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Announcement:

Moody's confirms CLP Holding's ratings; outlook stable

15 Mar 2011

Approximately US$2.1 billion of debt securities affected

Hong Kong, March 15, 2011 -- Moody's Investors Service has today confirmed the followings ratings on the CLP group:

A2 issuer and P-1 short-term ratings on CLP Holdings Ltd ("CLPH")

A1 issuer and P-1 short-term ratings on CLP Power Hong Kong Ltd ("CLP Power")

A1 senior unsecured debt and P-1 short-term rating on CLP Power Hong Kong Financing Ltd

The outlook for all the ratings is stable.

This concludes the rating review initiated on 15 December 2010, when TRUenergy, an unrated, 100%-owned subsidiary of CLPH, announced its US$2.05 billion purchase of EnergyAustralia's retail business, the Delta Western GenTrader bundle, as well as two development sites for power stations in The New South Wales (NSW).

The ratings confirmation reflects Moody's expectation that the NSW acquisition will have no material impact on CLPH's business or financial profiles.

"The NSW acquisition provides strategic benefits to TRUenergy and is immediately earnings-accretive. The acquisition of the EnergyAustralia retail business significantly increases TRUenergy's customer base, improves its geographical diversification, and provides economies of scale. With it, TRUenergy will become the second-largest player in Australia's retail electricity market," says Jennifer Wong, a Moody's Assistant Vice President and Analyst.

"In addition, the acquisition of Delta Western's generation capacity -- through the Gentrader Agreement -- provides TRUenergy with a long-term supply of electricity to match growing demand and to maintain a balanced hedging profile," adds Wong.

These credit positives help counteract TRUenergy's exposure to the uncertainties related to future carbon emission regulations in Australia, given its obligation -- under the Gentrader Agreement -- to cover future carbon costs and any residual exposure to securing the necessary coal supply for Delta Western's power station.

At the CLPH level, after the NSW acquisition, TRUenergy will contribute only about 20% of CLPH's total earnings, up from 14% previously.

The majority of earnings -- around 60% -- will still come from CLP Power due to the highly stable and predictable Scheme of Control business in Hong Kong, which is characterized by a well-established regulatory framework. As such, the NSW acquisition does not materially impact CLPH's overall operating risk profile.

The NSW deal is being funded by an acquisition facility of A$1.6 billion (including A$400 million AEMO guarantee) and an equity portion of A$835 million (which includes US$273 million generated from the sale of a 13.36% share in Electricity Generating Company Limited) from CLPH.

After the transaction, CLPH's financial metrics will likely weaken temporarily in FY2011, but improve in FY2012 and afterwards as a result of the full-year contributions of the NSW business and the commissioning of the Jhajar project in India.

Over the next few years, Moody's expects CLPH's consolidated FFO/debt to remain above 22%, FFO/interest to stay just below 5x, and debt/capitalization to stay around 45%, which are appropriate for the group's A1 rating level. The one-notch lower rating for CLPH further factors in the risk of structural subordination, given its holding company status.

Furthermore, the ratings are supported by CLPH's and CLP Power's sound liquidity profiles and their strong access the domestic and international bank and capital markets.

Moody's further considers the ratings of CLPH and CLP Power to be closely linked, and a material deterioration in one could mean downward rating pressure for the other.

The ratings outlook is stable, reflecting Moody's expectation that CLPH will successfully integrate the NSW business and improve its financial profile. The outlook also reflects Moody's expectation that the company will make no major overseas acquisitions in the next 12-18 months.

The possibility of upward rating pressure is limited over the near term, given the temporarily weakened credit metrics of CLPH and the 12-18 months it will need to improve its financial profile to pre-acquisition levels.

Downward rating pressure will emerge if TRUenergy or other overseas operations perform materially below Moody's expectations or if CLPH makes any additional majority debt-funded acquisitions, such that its business and financial risk expands. The key credit metrics that Moody's would consider for a downgrade include FFO/debt falling below 15-20%, debt/capitalization rising above 50%, FFO/interest falling below 4-4.5x (consolidated), or CLP Power's cash flow contribution falling below 50% of the group total.

The last rating actions with respect to these entities were taken on 15 December 2010, when Moody's placed all of their ratings on review for possible downgrade.

The principal methodology used in this rating was Moody's Regulated Electric and Gas Utilities published in August 2009.

CLP Holdings Limited, headquartered and listed in Hong Kong, operates its electric utility business through its 100%-owned subsidiary, CLP Power Hong Kong Ltd. The group also has a growing portfolio of electricity generation investments across Asia Pacific.

CLP Power Hong Kong Ltd is a vertically integrated electricity generation, transmission, and distribution company. It is regulated by the Hong Kong SAR Government under the Scheme of Control and accounts for the majority of CLPH's operating cash flow. It has a de facto monopoly over Kowloon and the New Territories, which account for over 70% of Hong Kong's electricity demand

Hong Kong
Jennifer W. Wong
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Moody's confirms CLP Holding's ratings; outlook stable
No Related Data.
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