OREANDA-NEWS. Fitch Ratings has assigned Three Gorges Finance I (Cayman Islands) Limited's USD700m 3.7% senior unsecured notes due 2025 and Three Gorges Finance II (Cayman Islands) Limited's EUR700m 1.7% senior unsecured notes due 2022 final ratings of 'A+'. The notes are guaranteed by China Three Gorges Corporation (CTG; A+/Stable); Three Gorges Finance I and Three Gorges Finance II are wholly-owned by CTG.

The assignment of the final rating on the notes follows the receipt of documents conforming to information already received. The final ratings are in line with the expected rating of 'A+(EXP)' assigned on 21 May 2015.

CTG's ratings are equalised with the China sovereign (A+/Stable), its sole owner, as per Fitch's Parent-Subsidiary Linkage methodology. The equalisation reflects CTG's irreplaceable critical role in China in terms of flood control, drought relief, navigation improvement and water supply, as well as the strength of policy and financial support CTG consistently receives from the state.

KEY RATING DRIVERS
Critical Role in China: CTG is responsible for six large hydropower stations (four operational and two under development) on the Yangtze River, one of China's two main rivers. The hydropower stations, 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 the country's hydropower capacity at March 2015 and supplying 12 of China's 32 provinces and municipalities. 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, supporting the regional economy development with clean and affordable energy.

Unparalleled Level of Government Support: The government has offered CTG material tangible support, including equity injections, consistent subsidies and tax rebates. The central government until 2009 ran The Three Gorges Project Construction Fund (TGP Fund), which collected a portion of retail power tariff nationwide and injected the majority of this collection into CTG as equity for the construction of the Three Gorges Project. In 2010 the central government changed the TGP Fund to the National Major Water Conservancy Project Construction Fund, which would continue to run till 2019. Fitch expects a portion of this fund to continue to support CTG for the operation and maintenance of the Three Gorges Project.

Concentration and Expansion Risks: CTG's hydropower stations are on the Yangtze River and its hydropower revenue is closely correlated to the water flow in the river. However, the fluctuations in plant utilisation rate have been within a reasonable range over its long operating record. CTG's ongoing hydropower development further upstream of Yangtze River and non-hydro clean energy and overseas investments to support its ambitions to become a global clean energy player will lead to elevated capex of around CNY40bn per annum in the next three to four years.

Investment Grade Standalone Profile: CTG's robust cash generation from its 45.5 giga-watt hydropower capacity at its four plants on Yangtze River supports its investment grade standalone profile. 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 CTG'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. Fitch estimates that CTG could maintain a funds flow from operation (FFO) fixed charge coverage above 4x (end-2014: 5.6x), and FFO adjusted net leverage under 4.5x in the next three to four years (end-2014: 3.3x), supported by a robust EBITDA margin of around 70%.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CTG 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
- Annual expenditure around CNY40bn for the next three to four years

RATING SENSITIVITIES
Positive rating action may arise from positive rating action on China sovereign, provided linkages between CTG and the sovereign remain intact.

Negative rating action may arise from negative rating action on China sovereign or weakening of the linkages between CTG and the sovereign, such as a material decrease of state control or government support.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 31 March 2015:

The main factors that individually, or collectively, could trigger positive rating action on China include:
- Progress on structural reform oriented towards sustainable longer-term growth;
- Increasing evidence that the economy was adjusting smoothly;
- Greater clarity on the strategy to address the debt problem in the economy, including at local governments.

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 rise in unemployment and/or a materialisation of risks to financial stability;
- A rise in estimated general government indebtedness well above Fitch's current estimate;
- A change in policy direction that increased economic imbalances and structural vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment.