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Rating Action:

Moody's upgrades ENN Natural Gas to Ba1; outlook stable

 The document has been translated in other languages

28 Jan 2021

Hong Kong, January 28, 2021 -- Moody's Investors Service has upgraded the corporate family rating (CFR) of ENN Natural Gas Co., Ltd. (ENN Natural Gas) to Ba1 from Ba2. At the same time, Moody's has upgraded to Ba1 from Ba2 the rating on the senior unsecured notes issued by ENN Clean Energy International Investment Limited and guaranteed by ENN Natural Gas.

Moody's has also changed the outlook to stable from positive.

This rating action follows ENN Natural Gas's collection of proceeds from a share placement of about 245.9 million new shares on 21 January 2021, representing approximately 9.5% of the company's existing share capital. Moody's expects the share placement to be formally completed following the finalization of certain administration procedures.

RATINGS RATIONALE

"The rating upgrades reflect ENN Natural Gas's improved liquidity position and financial metrics upon completion of the share placement," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

The share placement follows ENN Natural Gas's completion of its acquisition of a 32.8% stake in ENN Energy Holdings Limited (ENN Energy, Baa2 stable) from two entities controlled by Mr. Wang Yusuo, ENN Natural Gas's chairman, in September 2020.

Net proceeds from the share placement, which amount to about RMB3 billion, will be used to repay the consideration for the ENN Energy acquisition.

Moody's expects that ENN Natural Gas's liquidity position will improve over the next 12 months after the share placement, although the company still remains in a cash deficit position. Moody's believes that the company had unrestricted cash of about RMB1.7 billion at the end of September 2020, and projects an operating cash flow of about RMB1.3 billion and a dividend income of about RMB550 million over the next 12 months. These cash sources, along with the RMB3 billion net proceeds from the share placement, are inadequate to cover its debt repayments of about RMB8.8 billion, shareholder loans (after deducting dividend income for 2020 of about RMB520 million) of about RMB2.2 billion, dividend payments of about RMB250 million and capital spending of about RMB885 million over the same period.

That said, the company has an established track record in the capital markets and has secured access to external financing. As of the end of September 2020, the company had uncommitted undrawn banking facilities of about RMB3.3 billion and committed credit facilities of about USD500 million. Moody's expects that these external funding sources will help mitigate the company's funding needs over the next 12 months. Particularly, the company has already secured committed funding to refinance its USD500 million bond that comes due in February 2021.

The share placement will also improve ENN Natural Gas's financial position. Moody's projects that the company's retained cash flow (RCF) to debt ratio will improve to about 15%-18% in 2021-22 after the share placement, from 12%-15% before the share placement over the same projection period. The stronger credit metrics support the company's Ba1 rating.

ENN Natural Gas's CFR, through its 32.8% equity stake in ENN Energy, reflects (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 city gas sector, (2) the company's lack of majority control over ENN Energy, (3) the company's weak liquidity and moderate financial profile, and (4) the challenges associated with its exposure to non-utilities businesses, which entail higher volatility and business risk.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

ENN Natural Gas faces moderate carbon transition risk, given its coal and methanol operations. However, the company has to date not experienced any major compliance violations related to water discharge or waste disposal. The company's increased exposure to its environmentally friendly city gas business following its acquisition of ENN Energy mitigates this environmental risk exposure.

ENN Natural Gas faces moderate social risk in terms of meeting worker health and safety standards in its construction and operation of city gas, methanol and coal mine projects.

From a governance perspective, the company's ownership is concentrated in Mr. Wang Yusuo, his wife, Zhao Baoju, and his controlling entities, with a combined 75.6% equity stake in ENN Natural Gas as of the end of 2020. The company's lack of majority ownership in ENN Energy is another important consideration, as its credit profile incorporates its significant control on ENN Energy and the latter's stable cash flows from its city gas business.

Lastly, the company's financial policy is characterized by high capital spending and leverage.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation that, over the next 12-18 months, ENN Natural Gas will (1) generate a majority of its cash flows from its downstream city gas operations and manage its exposure on its non-utilities operations, which entail higher volatility and business risks, (2) demonstrate conservative financial and investment policies to maintain a stable leverage and liquidity position, and (3) retain control on, and continue to integrate with, ENN Energy.

Moody's could upgrade the rating if ENN Natural Gas (1) establishes a track record of business stability by increasing its cash flow contributions from its stable downstream city gas operations, potentially through divestment of part of its non-utilities operations, (2) further increases its control over, and creates synergies with, ENN Energy, (3) strengthens its operating performance such that its financial metrics improve materially, or (4) demonstrates conservative financial and investment policies to further enhance its liquidity position.

Moody's assessment of leverage incorporates a pro rata consolidation of ENN Energy, which is 32.8% owned by ENN Natural Gas.

Financial metrics indicative of an upgrade trend include adjusted RCF/debt (with pro rata consolidation of ENN Energy) above 20% and funds from operations (FFO) interest coverage above 5.0x over a prolonged period.

Downward rating pressure may arise if (1) the company's control on ENN Energy reduces, (2) unfavorable regulatory changes significantly reduce the company's ability to pass through upstream gas costs for its city gas business, (3) the company encounters liquidity problems or weakening credit metrics because of aggressive debt-funded investments, or greater volatility in its non-utilities businesses than historically observed, or (4) the company further expands its non-utilities operations, potentially through acquisitions, resulting in higher business risk.

Financial metrics indicative of a downgrade pressure include adjusted RCF/debt (with pro rata consolidation of ENN Energy) below 13% and FFO interest coverage below 3.5x over a prolonged period.

The principal methodology used in these ratings 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.

Founded in 1992 and headquartered in Hebei, ENN Natural Gas Co., Ltd. (formerly known as ENN Ecological Holdings Co., Ltd) is a diversified energy company mainly engaged in (1) city gas distribution, (2) chemical production and trading, (3) energy construction services, (4) coal mining and trading, and (5) liquefied natural gas production.

Its major asset is its 32.8% equity stake in ENN Energy Holdings Limited, one of the largest city gas distributors in China, with 229 city gas concessions in 22 provinces as of the end of June 2020.

ENN Natural Gas is the single-largest shareholder in ENN Energy. In 2019, ENN Energy contributed 70% and 61% of ENN Natural Gas's adjusted FFO and gross profit, respectively, under pro rata consolidation.

ENN Natural Gas was listed on the Shanghai Stock Exchange in 1994. Mr. Wang Yusuo, his wife, Zhao Baoju, and his controlling entities owned 75.6% of the company as of the end of 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are 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 entities are participating and the rated entities or their agent(s) generally provide 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 61 2 9270 8141
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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