Hong Kong January 22, 2015

Transcription

1 CLP Holdings Limited Hong Kong January 22, 2015 Category: Rating Type: Long-term Credit Rating: Rating Outlook: Corporate Rating Unsolicited Rating AAg- Stable Analysts: Elle Hu Jolie Li Key Indicators 2014H EBITDA margin 18.8% 15.2% 19.1% 21.5% ROA 4.2% 2.8% 3.7% 4.7% Debt / Capital 44.9% 39.1% 42.1% 44.6% RCF / CAPEX 0.8x 1.4x 1.5x 0.5x FFO / Debt 29.8% 37.6% 32.7% 33.0% RCF / Debt 20.8% 26.0% 23.4% 23.8% Note: 2014H1 ratios are based on the twelve months ending June 30, Source: Company data, CCXAP research Rating Drivers Positives Strong and stable cash flows from Hong Kong regulated business Acquisitions of CAPCO and PSDC strengthen generation portfolio Growth prospects for the mainland China market Strong financial flexibility and sound liquidity profile Negatives Weak operating performance in Australia and India, although showing marginal improvement Construction and operating risks in less-regulated regions Short-term erosion of key credit metrics Corporate Profile Headquartered and listed in Hong Kong, CLP Holdings Limited ( CLP Holdings ) is a diversified electricity and energy company operated in the Asia Pacific region. Its largest business segment, CLP Power Hong Kong Limited ( CLP Power ), is a vertically integrated power company covering generation, transmission, and distribution, and retail service. Its Australian business, EnergyAustralia, engages in generation and retail of electric power, and storage and retail of natural gas. The company also operates as an independent power producer in mainland China, India, Taiwan and other Southeast Asian countries. The 1

2 company s business strategy is to maintain operational efficiency and supply reliability as well as to optimize its power generating portfolio across Asia Pacific. For fiscal year 2013, the company recorded HKD 9.3 billion in operating earnings and HKD 6.1 billion in total earnings. For the first half of 2014, operating earnings and total earnings grew to HKD 4.8 billion and HKD 6.7 billion, respectively. As of June 30, 2014, total assets amounted to HKD billion. Rating Rationale The credit rating for CLP Holdings is AAg-, underpinned by a favorable regulatory environment and stable cash flows of its largest Hong Kong electricity business. Given its scale and diversity, the company has strong financing capability and liquidity position. However, these positive drivers are partially offset by the difficult operating environment and weak performance in Australia and India, which is expected to have a negative impact on cash flow and profitability in the near to medium term. In addition, although providing control over core generating assets, the acquisitions of CAPCO and PSDC exerted pressure on the company s financial profile. Detailed Rating Considerations 1. Hong Kong operations accounts for the majority, while the company is growing its generation portfolio across Asia Pacific CLP Holdings and Power Assets are the two large electricity companies in Hong Kong. Although the government does not define a licensed area for operations, in practice, the two electricity suppliers have different service areas. Given their established customer bases within a developed market, it is difficult to introduce new competition to Hong Kong. Furthermore, the transparent regulatory regime ensures predictable cash flows from power generation. Exhibit 1. Operating Data of Two Large Electricity Companies in Hong Kong Fiscal Year 2013 CLP Power of CLP Holdings HK Electric of Power Assets Geographic coverage Kowloon, the New Territories, Hong Kong Island and Lamma Island Lantau, Cheung Chau and other outlying islands Total electricity sales 33,064 millions of kwh 10,773 millions of kwh Number of customers ('000) 2, Installed capacity 8,888 MW 3,737 MW Net tariff cents per kwh cents per kwh Both companies have entered the global markets and made acquisitions of power-related assets. CLP Holdings focuses on investments across Asia Pacific, while Power Assets allocates resources to European countries. As of June 2014, in terms of asset value, investments of CLP Holdings are allocated in Hong Kong (52%), Australia (26%), mainland China (11%), India (8%), and others (3%). This provides a growing diversification of regulatory regimes and economic conditions. Electricity business in Hong Kong generates stable cash flows, while operating performance in the global markets has an impact on the repayment capability of holding companies. In our peer comparison 2

3 analysis, overseas operations of CLP Holdings have faced notable challenges and uncertainties, while those of Power Assets have provided good returns. Exhibit 2. ROA of Two Large Electricity Companies in Global Markets CLP Holdings Power Assets Region 2014H Region 2014H Hong Kong 8.1% 6.2% Hong Kong 9.4% 8.8% Mainland China 8.1% 10.1% Mainland China 7.0% 5.2% Australia -3.0% -3.7% United Kingdom 21.3% 22.2% India 1.1% -0.6% Australia 9.9% 10.6% Exhibit 3. Operating Earnings of CLP Holdings (2,000) H2013 1H2014 (HK$M) Hong Kong Mainland China Others Australia India 12,000 10,000 8,000 6,000 4,000 2,000 0 Exhibit 4. ROA by Region Note: CLP Power Hong Kong s 2014H1 ROA included the one-off net gain on the CAPCO and PSDC acquisitions Hong Kong Australia H2014 Mainland China India 15.0% 10.0% 5.0% 0.0% -5.0% 2. Electricity business in Hong Kong continues to generate strong and predictable cash flows CLP Holdings, through its wholly owned subsidiary CLP Power, has a de facto monopoly of its service areas in Hong Kong. The company has 2.4 million customers in Kowloon and the New Territories, which account for about 75% of total electricity consumption. In the first half of 2014, the electricity business in Hong Kong reported a steady growth of 6.0% to HKD 16.8 billion in revenue. The operating earnings grew by 7.5% to HKD 3.7 billion, representing 77% of overall operating earnings (before non-recurring items). We expect CLP Power will continue to make stable dividend contributions to the holding company. The regulatory and political environment in Hong Kong is credit supportive, which underpins a long-term creditworthiness of the electricity companies in this region. Under the current Scheme of Control (SoC) Arrangement, CLP Power can earn a required return of 9.99% on non-renewable generation assets and 11% on renewable assets. This arrangement allows a full and timely recovery of operating costs and fuel costs. In December 2014, CLP Power announced that the Average Total Tariff would increase by 3.1% effective 1 January The tariff hike mainly reflected the expected increase in fuel costs, since natural gas consumption will be doubled to meet stringent emission requirements. The Environment Bureau indicated that it will review the market structure and regulatory framework, and launch a public consultation in

4 Given the regulatory uncertainty, we will continue to monitor the progress and evaluate its impact on electricity market post 2018, when the current SoC will expire. 3. Consolidation of high quality power assets strengthens power generating portfolio In May 2014, CLP Holdings completed its acquisitions of 30% stake in Castle Peak Power Company Limited (CAPCO) and 51% stake in Hong Kong Pumped Storage Development Company Limited (PSDC) from ExxonMobil Energy Limited. The total consideration payable was HKD 14 billion. Upon the deal closing, CLP Holdings ownership in CAPCO rose to 70% while PSDC became a wholly owned subsidiary. There is a new partnership with China Southern Power Grid, which owns the remaining 30% stake in CAPCO. CAPCO owns three thermal power stations in Hong Kong, and PSDC owns a hydro power plant in Guangdong, China. We view the underlying power assets as high quality given their long track records. Providing majority control over these key assets, the acquisitions will strengthen generation portfolio and improve operational efficiency. Therefore, expected returns from ongoing investments in electricity infrastructure will increase. The transaction required a large upfront payment from internally generated cash flows and externally raised funds, which had a potential negative impact on the company s credit profile. Nevertheless, we expect the adverse impact will be alleviated within the next 12 months, given its stable operating cash flows and well-managed capital structure. 4. Profit sharing from mainland China has been growing steadily CLP Holdings expanded its presence in mainland China mainly through joint venture partnership with local companies. The company operated a diversified fuel mix in the region, including thermal, nuclear, wind, hydro, and solar. About 60% of the total generation capacity is fueled by coal. Operating earnings from mainland China recorded HKD 2.1 billion in 2013, up from HKD 1.2 billion in 2011 and HKD 1.4 billion in Operating earnings in the first half of 2014 declined to HKD 662 million, mainly due to the divestment of two coal-fired power assets with minority interest. Since 2012, falling coal prices have improved the profitability of coal-fired power stations. We expect the coal prices will remain low, which underpin a steady stream of operating cash flows. The Chinese government has also implemented favorable policy measures for renewable energy, creating a higher margin of renewable plants than that of conventional power generation. 5. Australian operations remain under stress, due to sluggish demand and diminishing margin Despite stable regulated operations in Hong Kong and solid earnings growth in mainland China, CLP Holdings recorded declining revenues and profit margins, primarily due to the diminishing contribution from its Australian arm. The electricity business in Australia has been under pressure of intensified price competition, suppressed wholesale prices, and high operating costs. In 2012, EnergyAustralia s operating earnings dropped by 42% to HKD 1.7 billion; and in 2013, there was a slump of 93% to HKD 126 million. 4

5 In the first half of 2014, through reduction of operating costs and integration of generation assets, earnings slightly recovered to HKD 585 million. Since , electricity consumption in Australia has been declining in absolute terms, mainly driven by sluggish demand in the industrial sector. As for residential and commercial clients, the growth of rooftop photovoltaic installations further reduced grid power consumption. In 2013, CLP Holdings incorporated a non-cash impairment of HKD 3.1 billion to reflect the challenging prospects. We expect the prevailing situation of oversupply of generation and reduced electricity demand will continue in the near to medium term, and ongoing depressed electricity revenues are foreseeable. Regulatory challenges also arose in Australia. The new government removed carbon tax and the associated transitional assistance, which will adversely impact earnings from gas plants. In addition, retail electricity prices are fully deregulated in Victoria and NSW, where EnergyAustralia s customer base is concentrated. With prices set by market competition, it will affect the stability and predictability of electricity revenues. 6. India s power sector is facing structural challenges and regulatory uncertainties Due to major inefficiencies across the entire value chain, business risk in India has been high. Currently, the country is undergoing important energy reform under the new Indian government. CLP s electricity business in this region, although bringing a small contribution to the group, is facing various challenges. Given coal shortages and poor quality of domestic coal, Jhajjar power station (coal-fired generation capacity of 1,320MW) reported reduced operating and financial performance. With the improvement of domestic coal supplies and the agreement of importing foreign coal, the commercial availability of Jhajjar plant has reached 80% from the second half of 2013 as compared to 30%-40% prior to this period. Similarly, there are gas supply issues for Paguthan power station (gas-fired generation capacity of 655MW), and CLP Holdings has to purchase from alternative but more expensive fuel sources. However, gas supplies are unlikely to improve sharply in the near term due to limited resources and high prices. In addition to the fuel supply risk, Paguthan plant is also exposed to off-taker risk. The company had to revise the terms of the power purchase agreement with its customer, resulting in a lower utilization and lower revenue in the future. 7. The company deploys a prudent investment strategy and capital expenditure budget As of June 2014, the power generating portfolio of CLP Holdings amounted to 18,880 MW in equity capacity. In the near to medium term, major investments will include the Hong Kong SoC business, the Fangchenggang expansion project and potential renewable development projects. The company reported a committed capital expenditure of HKD 17.2 billion (including shares in joint ventures). Under the SoC, the Development Plan projected a capital expenditure of HKD 34.1 billion for the next five years, covering power generation (31%), transmission and distribution (66%), and customer services (2%). And there will be no construction of new power plants in this period. The tariff increase will help compensate the spending on future development. 5

6 For mainland China, future capital expenditures will be allocated to the construction of Fangchenggang Phrase II (coal-fired capacity additions of 1,320MW), the refurbishment work to reduce emission, and potential investment in renewable energy sector. In view of the rigorous market conditions, EnergyAustralia has closed some of its generation units in order to reduce future capital and operating costs. The management does not anticipate substantial investment in power assets in Australia, except the installation of additional wind turbines. In addition, the company indicated that it was seeking new wind and solar projects in India, and the development of two coal-fired projects in Vietnam is proceeding towards a final agreement with the government. However, expansion into less-regulated regions will introduce execution risk to the overall portfolio. 8. Key financial metrics were weakening, mitigated by strong financial flexibility Upon the completion of its business integration in Hong Kong, reported total debt increased to HKD 75.4 billion in the first half of 2014, up from HKD 56.1 billion in Correspondingly, adjusted debt-to-capital ratio rose to 44.9% from 39.1%, weak for its AA rating category. Since the SoC allows a permitted return based on average net fixed assets before interest, higher borrowing costs will result in lower net earnings. Furthermore, cash flow indicators have also weakened. Funds from operations (FFO) / debt and retained cash flow (RCF) / debt fell to 29.8% and 20.8% respectively for the first half of 2014, versus 37.6% and 26.0% for the fiscal year Nevertheless, strong financing capability of the company will help temper short-term weakening of its financial profile. CLP Holdings has proven access to local and international capital markets with diverse funding sources. In 2013, the company tapped into the Japanese yen market through syndicated loans, which had lower borrowing costs than that of loans offered by Hong Kong-based banks. In 2014, CLP Power arranged the issuance of USD 750 million (HKD 5.8 billion) perpetual capital securities, regarded as a 50/50 hybrid structure of debt and equity. The debt repayment schedule of different financing instruments is well managed. For the recent threeyear period, the percentage of long-term debt remained at 78%-82% of total debt. In addition, the borrowings of operating subsidiaries are arranged on standalone basis, without contingent guarantees from the parent or cross default clauses. 6

7 Exhibit 5. Debt Profile by Type 80,000 Exhibit 6. Debt Profile by Maturity 80,000 60,000 60,000 40,000 40,000 20,000 20, H2014 (HK$M) H2014 (HK$M) Money Market Line Medium Term Notes / Private Placement < 1 year 1-2 years 2-5 years > 5 years Term Loans Note: For comparison, the figures for 2011 to 2013 include the group and CAPCO. CLP Holdings also maintained an adequate liquidity profile, with undrawn bank facilities of HKD 34.9 billion, cash balances of HKD 6.8 billion and projected FFO of around HKD 20 billion. These sources of liquidity will be adequate to be used for short-term maturing debts, dividend distributions, planned capital expenditures, and working capital needs. Rating Outlook We see a stable outlook on the credit rating given the overall expectation that CLP Holdings will maintain stable operations with prudent financial management. It also assumes that the company will deliver cost control and asset disposal, if necessary, in response to a challenging environment. Upward rating pressure is limited for CLP Holdings, due to the financing pressures from the CAPCO and PSDC acquisitions and the negative prospects of overseas operating performance. Downward pressure could emerge if CLP Holdings: (1) encounters unexpected situations that will have significant adverse impact, such as regulatory challenges or political intervention; (2) demonstrates a lower level of liquidity due to weaker performance or aggressive acquisition and expansion; or (3) suffers a deterioration in credit metrics including total debt/total capitalization above 50%, FFO/debt below 15% or RCF/debt below 10%. 7

8 Appendix I. Major Assets and Investments CLP Holdings Hong Kong Australia Mainland China India Others 100% 100% 100% 20% CLP Power Hong Kong Limited EnergyAustralia Paguthan Power Station Ho-Ping in Taiwan 70% 100% 33% Castle Peak Power Company Limited (CAPCO) Jhajjar Power Station Solar Power in Thailand 40% ShenGang Natural Gas Pipeline Company Limited (SNGPCL) 100% Wind Farms Nuclear Power Coal-fired Generation Wind Power Hydro Power Solar Power 25% 70% 100% Guangdong Nuclear Power Joint Venture Guangxi Fangchenggang Wholly-owned Hong Kong Pumped Storage Development Company Limited (PSDC) Wholly-owned Minority-owned Minority-owned Wholly-owned Majority-owned Majority-owned 8

9 Appendix II. CCXAP s Credit Rating Symbols and their Meaning China Chengxin (Asia Pacific) Credit Ratings Company Limited uses simple, consistent, and comparable rating symbols expressed in letters to represent the credit worthiness of rated entities and rated debt issues. A. Long-Term Credit Ratings A long-term credit rating refers to a rating for a period of more than 12 months. Rating Symbol AAAg AAg+ AAg AAg- Ag+ Ag Ag- BBBg+ BBBg BBBg- BBg+ BBg BBg- Bg+ Bg Bg- CCCg CCg Cg Dg Definition Capacity to meet commitments on short-term and long-term debts is extremely strong. Business is operated in a virtuous circle. The foreseeable uncertainty on business operations is minimal. Capacity to meet short-term and long-term financial commitments is very strong. Business is operated in a virtuous circle. Foreseeable uncertainty in business operations is relatively low. Capacity to meet short-term and long-term commitments is strong. Business is operated in a virtuous circle. Business operation and development may be affected by internal uncertain factors, which may create fluctuations in profitability and solvency of the issuer. Capacity to meet financial commitment is considered adequate and capacity to meet shortterm and long-term commitments is satisfactory. Business is operated in a virtuous circle. Business is affected by internal and external uncertainties. Profitability and solvency may experience significant fluctuation. Principal and interest may not be sufficiently protected by the terms of agreement. Capacity to meet short-term and long-term financial commitment is relatively weak. Financial commitment towards short-term and long-term debts is below average. Status of business operations and development is not good. Solvency is unstable and subject to sustainable risk. Financial commitment towards short-term and long-term debts is bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Solvency is uncertain and subject to high credit risk. Financial commitment towards short-term and long-term debts is very bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Poor solvency with very high credit risk. Financial commitment towards short-term and long-term debts is extremely bad. Business operations are poor. There are very limited positive internal and external factors to support business operation and development. Extremely high credit risk is found. Financial commitment towards short-term and long-term debts is insolvent. Business falls into a vicious circle. Very limited positive internal and external factors are found to support business operations and development in positive cycle. Extremely high credit risk is seen and is near default. Unable to meet financial commitments. Default is confirmed. B. Long-term Credit Rating Outlook A rating outlook is the medium- and long-term trend of the credit rating of a rated entity. In formulating a rating outlook, CCXAP considers the potential change in economic and commercial factors from a medium- and long-term perspective for a period of 12 to 18 months. Positive Negative Stable Indicates a rating with an ascending trend Indicates a rating with a descending trend Indicates the rating is likely to be stable 9

10 Copyright 2015, China Chengxin (Asia Pacific) Credit Ratings Company Limited. All rights reserved. Definition of Credit Rating Credit Ratings are not recommendations for investors to buy, sell or hold debt securities, nor measurements of market value of the rated entities or the rated debt issues. Credit rating reveals and ranks specific risks, but it does not cover all risks embedded in the rated entity or the rated debt issue. While CCXAP has obtained information from sources it believes to be reliable, CCXAP does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Additional information about our ratings is available at CCXAP s website ( Important Information All information published in this document belongs to China Chengxin (Asia Pacific) Credit Ratings Company Limited (CCXAP) and is subject to change without prior notice by CCXAP. CCXAP considers the information contained in this document reliable. However, all information is provided on an "AS IS" and "AS AVAILABLE" basis and CCXAP does not guarantee the accuracy, adequacy, completeness or timeliness of any information included in this document. None of the information may be used, including without limitation reproducing, amending, sending, distributing, transferring, lending, translating, or adapting the information, for subsequent use without CCXAP's prior written permission. CCXAP is not liable for any in whole or part caused by, resulting from or relating to any error (neglect or otherwise) or other circumstances or other circumstance or contingency within or outside the control of CCXAP's or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, interpretation, analysis, editing, transcription, publication, communication or delivery of any such information, or any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if CCXAP, or representatives thereof, are advised of the possibility of such damage, losses or expenses. Regulatory Disclosure Any credit rating assigned by CCXAP is based on its rating principles of independence, fairness and objectivity. CCXAP institutes policies and procedures that clearly specify a person responsible for compliance by CCXAP and its employee with the provisions of Code of Conduct and with any law, rules, regulations, codes or other requirements which apply to CCXAP and are issued, administered or enforced by the Hong Kong Securities and Futures Commission (SFC) or any other relating regulatory bodies. Information regarding certain affiliations that may exist between directors of CCXAP and rated entities, and between entities who hold ratings from CCXAP and have also publicly reported to the SFC an ownership interest in CCXAP of more than 5%, is posted at under the heading Rating Process - Further Regulatory Disclosure. China Chengxin (Asia Pacific) Credit Ratings Company Limited Address: 12/F, 122 Queen's Road Central, Central, Hong Kong Website: info@ccxap.com Tel: Fax: