Fitch Affirms China Yangtze Power at 'A+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed China Yangtze Power Company Limited's (CYPC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'A+'. The Outlook is Stable. Fitch has also assigned a senior unsecured rating of 'A+' to CYPC. Simultaneously, Fitch has affirmed CYPC's Short-Term Foreign- and Local-Currency IDRs at 'F1'.
CYPC is 62% owned by China Three Gorges Corporation (CTG, A+/Stable) 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
Integrated with Parent: Fitch equalises the ratings of CYPC with that of CTG because of the strong integration between the two. CYPC completed the acquisition of the Xiluodu and Xiangjiaba plants from the parent at the end of March 2016. Following the acquisition, CYPC owns all four operational hydropower plants on the Yangtze River under CTG with a total generation capacity of 45.5 giga-watts. CYPC will also account for a majority of CTG's EBTIDA and cash generation.
In addition, CYPC continues to function as an important financing vehicle within CTG group. For the aforementioned acquisition CYPC raised CNY24bn from external equity investors and the majority of the cash will be paid to its parent.
Hydrological Risks: CYPC's four operational hydropower plants on the Yangtze River are dependent on water flow and rainfall in the catchment area along the river. CYPC's cash generation is highly related to these hydrological and climate factors. However, the fluctuations in plant utilisation rate have been within a reasonable range over its long operating record.
Robust Cash Generation: CYPC generates robust cash flows from its hydropower plants on the Yangtze River. China's policies to encourage clean energy development - such as giving electricity from clean energy sources priority access to the grid (dispatch priority) and regulated tariffs - along with the scale and diversity of CYPC's downstream customers ensure that its electricity sales have minimal price and volume risk. Fitch expects these policies to continue with China's ongoing energy reform to prioritise clean energy development.
'BBB' Standalone Credit Profile: CYPC's short-term credit metrics will be temporarily stretched by the large acquisition of the two hydropower plants, which requires a net cash payment of around CNY13.3bn and the assumption of net debt of over CNY90bn at the company being acquired. Fitch expects CYPC's FFO-adjusted net leverage to peak in 2016 at around 4x (2.5x at end-2014). However, with the increased cash generation from the two new hydropower plants, Fitch expects CYPC to deleverage moderately afterwards. Fitch expects its FFO-adjusted leverage to be below 4x and FFO fixed-charge coverage to be above 4.5x (5.2x at end-2014) in the next three to four years. This financial profile together with the operating risk profile of the company, places its standalone credit profile at 'BBB'.
Fitch's key assumptions within the rating case for CYPC include:
- Average utilisation hours of the hydropower plants to remain stable around the historical average
- Hydropower on-grid tariff to remain flat at the current level
- Annual expenditure including equity investments of around CNY12bn per year for the next three to four years
- Annual dividend payment of around CNY14bn according to the company's guidance
CYPC's ratings are equalised with those of CTG. Positive rating action may arise from upgrade of CTG's ratings, provided linkages between CYPC and CTG remain intact.
Negative rating action may arise from downgrade of CTG's ratings or weakening of the linkages between CTG and CYPC.
CTG's ratings are in turn equalised with those of the China sovereign (A+/Stable).
For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 26 November 2015:
The main factors that individually, or collectively, could trigger positive rating action on China include:
- Increased evidence that the economy can adjust smoothly while rebalancing without experiencing a disruptive "hard landing"
- Greater confidence that the debt problem in the broader economy can be resolved without a material negative impact on growth or financial stability
- Widespread adoption of the renminbi as a reserve currency globally
The main factors that individually, or collectively, could trigger negative rating action on China include:
- A sharper growth slowdown than currently anticipated, leading to a materialisation of risks to financial and/or social stability
- A rise in estimated general government indebtedness well above Fitch's current estimate
- Sustained capital outflows sufficient to erode China's external balance-sheet strengths, or undermine financial stability
- A change in policy direction that signalled decreased willingness to tackle the economy's imbalances and vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment