Hong Kong, June 07, 2017 -- Moody's Investors Service has assigned a first-time A1 long-term
issuer rating and a P-1 short-term issuer rating to Castle
Peak Power Company Limited (CAPCO).
At the same time, Moody's has assigned a (P)A1 long-term
senior unsecured rating and a (P)P-1 short-term rating to
the proposed US$2 billion Medium Term Note (MTN) program of Castle
Peak Power Finance Company Limited, a wholly owned subsidiary of
CAPCO.
The ratings outlook is stable.
The notes to be issued under the MTN program will be unconditionally and
irrevocably guaranteed by CAPCO. Moody's expects issuance under
the program will be used primarily for refinancing existing indebtedness
and capital expenditure.
RATINGS RATIONALE
"The A1 long-term issuer rating reflects CAPCO's predictable
cash flow and low-risk business profile, in turn underpinned
by its robust power purchase agreement and the stable regulatory environment
in Hong Kong," says Ivy Poon, a Moody's Vice President
and Senior Analyst.
"The issuer rating also considers CAPCO's high operational
and financial linkages to CLP Power, as well as CAPCO's strong
financial headroom against a likely increase in leverage over the next
3-4 years," adds Poon.
Moody's expects the robustly structured terms of the power purchase
agreement (PPA) with CLP Power Hong Kong Limited (CLPP, A1 stable)
will continue to allow CAPCO to pass through all of its costs and earn
its share of regulated return, thereby supporting its highly predictable
cash flow. The PPA also covers 100% of CAPCO's output
and thus leaves CAPCO with no merchant exposure.
In addition, CAPCO will continue to operate under a stable and transparent
regulatory framework. The new Scheme of Control (SOC) agreement
-- signed in April 2017 by CAPCO and CLPP with the government of
Hong Kong (Aa2 stable) -- will replace the existing agreement upon
its expiry at end-3Q 2018 and permit the company to earn a stable
8% return -- although down from the current 9.99%
-- on its investments from 4Q 2018 to end-2033.
However, CAPCO is exposed to moderate concentration risks associated
with its high reliance on its two main plants and on a single offtaker.
That said, such asset concentration is mitigated by CAPCO's
proven track record of operating the plants with no major accidents.
Also, CAPCO's reliance on a single offtaker is somewhat mitigated
by CLPP's strong credit quality and Moody's expectation that
the PPA will remain in place over the foreseeable future.
Moody's expects that CAPCO will remain an important part of CLPP's
electricity operations because CAPCO accounts for around 70% of
the latter's electricity purchases and is the only subsidiary of
CLPP owning generation assets. Such a high level of strategic importance
underpins Moody's expectation of a high level of support from CLPP
in the event of CAPCO's distress, although the presence of
two shareholders -- CLPP and China Southern Power Grid Co.,
Ltd. (CSG, A1 stable) -- may potentially complicate
the provision of support in a timely manner.
CLPP is a vertically integrated electricity generation, transmission
and distribution company in Hong Kong, supplying electricity to
over 80% of Hong Kong's population.
Moody's recognizes that CAPCO's shareholders have historically
demonstrated support via substantial investments and adoption of conservative
financial policy for the company.
CAPCO's financial metrics will remain strong and support CAPCO's
ratings over the next 2-3 years, owing to the company's
strong operating cash flow as well as the benefit of HKD17.1 billion
in interest-free subordinated shareholder capital.
The shareholder capital was granted by CLPP and the minority shareholder
CSG in April 2017, by way of reclassification of 75% of the
existing HKD22.7 billion in shareholder loans. Moody's
assigns a partial equity credit to the hybrid capital, in view of
the shareholders' intention to maintain such capital at CAPCO,
at least over the minimum irredeemable period to end-2032.
The company's strong level of operating cash flow and the hybrid
capital will help mitigate an increase in debt leverage over the next
3-4 years, which will likely stem from (1) incremental external
debt to finance its rising capital expenditure to build new gas-fired
capacity, (2) high dividend payouts, based on 100%
of net profits, and (3) a reduced regulated return under the new
SOC period starting 4Q 2018.
As a result, Moody's expects CAPCO's fund from operation
(FFO)/debt and debt/capitalization will stand at around 25%-27%
and 61%-64% in 2017-18, respectively,
and weaken slightly to around 21%-23% and 63%-66%
in 2019-20. Such metrics are stronger than the 18%-20%
and 85%-88% levels seen during 2011-16 --
prior to the conversion of the hybrid capital -- and will be consistent
with the company's A1 issuer rating.
The stable ratings outlook reflects our expectation that CAPCO will maintain
its low-risk business profile with predictable cash flow under
its PPA with CLPP and a stable regulatory environment, at least
over the next 12 months.
An upward trend in CAPCO's ratings is limited, given that
it is already at par with its parent CLPP's ratings. An upgrade
of CLPP's ratings, which is unlikely in the near term,
could potentially trigger a review of CAPCO's ratings.
Positive momentum on CAPCO's standalone credit profile could emerge
if its FFO/debt exceeds 25% or its debt/capitalization falls below
55% on a sustained basis.
On the other hand, a downgrade of CLPP's ratings will result
in a downgrade of CAPCO's ratings. A material weakening of
CAPCO's business linkage and strategic importance with CLPP could
also lead to a downgrade.
CAPCO's standalone credit profile could be pressured if its FFO/debt
falls below 15% or its debt/capitalization exceeds 75% on
a sustained basis.
Moody's could also assess the rating impact in the event of material changes
to the terms and condition of CAPCO's shareholder capital agreement.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in December 2013. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Castle Peak Power Company Limited (CAPCO), a power generation company
in Hong Kong, is owned 70% by CLP Power Hong Kong Limited
(CLPP) and 30% by China Southern Power Grid International (HK)
Co., Ltd., a wholly-owned subsidiary
of China Southern Power Grid Co., Ltd (CSG). CAPCO
generates electricity under a power purchase agreement with CLPP and is
regulated by the Hong Kong government through a Scheme of Control (SOC)
agreement.
CLPP, a wholly owned and principal subs 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 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
