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Rating Action:

Moody's upgrades Towngas China Company Limited to Baa1; outlook stable

 The document has been translated in other languages

02 Jul 2015

Hong Kong, July 02, 2015 -- Moody's Investors Service has upgraded Towngas China Company Limited's (TCCL) issuer rating to Baa1 from Baa2.

The outlook on the rating has been revised to stable from positive.

RATINGS RATIONALE

"The rating upgrade reflects that the continued strengthening in TCCL's credit profile, including establishing a track record of strong operating performance that is underpinned by a stable business profile and supportive government policies," says Ivy Poon, a Moody's Assistant Vice President and Analyst.

"We expect TCCL's credit profile will continue to strengthen over the next two to three years, leading to its credit metrics exceeding the rating upgrade guidance set for the previous rating," adds Poon.

Prior to today's rating action, TCCL's previous rating was on positive outlook reflecting the emergence of these strengths.

TCCL's piped gas operations have grown fast as a result of its geographical diversified coverage and supportive government policies. Its total gas sales volumes reached 1.7 billion cubic metre (bcm) in 2014, compared with less than 1.0 bcm in 2010, at a subsidiary level.

However, growth in China's natural gas consumption has slowed from double-digit rates in recent years, mainly due to China's economic rebalancing and a more mature piped gas distribution industry. Nonetheless, Moody's believes the positive momentum will continue, albeit at a moderate pace, supported by favourable government policies, as China aims to increase natural gas consumption to 10% of its primary energy mix by 2020, up from 5.1% in 2013, which offers healthy growth prospects for TCCL in the medium term.

Also, despite rounds of tariff adjustments by the government to improve pricing mechanism since 2012, TCCL has maintained a stable dollar margin with only a mild margin compression in percentage terms. This demonstrates its ability to fully pass through changes in fuel costs to its customers in a timely manner. Its healthy customer mix -- with 77% of gas sales volumes from commercial and industrial (C&I) customers -- also smoothens the downstream tariff adjustment process, as delays in cost pass through are not common for C&I customers.

Based on TCCL's business profile and market growth, Moody's expects the company to maintain an investment-grade financial profile in the next three years, with adjusted funds from operations (FFO)/ debt of 17.5%-18.5%, retained cash flow (RCF)/ debt of around 15.5%-16.5%, and FFO interest coverage of 7.5x-8.5x during 2015-2017. Moody's estimates an annual capital expenditure of HKD2.5 billion-HKD2.8 billion in the next three years.

The Baa1 rating incorporates a two-notch rating uplift based on our assessment of a high likelihood of strong extraordinary support from The Hong Kong and China Gas Company Limited (HKCG, A1 stable), in the times of need, given HKCG is its largest and majority shareholder.

The stable outlook reflects Moody's expectation that TCCL will maintain a stable credit profile and financial metrics and that its debt refinancing risk will be manageable over the next 12-18 months.

An upward rating trend is limited in the near term, but could emerge over time if TCCL achieves higher-than-expected growth in its piped gas operations such that (1) there is a sustained improvements in RCF/debt above 20%; and (2) the company continues to fully pass on changes in fuel costs to end users, without materially jeopardizing its profit margin below current levels.

Downward rating pressure will arise if TCCL fails to achieve its expected growth and returns, if it adopts more aggressive debt-funded investments, or if regulatory changes negatively affect its financial profile. The key credit metrics that Moody's would focus on include RCF/debt below 15% for a prolonged period.

Also, the rating is sensitive to changes in our assessment of the level of operational and financial support from HKCG. Accordingly, downward rating pressure could emerge if HKCG's stake in TCCL declines significantly (below 50%) or on evidence that HKCG is not providing the expected level of support in times of need.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Towngas China Company Limited is listed on the Hong Kong Stock Exchange and is engaged primarily in the downstream sales and distribution of natural gas in Mainland China. Its main operations include sales of piped gas, the construction of gas pipelines, and, to a lesser extent, the sales of household gas appliances. It was 62.16%-owned by The Hong Kong and China Gas Company Limited, as of 28 April 2015.

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 rating action on the support provider and in relation to each particular 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.

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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
Asst Vice President - 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
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD - Infrastructure Finance
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's upgrades Towngas China Company Limited to Baa1; outlook stable
No Related Data.
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