TEXT-S&P:ENN Energy 'BBB-' rating affirmed, off watch neg; otlk stable
(The following statement was released by the rating agency)
Oct 18 -
-- ENN's decision not to proceed with its proposed joint cash offer to acquire China Gas has reduced the risk of a deterioration in its financial risk profile.
-- We are affirming our 'BBB-' long-term corporate credit rating and our 'cnA-' Greater China regional scale rating on ENN.
-- We are also affirming the 'BBB-' issue rating and 'cnA-' Greater China regional scale rating on the company's outstanding senior unsecured notes. At the same time, we are removing all the ratings from CreditWatch, where they were placed with negative implications.
-- The stable outlook reflects our expectation that ENN will focus on developing its core piped-gas business in China, maintain its strategy of increasing penetration rates of existing projects, and be selective in making acquisitions.
On Oct. 18, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' long-term corporate credit rating and 'cnA-' Greater China regional scale rating on ENN Energy Holdings Ltd. The outlook is stable. We also affirmed our 'BBB-' issue rating and 'cnA-' Greater China regional scale rating on the company's outstanding senior unsecured notes. At the same time, we removed all the ratings from CreditWatch, where they were placed with negative implications on Dec. 13, 2011.
We affirmed the ratings and removed them from CreditWatch because the company's decision not to go ahead with a joint cash offer to acquire China Gas Holdings Ltd. (not rated) has reduced the risk of a deterioration in its financial risk profile.
A consortium comprising ENN and China Petroleum & Chemical Corp. (A+/Stable/--; cnAAA/--) had proposed a joint cash offer to acquire China Gas Holdings.
In our view, ENN's financial performance could recover by the end of 2012 to levels consistent with a 'BBB-' rating. This is based on our expectation that the company would use part of its cash balance to deleverage and that its operating cash flow will continue to grow. As of June 30, 2012, the company has Chinese renminbi (RMB) 6,370 million in cash balance and bank deposits. This includes RMB2,752 million in restricted bank deposits, primarily as escrow for a pre-conditional offer related to the proposed China Gas acquisition. ENN's business risk profile is likely to remain "satisfactory," as our criteria define the term, over the next two years.
ENN's liquidity is "adequate," as defined in our criteria. The cash-generative nature of the company's gas distribution business supports its liquidity. We expect ENN's liquidity sources to exceed uses by more than 1.2x over the next 12 months.
Our liquidity assessment is based on the following factors and assumptions:
-- ENN's near-term liquidity sources include consolidated cash balance and bank deposits of about RMB6,370 million as of June 30, 2012, forecasted cash flow from operations, and committed credit facilities.
-- Near-term liquidity uses include short-term debt maturities of about RMB3,222 million due in 2012, planned capital expenditure of about RMB2.6 billion, and estimated dividend payouts of about Hong Kong dollar (HK$) 400 million.
-- Even if ENN's EBITDA declines by 15%, net liquidity sources should remain positive and the company could still be in compliance with its financial covenants.
The stable outlook reflects our expectation that ENN will focus on developing its core piped-gas business in China, maintain its strategy of increasing penetration rates of existing projects, and be selective in making acquisitions. The stable outlook also reflects our view that ENN's financial performance will be stable over the next six to 12 months, with adequate liquidity and good financial flexibility.
We could lower the rating if ENN aggressively expands and significantly increases its debt burden, such that its ratio of funds from operations (FFO) to total debt is less than 20% on a sustainable basis. We consider an aggressive expansion strategy to include expansion outside China or investment in non-core businesses. We may downgrade ENN if regulatory changes in China adversely affect the company's profitability and cash flow.
We may raise the rating if ENN's financial strength further improves while the company maintains positive discretionary cash flow. An EBIT interest coverage ratio of more than 7x and a ratio of FFO to total debt of more than 30% on a sustainable basis would indicate such progress. We may also consider upgrading the company if the regulatory environment improves substantially, particularly if reform of the pricing mechanism becomes more transparent and predictable.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- ENN Energy Holdings Ltd. Ratings Placed On CreditWatch Negative On Cash Offer To Acquire China Gas, Dec. 13, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks in the Investor-Owned Utilities Industry, Nov. 26, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
ENN Energy Holdings Ltd.
Corporate Credit Rating BBB-/Stable/-- BBB-/Watch Neg/--
Greater China Regional Scale cnA-/-- cnA-/Watch Neg/--
ENN Energy Holdings Ltd.
Senior Unsecured BBB- BBB-/Watch Neg
Senior Unsecured cnA- cnA-/Watch Neg