OREANDA-NEWS. Fitch Ratings has upgraded China Yangtze Power Company Limited's (CYPC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'A+' from 'A-'. The Outlook is Stable. Simultaneously, Fitch has upgraded CYPC's Short-Term Foreign- and Local-Currency IDRs to 'F1' from 'F2'.

The upgrade of CYPC's IDRs stems from Fitch's re-assessment of the linkages between CYPC's parent, China Three Gorges Corporation (CTG), and the state (China; A+/Stable). The re-assessment of the linkages was based on an evaluation of CTG's operations and its policy role, particularly its contribution to flood control, drought relief, navigation improvement and water supply, as well as the strength of policy and financial support that CTG receives from the state.

CYPC is 73.33% owned by CTG at end-March 2015, and CTG is in turn wholly owned by the State-owned Assets Supervision and Administration Commission (SASAC). CYPC's credit profile is equalised with that of CTG, as per Fitch's Parent and Subsidiary Linkages methodology.

KEY RATING DRIVERS

Critical Role in China: CTG is responsible for six large dams (four operational and two under development) on the Yangtze River, one of China's two main rivers. The dams, including the high profile Three Gorges Project, serve around half of China's provinces - including some of the highly populated and economically important regions - in terms of flood control, drought relief, navigation improvement and water supply. CTG is supervised by the State Council, the country's highest policy-making body, and the National People's Congress, the national legislature of China, reflecting its significance to the state.

Leader in Hydropower: CTG is the nation's largest hydropower producer, accounting for around 17% of total hydropower capacity at March 2015, providing affordable clean energy supply. The electricity generated from Three Gorges has a regulated on-grid tariff of 26 cents per kilowatt hour (kwh), 30-40% lower than the average thermal power on-grid tariff in the regions the Three Gorges Project serves. The power generated is supplied to the surrounding provinces to support economic development.

Unparalleled Level of Support to CTG: The government has offered CTG material tangible support, including capital injections, consistent government subsidies and a partial rebate of value-added tax payments.

The central government until 2009 ran The Three Gorges Project Construction Fund (TGP Fund), which collected a fixed portion of retail power tariff and injected a significant part of this collection into CTG as equity for the construction of the Three Gorges Project and for the relocation of the local residents affected by it. The TGP Fund was renamed the National Major Water Conservancy Project Construction Fund (NMWCPCF) in 2010, and the central government has committed to continue to fund the NMWCPCF through 2019 from a portion of power tariffs. Fitch expects a portion of this fund will continue to be provided to CTG for the operation and maintenance of the Three Gorges Project and potential new projects.

Strong Integration Between CYPC and CTG: Fitch equalises the credit profile of CYPC with that of CTG group because of the strong integration between CYPC and CTG. Operationally, CYPC owns The Three Gorges Project for CTG and operates all of CTG's other operational dams. Financially, CYPC accounted for around 50% of CTG consolidated EBITDA in 2014 and provided significant dividends to CTG. Around half of CYPC's debt is sourced from the CTG group, and some of CYPC's debt benefits from guarantees from CTG. In the absence of any future large capex or investments at CYPC level, it is likely that debt from the CTG group may reduce over time given CYPC's strong operating cash generation.

Hydrological Risks: CTG's four operational hydropower plants on the Yangtze River are dependent on water flow and rainfall in the catchment area along the river. However, the fluctuations in plant utilisation rate have been within a reasonable range over its long operating record.

Strong Operating Cash Flows: CYPC's standalone credit profile benefits from the government's favourable clean energy policies, including no off-take volume risks for the electricity generated and secured hydropower tariffs leading to strong cash generation. Unlike conventional thermal independent power producers (IPPs), which are subject to volatile fuel costs and an opaque tariff regime, the favourable tariffs and the low-cost nature of hydropower allows CYPC to maintain a high EBITDA margin.

Robust Financial Profile: In the absence of large debt-funded investments by CYPC, Fitch expects CYPC to continue to maintain a robust financial profile. Fitch expects funds flow from operations (FFO) fixed charge cover to be sustained at above 5.0x (2013 4.65x) and FFO net adjusted leverage to remain below 4.5x (2013: 3.59x) over the medium-term.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Average utilisation hours of the hydropower plants to remain stable around the historical average
- Hydropower on-grid tariff to remain flat at the 2014 level
- No large debt funded investment by CYPC in the next three to four years

RATING SENSITIVITIES

Positive rating action may arise from an improvement of CTG's credit profile, provided linkages between CYPC and CTG remain intact.

Negative rating action may arise from weakening of CTG's credit profile or weakening of the linkages between CTG and CYPC.