Hong Kong, September 08, 2020 -- Moody's Investors Service has assigned a Baa2 rating to ENN Energy Holdings
Limited's proposed senior unsecured USD note.
The outlook is stable.
ENN Energy will use the proceeds from the note for refinancing of existing
debt and for general corporate purposes.
RATINGS RATIONALE
"The proposed USD note issuance will not have a material impact on ENN
Energy's overall credit profile because the scale of the issuance will
be manageable for the company," says Boris Kan, a Moody's
Vice President and Senior Credit Officer.
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) its increasing involvement in unregulated businesses,
which entail higher business risk.
On 30 August 2019, ENN Energy announced that ENN Group International
Investment Limited (EGII) and Essential Investment Holding Limited (Essential
Investment) have agreed to sell their combined and entire 32.8%
equity stake in ENN Energy to ENN Ecological Holdings Co.,
Ltd (ENN Ecological, Ba2 positive). The buyout is subject
to certain conditions, including the completion of legal procedures
for the transfer of assets. Upon completion, ENN Ecological
will become the controlling shareholder of ENN Energy.
Wang Yusuo, the company's chairman and executive director,
and his concert parties currently own a 100% equity interest in
EGII, a 100% stake in Essential Investment and a 48.4%
stake in ENN Ecological. ENN Energy will remain under Wang's
control if the transaction completes.
Moody's believes that the impact of the proposed transaction on
ENN Energy is likely to be limited as Mr. Wang will maintain ultimate
control of 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 will benefit from the supportive
regulatory environment under the Government of China's (A1 stable) clean
energy initiative.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
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 ENN Energy's
(1) RCF/debt staying above 28% and/or (2) debt/EBITDA staying below
2.2x over a prolonged period.
The rating could come under pressure if (1) unfavorable regulatory changes
significantly reduce the company's ability to pass through costs and concession
rights, (2) its credit metrics significantly weaken because of aggressive
debt-funded capital spending or acquisitions, or (3) there
is a material increase in its risk exposure from its unregulated businesses.
Financial metrics indicative of a downgrade include ENN Energy's
(1) RCF/debt staying below 15% and/or (2) debt/EBITDA staying above
4.0x over a prolonged period.
The rating also takes into account the following 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 worker health and safety
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 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.
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.
ENN Energy is listed on the Hong Kong Stock Exchange. At the end
of June of 2020, the company was 32.8% owned by the
founder, Wang Yusuo and his concert parties, with the remaining
shares 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.
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Boris Kan
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Project & Infrastructure Finance
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Terry Fanous
MD-Public Proj & Infstr Fin
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Yian Ning Loh
Associate Managing Director
Project & Infrastructure Finance
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