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Rating Action:

Moody's upgrades ENN to Baa2; outlook stable

 The document has been translated in other languages

20 Jun 2017

Hong Kong, June 20, 2017 -- Moody's Investors Service has today upgraded to Baa2 from Baa3 the issuer rating and senior unsecured debt rating of ENN Energy Holdings Limited.

The outlook for the ratings has changed to stable from positive.

RATINGS RATIONALE

"The ratings upgrade reflects the continued strengthening in ENN's credit profile, supported by ongoing stability in its business model and strong financial metrics that exceed our expectation for the previous rating," says Ivy Poon, a Moody's Vice President and Senior Analyst.

"We expect the company's financial profile will be consistent with the Baa2 rating level in the next three years, due to healthy operating cash flow and moderate capital spending plan," adds Poon.

"However, China's evolving regulatory regime and ENN's increasing exposure in energy trading will remain as the key challenges for the company's rating," says Poon.

ENN's Baa2 rating is underpinned by the ongoing stability in its business profile with an established market position and geographically diversified operations. The company, one of the largest city gas distributors in China (A1 stable), maintained a robust performance over the past two years despite moderating gas demand.

Moody's expects ENN will continue to focus on organic growth in the medium term. The risk of merger and acquisition activity has declined considerably from two years ago, which had constrained ENN's credit profile in the past.

Moody's expects the company's financial profile will remain strong and consistent with its Baa2 rating over the next three years, with funds from operations (FFO)/debt at 27%-30%, retained cash flow (RCF)/debt at 19%-22%, and debt/ EBITDA at around 2.7x. Annual capital expenditure will be moderate at RMB4.0 billion-RMB5.0 billion.

The sound prospects for city gas distributors will further fuel the company's business growth in the medium to long term.

The Chinese government reiterated its commitment to promoting natural gas in its 13th Five Year Plan for natural gas development (2016-2020) and in Dec 2016 published a consultation paper to promote the usage of natural gas. The country aims to increase natural gas consumption to 8%-10% of its primary energy mix by 2020 and 15% by 2030, up from 5.9% in 2015.

Despite these favorable industry prospects, the evolving regulatory regime and ongoing reforms in China's oil and gas sector continue to constrain ENN's issuer rating.

In particular, the ongoing sector reforms could create near-term volatility in ENN's financial performance.

ENN's Baa2 rating has incorporated the risk of a potential decline in investment returns in its city gas projects. Moody's expects ENN would have a moderate financial headroom against this potential volatility.

However, Moody's will reassess the rating impact if the regulatory decision on the investment return is more serious to the extent that negatively affects ENN's financial profile beyond Moody's expectation.

ENN has rapidly expanded its energy trading business -- mainly LNG wholesales -- in 2016. This unregulated business entails higher business risk than the company's city gas projects. Nevertheless, Moody's expects ENN will manage its business model, especially for the LNG import in 2019, such that it could minimize the relevant price risk and inventory risk.

The stable outlook reflects Moody's expectation that the company's credit profile and the regulatory environment will remain stable over the next 12-18 months.

Upward ratings pressure could emerge in case of (1) favorable regulatory changes that significantly improve the company's ability to pass through costs; (2) a material improvement in ENN's business model and financial profile.

Financial metrics that could trigger an upgrade include RCF/debt above 28%-30% and debt/EBITDA below 2.2x, on a sustained basis.

ENN's ratings could come under pressure in case of (1) unfavorable regulatory changes that significantly impact the company's credit profile; (2) a significant weakening of its credit metrics due to aggressive debt-funded capital expenditure or acquisitions; (3) a material increase in the risk exposure of its energy trading business.

Financial metrics that could trigger a downgrade include RCF/debt below 12%-15% and debt/EBITDA above 4.0x for a prolonged period.

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.

ENN Energy Holdings Limited is listed on the Hong Kong Stock Exchange. The company constructs and operates facilities for city gas distribution in a number of cities in China. In 2016, the company reported total revenues of RMB34 billion.

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

No Related Data.
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