Hong Kong, June 27, 2019 -- Moody's Investors Service has upgraded State Grid Corporation of China
(State Grid)'s baseline credit assessment (BCA) to a2 from a3.
At the same time, Moody's has affirmed State Grid's
A1 issuer rating, the A1 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 senior unsecured MTN rating issued
by State Grid Overseas Investment (2016) Limited.
The outlook on all ratings is stable.
RATINGS RATIONALE
"The upgrade of the BCA to a2 reflects State Grid's demonstrated
track record of maintaining a prudent financial policy and a disciplined
growth strategy, thereby underpinning a gradual strengthening of
the company's financial position," says Ivy Poon,
a Moody's Vice President and Senior Analyst.
"The BCA upgrade also considers the positive momentum observed in
the tariff setting mechanism, notwithstanding the manageable reduction
in tariffs implemented by the government as part of measures to support
the domestic economy," Poon adds.
"Moody's expects State Grid to demonstrate continued financial
strength, with financial metrics set to exceed the parameters set
for the previous BCA level," Poon says, adding "Such
improvement has benefited from greater than expected progress in the company's
deleveraging strategy."
Over the next 1-2 years, Moody's expects State Grid's
adjusted funds from operations (FFO)/debt to be in the 45%-50%
range, providing strong support for its BCA and rating. In
addition, Moody's expects annual capital spending to moderate to
around RMB420 billion to RMB440 billion, absent unexpected material
asset acquisitions or large new projects.
State Grid's BCA continues to reflect 1) the company's monopoly
position and enormous scale and diversity, which has benefited from
its manageable overseas investments over recent years; 2) stable
operating profile, and; 3) its excellent access to credit markets.
At the same time, the BCA is tempered by the short history of the
current transmission and distribution (T&D) regulatory regime introduced
in 2015. In particular, the government's cost saving
initiatives to cut retail electricity tariffs by 10% put the new
tariff mechanism to the test in 2018 and 2019.
Nevertheless, the new regulatory framework remains fundamentally
positive to grid operators as it enhances transparency of the sector compared
to previous years.
Moody's considers State Grid's carbon transition risk is relatively
low within the utility sector, given the company mainly owns and
operates power grid, and does not own thermal power generation facilities.
Its strong financial profile also provides 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.
State Grid's A1 rating incorporates a one-notch rating uplift
based on Moody's assessment of a very high likelihood of extraordinary
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 business in China, where
it serves more than 80% of the national territory.
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 a2 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.
The rating is unlikely to be upgraded, given that it is already
at the same level as China's sovereign rating.
Nevertheless, State Grid's BCA could be upgraded over time
if (1) China establishes a track record for the new tariff-setting
mechanism; and (2) State Grid maintains its currently strong financial
profile, including FFO/debt exceeding 40% and debt/capitalization
remaining below 35% on a sustained basis.
Moody's could also upgrade the rating if there is a strengthening
in the Chinese government's ability to provide support, as
reflected by an upgrade of the sovereign rating.
The rating is resilient to a weakening in the BCA given Moody's expectation
for very high likelihood of government support. Accordingly,
lowering the BCA from a2 to a3 may not necessarily lead to a downgrade
in the A1 rating, other things being equal.
The BCA could be lowered because of a material deterioration in State
Grid's business or financial profile. Such weakening could
result from (1) State Grid taking on aggressive debt-funded expansion
projects or acquisitions; or (2) unexpected adverse changes in the
tariff mechanism that would materially weaken State Grid's financial
position.
Financial metrics indicative of BCA downgrade include FFO/debt falling
below 30% or debt/capitalization exceeding 40%, both
on a sustained basis.
Moody's could also downgrade State Grid's rating 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 Government-Related
Issuers published in June 2018. 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. Its owns and operates the bulk of China's
national power grid network. For 2018, State Grid generated
revenue of RMB2,548 billion. The company is wholly owned
by the State-owned Assets Supervision and Administration Commission
under China's State Council.
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
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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
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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
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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,
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to rated entity, Disclosure from rated entity.
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Please see www.moodys.com for any updates on changes to
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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
