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I AGREE
01 Apr 2011
Approximately USD141 million of debt securities affected
Hong Kong, April 01, 2011 -- Moody's Investors Service has upgraded to Baa2 from Baa3 the issuer and
senior unsecured bond ratings on Towngas China Company Limited (TCCL).
The ratings outlook is stable.
RATINGS RATIONALE
"The upgrade is driven mainly by the upgrade to TCCL's standalone
rating to Ba1 from Ba2. The final Baa2 rating incorporates a two-notch
uplift from the expectation for strong support from its major shareholder,
Hong Kong China Gas (HKCG, A1/Stable)," says Jennifer
Wong, a Moody's Assistant Vice President and Analyst.
"The upgrade to the standalone rating reflects TCCL's ability
to (1) largely pass through increases in gas prices despite some time
lag; (2) achieve its financial targets and grow its cash flow from
piped gas sales; and (3) achieve consistent financial and operational
performance."
"The Chinese government raised wellhead gas prices by 23.5%
effective June 2010," says Wong, adding that "the
ability of TCCL to pass through increased gas prices affords it more stable
profitability and an improved financial profile."
TCCL has also demonstrated its ability to establish a more stable and
predictable revenue structure by gradually increasing the proportion of
piped gas sales compared to one-off connection fees. The
proportion of connection fees to TCCL's revenue is declining,
from 31% in 2005 to 14% in 2010.
TCCL's consistent financial and operational performance, with
key projected financial metrics -- funds from operations (FFO)/interest
above 4.0x; retained cash flow (RCF)/debt around 12.0%,
and debt/capitalisation around 30% for the next few years --
support its standalone rating of Ba1.
TCCL's Ba1 standalone rating further reflects (1) the company's
dominant position in the piped gas sector and its geographically diversified
piped gas operations; (2) its large market presence, often
involving monopoly positions, for gas distribution of more than
30 years; and (3) favorable industry trends that offer growth potential.
However, TCCL's standalone rating also reflects (1) its relatively
short track record managing the financial and operational business challenges
it faces at its current scale; (2) its exposure to China's evolving
regulatory and operating environments; and (3) potential cash flow
volatility as a result of downward pressure on connection fees.
The final Baa2 rating incorporates a two-notch uplift based on
Moody's assessment of the likelihood of strong financial and operational
support that TCCL will receive from HKCG, its largest shareholder,
and on the strengthening of its corporate governance standards and risk
control practices.
Near-term upward rating pressure is limited given this rating upgrade.
The rating could be upgraded over time if TCCL can (1) consistently achieve
its financial targets and increase its cash flow from piped gas sales;
or (2) improve its balance sheet strength, such that FFO/interest
rises above 4.5x and RCF/total debt, above 15%.
The rating is also sensitive to changes in Moody's assessment of the level
of operational and financial support from HKCG. Accordingly,
downward rating pressure could emerge on any significant decline in HKCG's
stake (although Moody's does not expect this to occur) or evidence that
HKCG is not providing the expected level of support.
Downward rating pressure will also arise if TCCL cannot achieve its expected
growth and returns or if it adopts more aggressive debt-funded
investments, or if regulatory changes negatively affect its cash
generating ability. The key credit metrics on which Moody's would
focus include FFO/interest below 3.0x and RCF/total debt below
8-10%.
The last rating action was taken on 14 June 2010 when the outlook on TCCL's
Baa3 ratings was changed to positive from stable.
The principal methodology used in rating TCCL was "Moody's Rating Methodology
for Regulated Electric and Gas Utilities," published in August 2009.
TCCL, listed on the Hong Kong Stock Exchange, is engaged primarily
in the downstream sale and distribution of natural gas in mainland China.
Its main operations include the provision of piped natural gas,
the construction of gas pipelines, and to a lesser extent,
the sale of gas household appliances. It is 66.49%-owned
by Hong Kong and China Gas Co Ltd.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
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Please see ratings tab on the issuer/entity page on Moodys.com
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Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Hong Kong
Jennifer W. Wong
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
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
SUBSCRIBERS: (852) 3551-3077
Moody's upgrades Towngas China to Baa2
No Related Data.
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