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Rating Action:

Moody's assigns (P)Baa1 rating to Towngas China's MTN program

15 Jun 2021

Hong Kong, June 15, 2021 -- Moody's Investors Service has assigned a (P)Baa1 senior unsecured rating to the proposed medium term note (MTN) program to be issued by TCCL (Finance) Limited (TCCL Finance), a wholly-owned subsidiary of Towngas China Company Limited (TCCL, Baa1 stable). The notes to be drawn down under the MTN program will be unconditionally and irrevocably guaranteed by TCCL.

The outlook is stable.

TCCL will use the net proceeds from the MTN program to refinance existing indebtedness and fund future capital expenditures, as well as for general corporate purposes.

The provisional rating on the MTN program reflects the irrevocable and unconditional guarantee from TCCL.

RATINGS RATIONALE

"TCCL's overall credit profile will not be materially affected upon drawdowns under the program because we expect most of the proceeds of future drawdowns will be used for refinancing its existing debt, and that the scale of the drawdowns will be manageable," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

Obligations under the guarantee will rank pari passu with TCCL's existing and future unsecured and unsubordinated obligations.

Ratings on individual drawdowns to be issued under the program will be subject to Moody's review of the terms and conditions set forth in the final base and supplementary offering and the pricing supplements of the drawdowns.

TCCL's Baa1 issuer rating reflects its standalone credit strength and a two-notch rating uplift based on Moody's expectation of a high likelihood of extraordinary support from its parent, The Hong Kong and China Gas Company Limited (HKCG, A1 stable), in times of need.

The company's standalone credit strength is underpinned by its strong market position in the gas distribution sector with a geographically diversified portfolio of city gas projects secured under long-term franchised operating rights, and favorable industry trends with strong growth potential.

However, these strengths are counterbalanced by China's evolving regulatory and operating environments, the company's moderate financial profile as a result of high capital spending, potential cash flow volatility as a result of its exposure to connection fees, and uncertainty on the acquisition of Shanghai Gas Co. Ltd. (unrated).

The rating also considers the following environmental, social and governance (ESG) factors.

TCCL is exposed to physical climate risk, mostly in the form of climate-driven changes in costs and supply of natural gas. This is counterbalanced by the company's strong position on carbon transition, underpinned by China's plan to increase consumption of natural gas, a cleaner fuel than coal, to control air pollution.

TCCL's operations are also exposed to increased public concerns over worker health and safety, as well as affordability issues on its city gas distribution operations. Such concerns could lead to adverse regulatory political intervention. Nevertheless, the company's long track record and its management's experience mitigate these risks.

Moody's has also considered governance risk around concentrated ownership. TCCL is 68.21% controlled by HKCG. Nonetheless, this risk is mitigated by the oversight exercised through TCCL's seven-member board, which includes three independent non-executive directors.

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 will (1) maintain a stable credit profile and financial metrics; (2) continue to fully pass on changes in fuel costs to end-users without materially jeopardizing its profit margin; and (3) continue to receive support from HKCG, when needed.

Moody's would consider an upgrade on TCCL's issuer rating if the company achieves higher-than-expected growth in its piped gas operations, such that retained cash flow (RCF)/debt rises above 20% on a sustained basis.

The senior unsecured program rating will be upgraded if TCCL's issuer rating is upgraded.

Moody's could downgrade the rating if (1) TCCL fails to achieve its expected growth and returns, (2) the company adopts a more aggressive debt-funded investment strategy, or (3) regulatory changes hurt its financial profile. Financial metrics that could trigger a downgrade include RCF/debt below 13% over a prolonged period.

The senior unsecured program rating will be downgraded if TCCL's issuer rating is downgraded.

Furthermore, the rating is sensitive to changes in Moody's assessment of the level of operational and financial support from HKCG. Accordingly, Moody's could downgrade the rating if HKCG's stake in TCCL declines below 50% or if there is evidence that HKCG is not providing the expected level of support in times of need.

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.

Towngas China Company Limited (TCCL) is listed on the Hong Kong Stock Exchange and is engaged primarily in the downstream sale and distribution of natural gas in mainland China. TCCL's main operations include the sale of piped gas, construction of gas pipelines and, to a lesser extent, the sale of household gas appliances. The company was 68.21% owned by HKCG as of 31 December 2020.

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 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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 entity is participating and the rated entity or its agent(s) generally provides 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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