SEP, Baa2 stable) rating
could be upgraded over time if the company improves its financial profile,
such that adjusted FFO/debt rises above 15.5% on a sustained
basis.
The rating could be downgraded if SEP's standalone credit profile deteriorates,
or in case of a material change in its strategic importance to State Power
Investment Corporation Limited (SPIC, A2 stable). The company's
standalone credit profile will come under downward pressure if there are
changes in China's regulatory environment that adversely affect SEP's
profitability, or if SEP pursues further debt-funded expansion
or acquisitions that weaken its financial and business profile.
The metrics that Moody's would consider for a downgrade include FFO/debt
deteriorating below 7.5% on a consistent basis.
A downgrade of SPIC's rating by one notch would not have an immediate
impact on SEP's final rating if SEP maintains its standalone credit quality,
because the three-notch uplift incorporated in SEP's ratings will
remain unchanged in such a scenario.
SPIC's upward rating potential is limited, given the very high likelihood
of government support already incorporated into the rating. However,
the company's BCA could be upgraded if (1) it successfully deleverages,
such that its FFO/debt exceeds 7.5% or its debt/capitalization
falls below 65% on a sustained basis; or (2) Moody's
sees a more supportive regulatory regime over time.
SPIC's issuer rating could be downgraded if (1) we believe that
central government support will weaken; or (2) the company's standalone
credit profile deteriorates as a result of (a) material adverse changes
due to market liberalization or changes in the regulatory environment,
(b) further aggressive debt-funded expansions or mergers,
or (3) a significant rise in business risks stemming from its development
of nuclear technology or overseas operations.
Financial metrics that could lead to a downgrade include FFO/debt below
5% or debt/capitalization above 85% for a prolonged period.
Zhejiang Provincial Energy Group Co. Ltd's (ZEG, A2 stable)
rating could be upgraded if the likelihood of support for ZEG increases
or ZEG's BCA improves significantly, or both.
ZEG's BCA would be upgraded if (1) there is a material improvement in
the regulatory framework; or (2) the company improves its financial
profile, such that its funds from operations (FFO)/interest coverage
exceeds 6.0x and FFO/debt exceeds 25.5% on a sustained
basis.
The rating could be downgraded if the likelihood of support for ZEG decreases.
The BCA could be lowered if (1) ZEG takes on more aggressive debt-funded
capital spending; or (2) the company's credit profile weakens substantially
because of adverse changes in the regulatory environment.
Because of the high likelihood of support, ZEG's rating is
resilient to a weakening in its BCA. Accordingly, a downgrade
in the BCA to baa3 may not necessarily lead to a rating downgrade,
assuming the likelihood of government support remains high.
Credit metrics that could indicate downward pressure on the company's
BCA include adjusted FFO/interest coverage falling below 4.0x and
FFO/debt falling below 15.5% for a prolonged period.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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.
Ivy Poon
Vice President - Senior 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
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
