Hong Kong, April 17, 2018 -- Moody's Investors Service has assigned A1 ratings to the proposed senior
unsecured USD-denominated notes and EUR-denominated notes
under the guaranteed medium-term note program (MTN, (P)A1),
to be issued by State Grid Overseas Investment (2016) Limited.
The program is unconditionally and irrevocably guaranteed by State Grid
Corporation of China (State Grid, A1 stable).
At the same time, the guaranteed MTN program has been upsized to
USD10 billion from USD7.7 billion.
The ratings outlook remains stable.
State Grid plans to use the net proceeds of the notes for general corporate
purposes, including capital expenditure (capex), overseas
investments, and refinancing of indebtedness.
RATINGS RATIONALE
"The A1 ratings continue to reflect State Grid's indispensable role
in China's power sector, its stable operations with a very large
scale, and the expected very high support from the Chinese government
in times of need," says Ivy Poon, a Moody's Vice President
and Senior Analyst.
"State Grid's financial profile after the bond issuance will
remain well position at its current rating level, although the evolving
regulatory regime and ongoing sector reforms will continue to constrain
its credit profile," adds Poon.
State Grid's A1 ratings combine its baseline credit assessment (BCA) of
a3 and a three-notch uplift based on the expected very high level
of support from the Chinese government (A1 stable) in times of need.
State Grid's BCA is underpinned by its (1) close-to-monopoly
position in the very large Chinese market, supported by its stable
operating profile; (2) proven operating track record and technological
edge in ultra-high voltage (UHV) and smart-grid technology;
and (3) solid financial profile.
At the same time, its BCA is constrained by the evolving regulatory
environment when compared to other mature power markets in developed countries.
The ongoing power sector reforms will improve the transparency and predictability
of the regulatory framework in the long term. However, the
new tariff mechanism is untested and it will take time to establish a
track record of predictable tariff adjustments. Moody's also
expects a moderation in the company's profit margin after the full implementation
of the new tariff mechanism after 2017.
Moody's expects State Grid's financial profile will remain consistent
with its a3 BCA. However, there will be a gradual moderation
in its credit metrics from the levels in 2017 due to the lower profit
margin and sizable capex, with funds from operations (FFO)/debt
of 35%-38%, retained cash flow (RCF)/debt of
34%-36%, and debt/capitalization of 36%-39%
during 2018-2020. Its EBITDA margin will broadly stay at
17%-19%.
Moody's estimates State Grid will incur annual capex of RMB460 billion-RMB480
billion over the next three years, with the majority of the capex
likely to be used to expand and upgrade the domestic grid network in line
with the sector's 13th Five Year Plan (2016-2020).
Moody's expectation of a very high level of support from the Chinese government
reflects (1) State Grid's strategic role as the sole operator for the
bulk of China's power transmission and distribution grids; (2) its
full government ownership; and (3) the reputational risks for the
government in the event of operating or financial difficulties.
The stable outlook incorporates Moody's expectation that over the
next 12 months (1) State Grid's credit metrics will remain at the levels
projected by Moody's; and (2) its key strategic role and the
Chinese government's ability to support will remain intact,
as reflected by the stable outlook on the sovereign rating.
The ratings are unlikely to be upgraded as they are already at the same
level as China's sovereign rating. Upward movement in State
Grid's BCA could emerge over time if (1) China smoothly implements
power-sector reforms and establishes a track record for the new
tariff-setting mechanism; or (2) there is a material improvement
in the company's financial profile, such that RCF/debt exceeds 40%
and debt/capitalization remains below 35% on a sustained basis.
Moody's could also upgrade the rating if the Chinese government's
ability to provide support strengthens, as reflected by an upgrade
of the sovereign rating.
On the other hand, the final rating could be downgraded if there
is a material weakening in State Grid's BCA, without any substantial
changes in the support assessment.
The BCA could be lowered if (1) State Grid takes on aggressive debt-funded
expansion plans or acquisitions; or (2) there are adverse changes
in the tariff mechanism that narrow the company's profit margins.
Metrics that Moody's would look for to lower the BCA include debt/capitalization
above 45%-50% and RCF/debt below 20%-25%,
on a sustained basis.
Moody's could also downgrade State Grid's rating if the company's
strategic importance to the country's power sector reduces or if
the Chinese government's ability to provide support weakens,
as reflected by a downgrade of the sovereign rating.
The methodologies used in these ratings were Regulated Electric and Gas
Utilities published in June 2017, and Government-Related
Issuers published in August 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
State Grid Corporation of China is the largest public utility and power
grid company in the world in terms of revenue. It is a natural
monopoly of China's power grid network, with 88% coverage
in China and servicing over 1.1 billion customers.
For the year ended 31 December 2017, State Grid reported an electricity
sales volume and total revenue of 3,875 TWh and RMB2.4 trillion,
respectively.
State Grid is 100% owned by the State-owned Assets Supervision
and Administration Commission (SASAC) under China's State Council.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
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.
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
