Nov 20 (The following statement was released by the rating agency)
Fitch Ratings has placed Hong Kong-based CLP Holdings Limited's (CLPH) and CLP Power Hong Kong Limited's (CLP Power HK) Long-Term Foreign- and Local-Currency Issuer Default Rating (IDRs) of 'A' and their 'F1' Short-Term IDRs on Rating Watch Negative (RWN).
The rating action follows the announcement that CLP Power HK has reached agreement to acquire a further 30% stake in Castle Peak Power Company Limited (CAPCO) for HKD12bn and the remaining 51% stake in Hong Kong Pumped Storage Development Company Limited (PSDC) for HKD2bn from Exxon Mobil Corporation's wholly owned subsidiary, ExxonMobil Energy Limited (EMEL). The acquisitions will increase CLP Power HK's stake in CAPCO to 70% from 40% and in PSDC to 100% from 49%. The acquisitions will be immediately funded by CLP Group's existing cash, existing available banking facilities and HKD10bn bridge facilities. Half of the bridge facilities will mature in one year and the remainder in two years from completion.
KEY RATING DRIVERS
The RWN on the ratings reflects a potential deterioration in CLPH's financial profile, should the acquisitions be entirely debt-funded, as credit and coverage ratios could worsen to levels that are not in line with their current 'A' ratings. Under this scenario, Fitch projects FFO-adjusted net leverage in 2014 and 2015 near our threshold level of 3.5x for the current ratings. These expectations also include our view that CLPH's 100% subsidiary, EnergyAustralia, will post weaker earnings and cash flow in 2014 from a combination of continued weak electricity demand and wholesale prices, a highly competitive retail segment, and regulatory uncertainty around price-setting in New South Wales and Queensland.
We expect CLPH's business profile to remain unchanged through the proposed acquisition, as the generation assets are already part of its regulated Hong Kong electricity business, CLP Power HK and part of the Scheme of Control (SoC) arrangement that will be in place till 2018. CLP Power HK operates under the favourable and transparent regulatory framework (the SoC), which allows a permitted return and full operating-cost pass through. The increased investment in CAPCO is likely to increase regulated cash flows to CLPH from CLP Power HK, although the transaction will increase debt at CLPH, which is currently very low (HKD1.5bn as at 30 June 2013).
Fitch expects to resolve the RWN once the transaction completes and there is greater certainty of the long-term funding structure. The acquisition of shares will likely be completed within the next six months. However, it may take longer for CLPH to provide details of how the bridge loan will be refinanced. In accordance with Fitch's parent-subsidiary rating linkage methodology, Fitch analyses CLPH and CLP Power HK as a consolidated entity due to the strong linkages between the two and reflecting the full integration of CLP Power HK within the group, which constrains the latter's ratings. Hence, the RWN applies to both entities.
The acquisitions are subject to various approvals, including from CLPH's shareholders. Additionally, the CAPCO acquisition is contingent on China Southern Grid (CSG) - who is purchasing EMEL's remaining 30% stake in CAPCO - obtaining relevant approval from authorities in mainland China.
Negative: Future developments that may collectively or individually lead to negative rating actions:
-Substantial increase in business risk, including significant adverse regulatory changes
-FFO net leverage above 3.5x on a sustained basis (2012: 2.8x)
-FFO interest coverage below 5x on a sustained basis (2012: 5.7x)
The resolution of the RWN:
-Completion of the transaction and confirmation of the final financing structure;
-The ratings would be affirmed if FFO interest cover remains at or above 5.0x on a sustained basis; and FFO net leverage below 3.5x on a sustained basis.