Hong Kong, December 07, 2020 -- Moody's Investors Service has upgraded State Grid Corporation of China's
("State Grid") baseline credit assessment (BCA) to a1 from a2.
At the same time, Moody's has affirmed State Grid's A1 issuer ratings,
the A1 backed senior unsecured debt ratings issued by State Grid Overseas
Investment (2013) Limited, State Grid Overseas Investment (2014)
Limited, and State Grid Overseas Investment (2016) Limited,
as well as the (P)A1 backed senior unsecured MTN rating issued by State
Grid Overseas Investment (2016) Limited.
The outlook on all ratings remains stable.
"The upgrade of the BCA to a1 reflects the continued strengthening
of State Grid's intrinsic credit profile through its excellent financial
position, prudent growth strategy, and tremendous scale and
market position" says Ivy Poon, a Moody's Vice President and
Senior Analyst.
These attributes, which enabled State Grid to navigate the coronavirus
pandemic relatively unscathed, demonstrate the exceptional resilience
of the company's credit profile, and position it more appropriately
at the a1 BCA level, especially when compared to its regional and
global peers.
RATINGS RATIONALE
State Grid's A1 issuer ratings primarily reflects its BCA of a1,
which is underpinned by the company's highly resilient credit profile,
illustrated by its conservative balance sheet, enormous business
scale which affords its near monopoly status in a growing market;
and stable operating profile which, in turn, is bolstered
by its proven operating track record and technological edge.
These features position State Grid well to manage challenges related to
temporary tariff cuts, such as the one implemented this year as
part of the government's initiative to manage the impact of coronavirus.
At the same time, the strength of the BCA is tempered by the short
history of the current transmission and distribution regulatory regime,
introduced in 2015. Nevertheless, the recent regulatory reset
for the second regulatory period has reduced the level of uncertainty
around China's regulatory regime.
Moody's expects State Grid's projected financial metrics to
stay robust, with the ratio of funds from operations (FFO) to debt
likely to be above 40% in the next two years, supported by
the rebound of China's economy and power demand. The company's
strong credit metrics, along with its excellent access to credit
markets, provide it with considerable financial flexibility.
The A1 ratings consider Moody's assessment of a very high level
of dependence on, and very high likelihood of support from the Government
of China (A1 stable), in times of need.
Such likelihood of support is underpinned by State Grid's highly strategic
national importance. The company owns and operates essential and
dominant transmission and distribution businesses in China, where
it serves more than 80% of the national territory.
In terms of environmental, social and governance (ESG) factors,
Moody's has considered that State Grid's relatively low carbon transition
risk within the utility sector, since it mainly owns and operates
the power grid and does not own thermal power generation facilities.
The company's proven operating track record mitigates its exposure
to accidents and environmental hazards. Its strong financial profile
also provides a buffer for its sizable capital spending to expand and
upgrade the grid network, such that it can accommodate the increasing
share of renewables in the power generation.
The stable outlook incorporates Moody's expectation that, over the
next 12-18 months, (1) State Grid's credit metrics will remain
at levels appropriate for its a1 BCA; and (2) its important strategic
role and the Chinese government's ability to provide support will remain
intact, as reflected in the stable outlook on the sovereign rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
State Grid's ratings could be upgraded if there is a strengthening
in the Chinese government's ability to provide support, as reflected
by an upgrade of the sovereign rating.
The ratings are resilient to a weakening in the BCA given Moody's expectation
of a very high likelihood of government support in times of need.
Accordingly, downgrading the BCA from a1 to a2 would not necessarily
lead to a downgrade of the A1 ratings, other things being equal.
State Grid's BCA is strongly positioned and unlikely to experience
downward pressure in the near term. Over the longer term,
the BCA could be lowered in case of a material deterioration in its business
or financial metrics, as indicated by FFO/debt falling below 35%
on a consistent basis. Such weakening could result from (1) aggressive
debt-funded expansion projects or acquisitions; or (2) unexpected
adverse changes in the tariff mechanism that materially weaken its financial
position.
Moody's could also downgrade State Grid's ratings if there is a weakening
in the Chinese government's ability to provide support, as reflected
by a downgrade of the sovereign rating.
The methodologies used in these ratings were Regulated Electric and Gas
Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of these methodologies.
State Grid Corporation of China is the largest public utility in the world
in terms of revenue. The company owns and operates the bulk of
China's national power grid network, servicing 88% of the
mainland and a population of over 1.1 billion. The company
is wholly owned by the State-owned Assets Supervision and Administration
Commission under China's State Council.
REGULATORY DISCLOSURES
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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.
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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: 61 2 9270 8141
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
