OREANDA-NEWS. Fitch Ratings has affirmed the ratings on Hong Kong-based CLP Holdings Limited (CLPH) and CLP Power Hong Kong Limited (CLP HK). The Long-Term Foreign- and Local-Currency Issuer Default Rating (IDRs) are affirmed at 'A' and their Short-Term IDRs at 'F1'. The Outlook on the Long-Term IDRs is Stable.

KEY RATING DRIVERS

Stable, Regulated Cash Flow: The ratings of CLPH reflect the predictable cash flow from its wholly owned subsidiary, CLP HK, which typically accounts for around 70% of CLPH's total EBITDA. CLP HK benefits from a monopoly, vertically integrated electricity business in Kowloon and the New Territories, which is regulated under a transparent and supportive framework, the Scheme of Control (SoC). The SoC allows a permitted rate of return and operating cost pass-through (including full fuel cost pass-through) to 2018.

Regulatory Uncertainty in HK: The current, favourable SoC ends in 2018. If the regulator does not exercise its option to extend the current framework for a further five years, CLP HK and the regulator will have to agree on new terms of the framework for 2018-2028. We expect further clarity on the final outcome regarding the SoC by mid-2016. Regulatory changes that could result in any material negative implications for the cash generation of CLP HK's operations after 2018 could constrain the ratings of CLPH and CLP HK.

Environmental Legislation Uncertainty: Potential cost pressure from environmental legislation in Hong Kong and Australia, including the long-term availability of alternative fuel supplies on competitive terms, could constrain the ratings, given CLPH's substantial portion of coal-fired generation. We expect CLP HK to make additional investments in gas-fired generation, likely commencing in 2017, in order to meet the HK SAR government's proposed 2020 emissions targets. Under our base case scenario, which assumes moderate additional capex over a three-year period from 2017 and full and timely recovery of fuel cost, as allowed under the SoC, we expect CLPH to have sufficient headroom under its current ratings.

Elevated Capex, Stable Financial Profile: We expect CLPH's capex to remain elevated due to the investment requirements of CLP HK, as well as growth capex for its international businesses. Nevertheless, we expect CLPH's financial profile to remain stable over our forecast period 2015-18 due to sound operating cash flow generation and assuming moderate dividends and no material debt-funded acquisitions. Our forecasts factor in a continued weak operating environment for the Australian business, EnergyAustralia. We expect CLPH's FFO net leverage to remain below our guideline of 3.5x (2014: 2.8x) and FFO interest cover comfortably above 5.0x (2014: 8.0x).

International Diversification, Some Volatility: CLPH's international businesses include EnergyAustralia, a leading integrated utility in Australia (typically accounting for 15%-20% of CLPH's total EBITDA) and generation assets in China, India and south-east Asia. These provide geographic diversification, but weaken the company's overall business risk profile as they are largely unregulated, contributing to some earnings and cash flow volatility for the group.

CLP HK's Ratings Constrained: Fitch analyses CLPH and CLP HK as a consolidated entity, due to their strong linkages. This reflects the integration of CLP HK within the group, but constrains the ratings of CLP HK.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CLPH include:
- Modest revenue and EBITDA growth in 2015-16;
- Continued elevated capex with capex/revenue of around 12%-13% in 2015-16 (2014: 13%)
- No acquisitions;
- Moderate dividend growth in 2015-16.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Substantial increase in business risk, including significant adverse regulatory changes
- FFO net leverage above 3.5x on a sustained basis (2014: 2.8x)
- FFO interest cover below 5.0x on a sustained basis (2014: 8.0x)

Positive: Fitch does not anticipate events, individually or collectively, leading to a rating upgrade in the medium term.

FULL LIST OF RATING ACTIONS

CLP Holdings Limited
Long-Term Foreign-Currency IDR affirmed at 'A', Outlook Stable
Long-Term Local-Currency IDR affirmed at 'A', Outlook Stable
Short-Term IDR affirmed at 'F1'

CLP Power Hong Kong Limited
Long-Term Foreign-Currency IDR affirmed at 'A', Outlook Stable
Long-Term Local-Currency IDR affirmed at 'A', Outlook Stable
Short-Term IDR affirmed at 'F1'