OREANDA-NEWS. China Yangtze Power Company Limited's (CYPC, A+/Stable) proposed acquisition of hydropower assets further up the Yangtze River will further strengthen the linkages with its 72% parent, China Three Gorges Corporation (CTG, A+/Stable), and improves CYPC's business profile, says Fitch Ratings.

CYPC announced on on 7 November 2015 that it had reached an agreement to acquire 100% of Chuanyun Hydropower Development Company from parent CTG (70% share), Sichuan Energy Investment Group (15%) and Yunnan Energy Investment Group (15%). Chuanyun Hydropower is a subsidiary of CTG that owns the Xiluodu and Xiangjiaba hydropower stations on the Yangtze River, with a combined installed capacity of 18.6 gigawatts. CYPC will pay a total consideration of CNY79.7bn via a combination of cash and stock issuance.

The proposed acquisition further supports the integration between CYPC and CTG, and echoes Fitch's rating approach of equalising CYPC's ratings with that of CTG. Following the proposed transaction, CYPC will own and operate all four large hydropower stations constructed by CTG, and will account for most of CTG's cash generation.

CYPC's hydropower installed capacity and power generation will increase by around 75% with the transfer of assets. Fitch forecasts CYPC's debt to rise by around CNY130bn, and FFO-adjusted net leverage to increase to around 5x from less than 3x immediately following the transaction, after assuming debt at Chuanyun Hydropower. However, Fitch believes CYPC can gradually deleverage thereafter with strong positive free cash flows from the hydropower generation assets.

The acquisition will also boost the cash level at CTG, supporting the ongoing development of the remaining Wudongde and Baihetan hydropower stations further upstream on the Yangtze River. Aside from the strong operational integration between CYPC and CTG, the proposed transaction also highlights the continued status of CYPC within the CTG group as an important financing vehicle for the group. CTG will receive CNY34.8bn from CYPC as part of the proposed transaction. CTG group (including CYPC) will also raise up to CNY24.2bn in cash with CYPC's planned private placement to a few qualified financial investors. The FFO-adjusted net leverage is likely to remain under 4x for CTG on a consolidated basis. Fitch acknowledges that CTG's shareholding of CYPC will fall to 62% from 72% after CYPC's private placement. However, we believe CTG will retain absolute control over CYPC, and the latter to remain highly important to the group.

The acquisition is still subject to approval from CYPC's shareholders and the relevant government offices, including the China State-owned Asset Supervision and Administration Commission (SASAC) and China Securities Regulatory Commission (CSRC). CTG management expects the acquisition to complete in the first quarter of 2016.