Fitch Assigns Gansu Power Investment First-Time 'BBB-' Rating
GPI's ratings are credit-linked, but not equalised with, Fitch's internal credit assessment of China's Gansu province. The linkages between GPI and Gansu are based on strategic and operational linkages arising from the province's effective ownership of GPI, oversight of the company's management and strategies, the high strategic importance of GPI's investments to the province and the policy-support rendered to the company.
KEY RATING DRIVERS
Strong Linkage with Parent: Gansu State-Owned Assets Supervision and Administration Commission (SASAC) effectively controls GPI, although Gansu SASAC only indirectly fully owns the company through Gansu State-Owned Assets Investment Group (GSAI). Gansu SASAC is, however, directly responsible for GPI's strategies, investment decisions, management appointments and key financial decisions. GSAI merely holds GPI shares on behalf of Gansu SASAC. GPI's strategic importance to the province stems from its responsibilities in power generation, local railway-project investments and other key landmark social projects.
Strong Tangible Support: Gansu SASAC has provided significant tangible support directly to GPI, including capital and assets injections, subsidies and supportive policies. In the past five years, Gansu SASAC injected 41% of Huating Coal into GPI and provided the company with the controlling stake of a listed platform to enable the listing of GPI's renewable assets. GPI has received equity injections totalling CNY12.3bn during the last five years, of which over 98% were for the province's investment requirements in railway projects via GPI. In addition, Gansu has provided GPI with preferential dividend and tax reliefs. Fitch expects provincial support for GPI to remain strong due to the company's strategic roles.
Weak Role in Provincial Energy Security: Fitch deems GPI's role in ensuring energy security for the province as weaker compared with that of China's other rated province-owned power generation companies, such as Zhejiang Provincial Energy Group Company Ltd. (A/Stable) and Beijing Energy Investment Holding Co., Ltd (A+/Stable). GPI is Gansu's largest power operator in terms of attributable capacity, despite owning only 14% market share. Gansu's power generation sector is fairly fragmented - the top-three operators account for less than 30% of the province's total capacity.
Strategic Importance for Renewable Power: Fitch sees GPI's responsibility in building the Changle thermal power plant as strategic for Gansu in tackling the region's renewable power curtailment problems. Gansu's geographic location, rich in solar and wind resources, provides it with high renewable power capacity. We estimate 11 billion kilowatt hours (kWh), or around 40%, of wind and solar power was wasted in 2015 due to weak local power-demand and, more importantly, a lack of power-exporting capability.
The Jiuquan-Hunan ultra-high-voltage (JHUHV) transmission line project, planned for completion in 2017, will improve the infrastructure to export power from Gansu to mid - and eastern-China. The to-be-built Changle thermal power plant is an important component of this project, as it will provide base-load power to ensure the stable operation of JHUH, enabling up to 18 billion kWh of renewable power to be exported.
Important Local Railway Stakes: GPI has played an important role in local railway construction. The company was Gansu SASAC's designated vehicle for holding the province's minority stakes in railway projects, which were invested together with China Railway Corporation (CRC). GPI had the strategic role of coordinating and representing the interests of Gansu's stakeholders, while CRC leads and operates the projects.
Gansu aims to position itself as a transportation and logistics hub in China's western region. Enhancing local railway networks will also help transport excavated natural resource products, supporting the local economy. Historically, GPI's portion of the funding for these railway projects has been mostly provided by the province's Department of Finance. GPI will continue to take a minority stake on behalf of Gansu province for the upcoming railway projects, however, how the province will fund the investments is undecided, including how much will be channelled via GPI.
Weak Standalone Profile: GPI has a weak standalone credit profile, which Fitch assesses at around the mid 'B' category. Fitch expects GPI's leverage, measured by FFO/adjusted-debt, to deteriorate from 13.2x in 2015 to around 19x in 2017, with FFO-fixed charge coverage of 1.0x-1.2x. The weakening credit metrics are due to poor operating cash flow from sustained low power-plant utilisation and high capex related to the construction of the Changle thermal power plant. GPI may also incur additional capex from the upcoming railway investment projects. However, the standalone assessment takes in to consideration the company's adequate liquidity via its good access to local debt capital markets due to its status as one of Gansu's prominent state-owned enterprises.
Fitch's key assumptions within our rating case for the issuer include:
- Capacity addition: effective capacity addition of 14 megawatts (MW) in 2016, 243MW in 2017, 896MW in 2018 and 3000MW in 2019.
- Utilisation: low utilisation hour for both thermal and renewable power to continue in 2016-2017, gradually improving from 2018 after completion of the JHUHV transmission line project.
- Coal-price change per Fitch price-deck assumptions: Newcastle 6000kcal thermal coal at USD50 per tonne (t) in 2016, USD52/t in 2017, USD55/t in 2018 and USD60/t 2019.
- Capex: Capex of up to CNY18bn in 2016-2019.
- No additional investment in railway and no profit or cash flow contribution from railway from 2016 to 2019.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an upgrade of Fitch's internal assessment of Gansu province's creditworthiness, provided GPI's operational and strategic linkages with the province remain intact
- evidence of strengthening linkages between GPI and Gansu province
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- lowering of Fitch's internal assessment of Gansu province's creditworthiness
- evidence of a weakening of GPI's operational and strategic linkages with Gansu province