China General Nuclear has no choice but to seek higher tariffs for Edra:CGN's financial metrics remain weak says Moody's

by Ganesh Sahathevan

While Moody's has decalred in its headline that China General Nuclear Power Corporation's (CGN, A3 stable)

 rating is not affected by its announced acquisition of Edra Global Energy Bhd (Edra, unrated), the part relevant to Malaysian

consumers it the Moody's announcement is this:

CGN's financial metrics remain weak because of its ambitious debt-funded expansion, both domestically and overseas. We estimate the debt/EBITDA will measure around 12x in 2015, based on pro-forma consolidation of Edra's end-March 2015 financials and assume the transaction is fully debt funded, compared with 13-15x in our original projections for CGN.

Clearly, CGN is cash flow hungry and that cash flow can only come from higher tariffs. 

END 

 

Moody's: China General Nuclear's Rating is Unaffected by the Acquisition of EDRA

  

Global Credit Research - 26 Nov 2015

Hong Kong, November 26, 2015 -- China General Nuclear Power Corporation's (CGN, A3 stable) rating is not affected by its announced acquisition of Edra Global Energy Bhd (Edra, unrated) says Ada Li, a Moody's Vice President and Senior Analyst.

The cash acquisition may tighten CGN's weak liquidity and further increase the debt balance to the group. The acquired assets carries high business risks, as they operate in cyclical, emerging economies with political risks and less transparent regulatory environments.

This is partly mitigated by the earnings from Edra's operating projects, which will balance the incremental debt to support the acquisition, maintain CGN's combined pro-forma metrics at its current rating level. Also, the transaction is evidence of the company's strategic role in China's program to expand its economic presence overseas.

CGN entered on 23 November 2015 a sale-and-purchase agreement to acquire 100% of Edra from 1Malaysia Development Berhad (unrated). CGN will pay MYR9.83 billion (USD2.3 billion) in cash, and will assume all of Edra's debt -- currently at MYR10.3 billion (USD2.8 billion) -- and cash.

Around one-third of the acquired capacity are thermal power plants in weaker countries, for example, Egypt (B3 stable) and Bangladesh (Ba3 stable). CGN will be facing less familiar regulatory environments, more volatile economies, and more exposed to thermal power from its specialized nuclear and wind power operations, which pose higher earning uncertainties to the group.

The acquisition will have limited impact on CGN's financial profile, considering the size of Edra to CGN. We expect the combined metrics of CGN still support CGN's baseline credit assessment of ba3, given (1) the acquired assets are plants which are already operating, therefore balancing the incremental debt added, assume the acquisition will be fully debt funded and no significant earning deterioration; (2) the benefits from the assets' low valuations in Malaysian ringgit terms; and (3) our incorporation of a financial buffer for further overseas expansion.

CGN's financial metrics remain weak because of its ambitious debt-funded expansion, both domestically and overseas. We estimate the debt/EBITDA will measure around 12x in 2015, based on pro-forma consolidation of Edra's end-March 2015 financials and assume the transaction is fully debt funded, compared with 13-15x in our original projections for CGN.

The agreement was signed after a meeting between the Chinese and Malaysian prime ministers with the chairmen of CGN and Edra. This acquisition is consistent with China's "One Belt, One Road" and "Going Out" strategies.

Government support is further evidenced by the provision of low-cost financing from policy bank, partially funding the cash consideration of the acquisition.

The Malaysian government has granted CGN a waiver to the 49% foreign ownership cap for the power businesses.

Edra is a Malaysia-based independent power producer, with a total operating installed capacity of 6.62GW through 13 projects in Malaysia, Egypt, Bangladesh, Pakistan and the UAE. They are mostly gas fired. Edra also has capacity under construction, of which 3.77GW is backed by power purchase agreements or legally binding memoranda.

The deal needs to be closed within 6 months, i.e. before May-2016. Edra will be held under CGNPC International Limited, which is the primary platform for CGN's overseas investments and financing activities.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Ada Li
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD-Public, Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077