Hong Kong, June 22, 2020 -- Moody's Investors Service has today assigned an A1 senior unsecured
rating to CLP Power Hong Kong Financing Limited's fixed-rate notes
draw down under its USD4.5 billion medium-term note (MTN)
programme guaranteed by CLP Power Hong Kong Limited (CLPP).
The rating outlook is stable.
The proceeds of the notes will be used for general corporate purposes.
RATINGS RATIONALE
"The issuance will not materially increase CLPP's debt leverage
because it will use the majority of the proceeds to refinance maturing
debt, thereby improving its debt maturity profile,"
says Ivy Poon, a Moody's Vice President and Senior Analyst.
CLPP's A1 issuer ratings continue to reflect the company's
strong and highly predictable cash flow generated from its integrated
utility operations, supported by its solid operating track record
and de facto monopoly in its service areas in Hong Kong (Aa3 stable).
The company operates under a well-established regulatory framework
that offers a transparent tariff system and allows for 100% pass-through
of costs. Its Scheme of Control (SOC) agreement with the Hong Kong
government also provides regulatory visibility until year-end 2033,
although the reduction in the permitted rate of return will reduce the
company's cash flow under the current SOC period. The current
permitted rate of return is 8%, down from 9.99%
in the previous SOC period.
Moody's expects CLPP's financial profile will remain consistent
with its current rating over the next three years, despite increased
capital spending due to the reduced regulatory rate of return, pressure
for dividend payments to its parent, CLP Holdings Limited (CLPH,
A2 stable), and the impact from the coronavirus outbreak.
Accordingly, Moody's estimates CLPP's funds from operations
(FFO)/debt will weaken to 24%-26%, FFO interest
coverage to 8x-9x and debt/capitalization to 43%-46%
during 2020-21, from 30%, 11x and 42%
in 2019, respectively.
In terms of environmental, social and governance (ESG) factors,
the ratings consider the following.
CLPP faces moderate carbon transition risk because tightening environmental
standards imposed by the Hong Kong government will require it to make
low-carbon investments and carry out ongoing upgrades to existing
generation facilities. At the end of 2019, CLPP's power
generation portfolio was 36% coal-fired, 29%
gas-fired and 35% nuclear power (including power imports).
The company is highly exposed to social risk in terms of health and safety
risk, responsible production risk, and demographic and societal
trend risk. Particularly, its utility operations are exposed
to the coronavirus outbreak. These social risks are mitigated by
CLPP's solid operational track record in the absence of major incidents,
as well as the protection from SOC agreement.
In terms of governance risk, CLPP's operations and financial
profile are monitored by the government through the SOC arrangement.
Moreover, while CLPP's ownership is concentrated in CLPH,
both companies are supported by strong management team and demonstrate
sound financial management. Also, CLPH is a listed company
with a high degree of transparency through regular company disclosures.
The stable outlook reflects Moody's expectation that CLPP will maintain
its low-risk business profile under Hong Kong's stable regulatory
environment, at least over the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade is unlikely in the near term, given the stable regulatory
environment and the company's predictable financial profile, with
a lower regulated return after 2018.
Key metrics Moody's would consider for an upgrade include FFO/debt
above 35% and debt/capitalization below 30% on a sustained
basis.
CLPP's issuer rating could be downgraded if the company's credit strength
deteriorates substantially because of adverse changes in the regulatory
environment and a weakening in its operator profile. Key metrics
Moody's would consider for a downgrade include FFO/debt below 20%
and debt/capitalization in excess of 45% on a sustained basis.
In addition, a material deterioration in the credit profile of CLPH
could trigger a review of CLPP's issuer rating.
The principal methodology used in this rating 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.
CLP Power Hong Kong Limited, a wholly owned and principal subsidiary
of CLP Holdings Limited (A2 stable), is a vertically integrated
power utility company in Hong Kong. It is regulated by the government
under the Scheme of Control arrangement. The company has a de facto
monopoly over Kowloon and the New Territories.
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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Regulatory disclosures contained in this press release apply to the credit
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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.
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
Yian Ning Loh
Associate Managing Director
Corporate Finance Group
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
