CREDIT FOCUS RATINGS KEY INDICATORS. Analyst Contacts: INFASTRUCTURE DECEMBER 14, China Resources Gas Group Limited. ENN Energy Holdings Limited

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1 DECEMBER 14, 2012 INFASTRUCTURE CREDIT FOCUS RATINGS China Resources Gas Group Limited Issuer Rating Outlook ENN Energy Holdings Limited Baa1 Stable Issuer Rating Baa3 Outlook Stable Towngas China Company Limited Issuer Rating Outlook KEY INDICATORS CR Gas Baa2 Stable LTM Jun 2012 Dec Dec EBIT/ interest 16.2x 24.3x 21.9x Debt/EBITDA 4.1x 2.6x 3.2x RCF/net debt % % % ENN LTM Jun 2012 Dec Dec EBIT/ interest 4.4x 4.8x 5.1x Debt/EBITDA 3.3x 3.4x 2.8x RCF/net debt 29.0% 18.5% 32.1% Towngas China LTM Jun 2012 Dec Dec EBIT/interest 5.9x 4.9x 3.1 Debt/EBITDA 4.5x 5.2x 5.8x RCF/net debt 22.3% 21.8% 16.7% Source: Moody s, company financial documents Analyst Contacts: HONG KONG Patrick Mispagel Associate Managing Director CR Gas, ENN and Towngas China: Peer Comparison While the ratings of the three companies all fall in the Baa category, the ratings are differentiated by the companies standalone credit profiles and parental backgrounds.» This report compares and contrasts the credit profiles of three major Chinese city gas distributors. China Resources Gas Group Limited (CR Gas, Baa1 stable), ENN Energy Holdings Limited (ENN, Baa3 stable) and Towngas China Company Limited (Baa2, stable) 1 share many similarities, including ratings in the Baa range. However, what sets them apart is their different operational profiles, expansion strategies and parental backgrounds.» CR Gas has a stronger operational profile than ENN and Towngas China. CR Gas has a more diverse and higher quality portfolio of projects and a lower reliance on one-off connection fee income than the other two companies. Nonetheless, CR Gas is exposed to higher risk in terms of cost pass-through, because it has the highest percentage of residential end-users in terms of gas sales volume.» CR Gas has been the most aggressive on acquisitions in recent years. In contrast, the other two players have slowed down the pace of their project acquisitions. ENN s acquisitive appetite remains intact in spite of the suspension of its plan to partially acquire China Gas.» CR Gas has the strongest credit metrics, with a net cash position at end-june While CR Gas has aggressive expansion plans, we expect it to maintain credit metrics appropriate for its current rating, owing to funding support from its parent, an additional equity placement, 2 and large cash holdings. Towngas China has higher leverage ratios than its peers, but its credit metrics are improving.» Towngas China and CR Gas receive strong financial support from their parent companies. The issuer ratings of CR Gas and Towngas China include a one and twonotch uplift respectively, based on strong parental support. In addition, the operational support provided by their parent companies in the form of better corporate governance is positive for their standalone ratings. >>contacts continued on the last page 1 Besides these three pure players in the city gas distribution sector, Moody s also rates Hong Kong and China Gas Company Limited (HKCG, A1 stable) and Beijing Enterprises Holdings Limited (BEHL, Baa1 stable). Both HKCG and BEHL have sizeable other businesses besides distributing gas in China. HKCG, which is the parent of Towngas China, has been the dominant gas distributor in Hong Kong for more than 150 years. BEHL, which mainly operates in Beijing, also has a large beer brewery and water treatment facility. 2 CR Gas announced on 20 November 2012 that it would raise around HKD2.7 billion through an equity placement.

2 Detailed Discussion City gas distributors in China will continue to benefit from favorable industry dynamics. The advantages include the government s promotion of natural gas as a cleaner alternative to other forms of energy, such as coal, increasing supplies of upstream gas, expanding transmission capacities, and the lower cost and efficiencies of natural gas. However, the following key risks remain: 1) delays in passing through any increase in costs to customers result in uncertainty over cost recovery and overall financial performance, 2) reliance on one-off connection fees exposes gas utilities to potential volatility in cash flow, 3) a slowdown in the economy may lower the volumes of gas consumed by various end-users, thereby reducing revenues to distributors. Operational Profile: CR Gas Has Overall Advantages over ENN and Towngas China Project Portfolio CR Gas Has a Better Project Portfolio in Terms of Diversification and Project Quality EXHIBIT 1 CR Gas Has a Better Project Portfolio than ENN and Towngas China At 30 June 2012 CR Gas (1) ENN Towngas China Number of city gas projects Gross gas sales volume in 1H 2012 (in million cubic meters) 4,248 3,197 2,595 Residential households (in thousands) 11,370 7,436 6,930 Piped gas sales volume per project or city (in million cubic meters) Residential households (in thousands) per project or city Remarks: (1) The data does not include CR Gas acquisition of AEI China Gas Limited, which will add 28 city gas projects to its portfolio. The table above also does not include the 16 projects CR Gas announced in August 2012 that it would acquire from its parent, China Resources Holdings. Source: 2012 interim company reports and other information provided by the companies As Exhibit 1 shows, Towngas China has fewer projects than its two competitors. Its projects are also not as well distributed across the country. The company s projects are concentrated in provinces such as Liaoning, Sichuan, Shandong, Anhui, Jiangxi and Guangdong. 3 CR Gas has been expanding faster than the other two pure gas players. Therefore, we expect it to own a greater number of projects than ENN in the near future. A more geographically diverse spread of projects is credit positive, as it reduces the risk of unfavorable tariff decisions by particular city governments. It also mitigates the risk of a drop in consumption, if there is a slowdown in a particular regional economy, or a shortage in upstream gas supply. 3 Towngas China is effectively its parent company s key gas operator in Mainland China. If its urban gas projects are considered together with those of its parent -- Hong Kong and China Gas -- the diversity of the group s 103 city gas projects would be comparable to that of CR Gas and ENN. 2 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

3 In addition, we consider projects located in large cities and economically more developed regions to be of better quality because of the benefits of economies of scale and the potential for higher penetration and growth in sales volumes. CR Gas also has a larger number of projects in bigger municipalities and economically developed cities, such as Suzhou and Wuxi. In contrast, ENN and Towngas China have more projects in lower tier cities, townships and development zones. The average volume of their gas sales to each project of 29 and 38 million cubic meters is much lower than that of CR Gas (see Exhibit 1). Other factors, such as proximity to major transmission pipelines, are also considered credit positive. Projects that are connected with major transmission pipelines are better in terms of quality because gas supplies from the pipelines are usually cheaper than other forms of supply, such as liquefied natural gas (LNG) and bottled liquefied petroleum gas. Pipeline transmission volumes can also be ramped up quickly, thereby reducing the costs and operational risks for distributors. We estimate that ENN relies more heavily on imported LNG, as it has quite a number of projects in Fujian, Guanxi and Guangdong provinces. These areas either have no access to major transmission pipelines, or have only recently been connected to the trunk pipelines. For instance, in 1H 2012, ENN s gross margin on gas sales improved by 1.2% from same period last year. The completion of the West-East Pipeline II in mid-2011 has enabled ENN to replace its supplies of LNG with cheaper piped natural gas in Guangdong and Guangxi provinces. However, it will take time to switch all its customers in Guangdong and Guangxi to piped gas. Moreover, as of June 2012, ENN still had nine projects in Fujian province, a region still not connected with major pipelines. Reliance on Connection Fee Revenues Exposes Companies to Volatility in Cash Flow EXHIBIT 2 Towngas China s Operating Profit has Higher Dependence on Connection Fees As of 1H 2012 CR Gas ENN Towngas China Revenues Connection fees 14% 19% 21% Gas sales and other revenues 86% 81% 79% Operating profit Connection fees 40% 44% 62% Gas sales and other revenues 60% 56% 38% Source: 2012 interim company reports, Moody s Financial Metrics Towngas China s credit profile is more vulnerable to changes in the property market than CR Gas and ENN, because it has a higher dependence on one-off connection fees for its operating profit (see Exhibit 2). 3 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

4 While connection fees provide gas distributors with higher operating margins, they are also a volatile source of income. There is no accurate data on the source of the connection fees, but we believe a large proportion is from newly developed properties. Consequently, any slowdown in the property market would have an adverse impact on the connection fee incomes of the three urban gas distributors. Overall though, we expect such income to be flat in the next few years, because positive factors such as government s supportive policy towards more natural gas usage and more social-welfare housing construction could offset the weakness in demand from new property sales. EXHIBIT 3 Diminishing Growth and Importance of Connection Fees HKD million 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ENN connection fee CR Gas connection fee Towngas China connection fee ENN % of connection fee CR Gas % of connection fee Towngas China % of connection fee annualized Annualized % 30% 25% 20% 15% 10% 5% 0% Source: 2012 interim company reports, past annual company reports, and other information provided by the companies While the total income from connection fees has been growing for all three gas distributors in recent years, the pace of growth has been slower (see Exhibit 3). The proportion of such income to total revenue has therefore declined, relative to revenues from gas sales. This trend is likely to continue, thereby improving the credit profiles of the three companies, as their profits and cash flows will be less vulnerable to volatile income from connection fees. 4 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

5 End-User Profiles Exposure to Residential Users May Lead to Delays in Passing Through Cost Increases EXHIBIT 4: Gas Sales Exposure by user CR Gas ENN Vehicle gas refueling stations 14% Residential 21% Vehicle gas refueling stations 17% Wholesale of gas 4% Residential 12% Commerical & industrial 65% Commerical & industrial 67% Towngas China Residential 19% Commerical & industrial 81% Source: 2012 interim company reports, company information, Moody s Financial Metrics The main risk facing Chinese gas distributors is the delay in passing through any cost increases to endusers, owing to the uncertain and evolving regulatory framework for tariff adjustments. The adjustment of residential tariffs usually involves longer delays because of the government s concerns over inflation and the lengthy public-hearing process. Because CR Gas and Towngas China have higher proportions of gas sales from residential users than does ENN, they are exposed to higher risks from such delays (see Exhibit 4). Although there are volume and credit risks associated with commercial and industrial users, these risks are less significant, given the rapid growth in the volume of natural gas consumed. 5 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

6 Expansion Strategy: CR Gas Has the Most Aggressive Project Acquisition Strategy EXHIBIT 5 CR Gas: The Most Rapid Growth in the Number of Projects EXHIBIT 6 CR Gas: The Fastest Growth in the Number of Connected Households (in millions) 120 ENN CR Gas Towngas China 12.0 ENN CR Gas Towngas China H 2012 Source: 2012 interim company reports, past annual company reports, other company information H 2012 Source: 2012 interim company reports, past annual company reports, other company information CR Gas has achieved the fastest growth by aggressively acquiring projects in the last five years, although it has the shortest company history 4 amongst the three urban gas distributors (see Exhibit 5 and Exhibit 6). EXHIBIT 7 CR Gas Project Acquisition Strategy 30 project acquired from CRH project acquired from market H H 2H 2012 beyond and Beyond Source: 2012 interim company report, annual company reports, other company information CR Gas expansion has been greatly supported by its parent, China Resources Holding (CRH, unrated). Under the group s strategy, the parent company holds a project during the incubation period and thereafter transfers only profitable projects to its subsidiaries. As Exhibit 7 shows, CRH has transferred 30 projects to CR Gas since In August 2012, CR Gas announced that it would be acquiring an additional 16 projects from CRH. 4 CR Gas focused in gas operation after the business restructuring in 2007, while ENN began in 1994 and Towngas China formerly named as Panva Gas Holdings Ltd. started in DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

7 CR Gas has also been aggressive in acquiring new projects from the market. It added seven projects in 1H In that same period, it also completed the privatization of Zhengzhou gas through a share swap, and bought AEI China Gas Limited for RMB1.5 billion. CR Gas is better positioned than its two competitors in expanding through acquisitions, because it has relatively easy access to capital, given its parent company s status as a state-owned company. In addition, its new projects are located in larger populated areas with bigger economies, whereas most of the projects acquired by ENN and Towngas China are in county-level small cities, industrial parks or development zones. Although ENN has given up trying to partially acquire China Gas, we believe it is still interested in acquisition opportunities within the urban gas distribution sector. ENN has also shown a strong interest in businesses related to its core operations, including in midstream transmission pipelines and compressed natural gas or LNG filling stations. However, given its weak financial profile and the lower level of support from its parent when compared with its two other rivals, it will be difficult for ENN to find acquisitions of a similar size to that of China Gas. We also expect Towngas China to maintain a moderate pace of acquisitions, mainly in medium-sized cities. It acquired its first midstream pipeline projects in 1H 2012, mirroring a strategy adopted by its parent company, HKCG. Unlike ENN, which has shown a readiness to carry out sizable or heavily debt-funded acquisitions, Towngas China will likely be prudent in its expansion strategy under the management of HKCG. And, like CR Gas, Towngas China has consistently received operational and financial support from its parent for its expansion plans. In 2010, HKCG transferred six projects to Towngas China, with a total value of HKD1.5 billion. HKCG also provides financial support to Towngas China through shareholder loans at low interest rate. 7 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

8 CR Gas Has the Strongest Financial Profile Amongst the Three Gas Distributors EXHIBIT 8 CR Gas, ENN and Towngas China: Peer Comparison Moody s adjusted financial metrics as of LTM Jun 2012 CR Gas ENN Towngas China EBITDA margin 20.0% 21.6% 24.0% EBIT Interest coverage 16.2x 4.4x 5.9x DEBT/EBITDA 4.1x 3.3x 4.5x Debt/Cap 51.8% 55.1% 32.3% RCF/debt 17.5% 20.3% 14.2% Net debt/ EBITDA net cash 2.3x 2.8x RCF/ net debt net cash 29.0% 22.3% 3- year average Moody s adjusted financial metrics CR Gas ENN Towngas China EBITDA margin 20.0% 21.4% 22.7% EBIT Interest coverage 20.8x 4.8x 4.6x DEBT/EBITDA 3.3x 3.2x 5.1x Debt/Cap 43.8% 52.0% 31.1% RCF/debt 23.0% 17.1% 12.7% Net debt/ EBITDA net cash 2.1x 3.2x RCF/ net debt net cash 26.5% 20.3% Moody s adjusted financial as of LTM Jun 2012 (in HKD billion) CR Gas ENN Towngas China Total debt Net debt Net cash * 3-year average refers to 2010, 2011 and LTM6/ 2012 Source: 2012 interim company reports, annual company reports, Moody s Financial Metrics Of the three gas distributors, CR Gas has the strongest financial profile, with a consistent net cash position. At 30 June 2012, it had a net cash position of HKD1.43 billion and a strong EBIT/interest ratio of 16.2x. Its good financial position is largely due to the strong funding support from its parent and its ability to raise equity from capital markets, which reduces its reliance on external debt to fund its aggressive expansion plan. For instance, CRH has largely funded the projects it transferred to CR Gas through equity injections totaling HKD7.5 billion and shareholder loans totaling HKD1.6 billion. CR Gas will acquire 16 more projects worth HKD2.5 billion from its parent. It has said that this amount will be funded by a shareholder loan from its parent. CR Gas issued $750 million in senior notes in March 2012, mainly to fund its capex and refinancing needs. We also expect its capex to continue exceeding its internal cash flows in next two to three years, owing to the large amount of considerations for the projects it will be acquiring from CRH and the market. 8 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

9 Nonetheless, given the funding support from its parent, the additional equity placement of around HKD2.7 billion and its large cash holding, we expect the company to maintain credit metrics appropriate for its current standalone rating of Baa2. CR Gas liquidity profile is also stronger than its two competitors, owing to its sizable cash on hand and good access to debt and capital markets. ENN had solid credit metrics before it leveraged up its balance sheet in 2011to prepare for the acquisition of China Gas. Now that the acquisition plans have fallen through, the company s cash balance of RMB6 billion as of 1H 2012 is excessive for its normal operations. Consequently, it may repay some of its short-term debt and improve its financial profile in the near-term. Its expected annual cash flow from operations of around RMB2.5-RMB2.8 billion over the next two years will be sufficient to cover normal capital spending. It can also afford a moderately sized acquisition of no more than RMB2 billion, while maintaining its credit profile. Towngas China has a moderate and improving financial profile, with a debt/ebitda ratio of 4.5x and retained cash flow/debt of 14.2% at end-june The company s expansion has been more prudent than its two rivals, because of the support and governance of HKCG. Its operating cash flow will continue to be the primary source of funding for its capex. Its projected retained cash flow/debt is considered average, at 15%, and its projected debt/capitalization is around 30% over the next three years. In addition to its internal cash flows, Towngas China received shareholder loans totaling HKD472 million at end-june CR Gas and Towngas China Receive Strong Support from Their Parent Companies The issuer ratings of CR Gas and Towngas China have received an uplift of one- to two-notch uplift, based on strong parental support. The operational support provided by their parent companies in the form of better corporate governance is also positive for their standalone ratings. CR Gas is one of CRH Group s core business units. The support from CRH has enabled CR Gas to build a nationwide city gas distribution franchise over a relatively short period. Funding support from CRH has also reduced the execution risks faced by CR Gas in the early stages of its acquisition of gas projects. In addition, CR Gas benefits from its parent s status as a conglomerate owned by China s State Council, which provides it a better negotiating position than private sector companies in acquiring new gas projects, and in its dealings with local governments. It can also capitalize on the investments of its sister companies, such as China Resources Land Limited (Baa2 Stable) and China Resources Power (Baa2 Stable), in fostering relationships with local governments. Towngas China is the major platform of HKCG s city gas distribution business in mainland China. HKCG, which has a 66.18% stake in Towngas China, has been providing urban gas services in Hong Kong for more than 150 years. The company increased its shareholding in Towngas China in January from 45.61% -- through an injection of assets and the acquisition of additional equity. HKCG s move to acquire majority ownership demonstrates its strong commitment to Towngas China. 9 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

10 Both Towngas China and CR Gas, through their close relationships with their parent companies, may also enjoy operational synergies in terms of capital expenditure, human resources management, and in managing vendors, suppliers, and service providers. The two companies may also benefit from the management experience and sound corporate governance standards set by their parents. 10 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

11 Appendix 1 Regulated Electric and Gas Utilities CR Gas ENN Towngas China Factor 1: Regulatory Framework (25%) a) Regulatory Supportiveness Ba Ba Ba Factor 2: Returns & Cost Recovery (25%) a) Rate Adjustment & Cost Recovery Mechanisms Ba Ba Ba Factor 3: Diversification (10%) a) Market Position Baa Baa Baa Factor 4: Financial Strength (40%) a) Liquidity Baa Baa Baa b) 3-Year Average CFO pre-wc + Interest / Interest Aaa A A c) 3-Year Average CFO pre-wc / Debt A Baa Baa d) 3-Year Average CFO pre-wc - Dividends / Debt A Baa Baa e) 3-Year Average Debt / Total Capital Baa Baa Aa Rating: a) Indicated Standalone Rating from Grid Baa2 Baa3 Baa3 b) Assigned Standalone Rating Baa2 Baa3 Ba1 c) Final Rating under parent support Baa1 - Baa2 d) Outlook Stable Stable Stable Note: The financial metrics in Factor 4 are based on the historical 3-year average. 11 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

12 Moody s Related Research Rating Actions:» Moody s confirms ENN s Baa3 ratings; concludes review» Moody s reviews ENN Energy Baa3 rating for downgrade» Moody s assigns first-time Baa1 rating to China Resources Gas» Moody s upgrades Towngas China to Baa2 Credit Opinions:» China Resources Gas Group Limited» ENN Energy Holdings Limited» Towngas China Company Limited Other Research:» China s Next Leaders Face New Economic and Policy Challenges, November 2012» China s Five-Year Natural Gas Plan Would Help Distributors, August 2012 (144559)» Moody s: CR Gas H results support its Baa1 rating» Beijing Enterprises Higher Stake in China Gas Challenges ENN s Acquisition, May 2012 (142009)» Moody s: No immediate rating impact from CR Gas AEI China deal Rating Methodology:» Global Regulated Electricity and Gas Utilities Methodology, August 2009 (118481) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 12 DECEMBER 14, 2012 CREDIT FOCUS: CR GAS, ENN AND TOWNGAS CHINA: PEER COMPARISON

13 » contacts continued from page 1 Report Number: Analyst Contacts: HONG KONG Ivan Chung Vice President - Senior Credit Officer ivan.chung@moodys.com BEIJING Kai Hu Vice President - Senior Analyst kai.hu@moodys.com HONG KONG Ivy Poon Associate Analyst ivy.poon@moodys.com Authors Ivan Chung Kai Hu Ivy Poon Production Associate Alisa Llorens 2012 Moody s Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY S INVESTORS SERVICE, INC. ( MIS ) AND ITS AFFILIATES ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. 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