OREANDA-NEWS. Fitch Ratings has affirmed State Grid Corporation of China's (SGCC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A+' with Stable Outlook.

Fitch has also affirmed at 'A+' SGCC's foreign-currency senior unsecured rating, and the ratings on bonds issued by State Grid Overseas Investment (2013) Limited and guaranteed by SGCC, State Grid Overseas Investment (2014) Limited and guaranteed by SGCC, and State Grid Europe Development (2014) Public Limited Company with keepwell provided by SGCC.

KEY RATING DRIVERS
Equalised With the Sovereign: The ratings of SGCC are equalised with the China sovereign (A+/Stable), the company's ultimate owner, as per Fitch's Parent-Subsidiary Linkage methodology. The equalisation of SGCC's ratings with the state takes into consideration its strategic importance to China as well as strong financial and operational support extended to SGCC by the government.

Strategic Role in China: SGCC's monopoly concessions serve over 1.1 billion users in 26 provinces, or 88% of the national territory, representing approximately 80% of the nation's total electricity consumption. As the largest purchaser, distributor and retailer of electricity, SGCC also holds a critical role in the electricity value chain in China.

Evolving Regulatory Environment: Fitch considers the existing regulatory framework to be highly beneficial to SGCC overall. Notwithstanding the expected changes to grid tariffs, Fitch expects the state to maintain its tight control on companies in the electricity transmission and distribution sector, and to implement a new tariff model that will preserve SGCC's strong financial position. The regulatory framework is expected to transition into a more transparent tariff model, which could over time lead to a liberalisation of the retail segment. China has already started pilot tariff schemes in Shenzhen.

Support from Government: SGCC has been receiving monetary and tax treatment support from the state. Most importantly, the state ensures SGCC a reasonable return on invested assets. During the next several years, the country will rely on SGCC to develop the power grid to keep pace with economic growth, facilitate changes to the coal-fired generation capacity and develop renewable energy sources. The development of a large ultra-high-voltage network, which is currently being executed by the company, is important to achieving this goal.

Strong Standalone Profile: SGCC's financial profile is robust for its 'A+' rating. Fitch expects SGCC's cash flow generation to remain strong. Fitch expects funds flow from operations (FFO) adjusted net leverage to remain below 2.75x and FFO interest cover to be around 8.5x on a sustained basis (2.0x and 8.5x respectively in 2013), even though the company has large capex plans. The company also maintains healthy liquidity and a favourable debt profile.

Strong Liquidity: SGCC's liquidity position stems from its robust internal cash generation, its well-structured debt maturities, as well as its access to debt markets. SGCC has committed credit facilities from major banks of over CNY1trn. There is little secured debt (less than 5% of total consolidated debt). SGCC also centrally manages the cash flow generated by its subsidiaries.

KEY ASSUMPTIONS
- Revenue growth in mid-single digit, reflecting electricity usage growth as well as capex investments
- EBITDA margins remain stable in the low teens, similar to historical levels
- Capex remains elevated, similar to historical levels of CNY350bn-400bn per year
- Total debt continues to increase moderately as capex continues to exceed operating cash generation

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, result in negative rating action:
-A negative rating action on the sovereign
-Weakening linkages with the sovereign in conjunction with deterioration in FFO adjusted net leverage to over 3.0x and FFO interest cover to less than 5.0x on a sustained basis

Positive: Future developments that may, individually or collectively, result in positive rating action:
-A positive rating action on the sovereign provided the linkages remain intact

For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 4 April 2014:

The main factors that individually, or collectively, could trigger positive rating action on China include:
- The country's ability to navigate structural economic adjustment without economic, financial or social disruption is centrally important for the sovereign credit profile and ratings. Progress on reform and rebalancing without disruptive shocks would reduce China's structural vulnerabilities.
- Greater confidence over the scale of the debt problem in China's broader economy, and of the approach to resolving it.

The main factors that could individually, or collectively, could trigger negative rating action on China include:
- Continuation of "more of the same" credit-fuelled and investment-led growth, reflecting an absence of material progress on reform and rebalancing, would exacerbate China's structural vulnerabilities. The ultimate resolution would likely be riskier and potentially costlier for the sovereign.
- A further significant and sustained rise in public indebtedness, potentially reflecting a crystallisation of contingent liabilities, without a clear prospect of a subsequent sustained decline.