OREANDA-NEWS. Ratings has affirmed China General Nuclear Power Corporation's (CGNPC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A+'. The Outlook is Stable. Fitch has also upgraded CGNPC's senior unsecured rating to 'A+' from 'A'.

Fitch has upgraded to 'A+' from 'A' the ratings on CGN Meiya Power Holdings Co., Ltd.'s (CGN Meiya) USD350m senior unsecured notes, which are backed by a keepwell deed and deed of equity interest purchase undertaking from CGNPC, China Uranium Development Company Limited's (China Uranium) USD600m senior unsecured notes guaranteed by CGNPC, and CGNPC International Limited's USD600m senior unsecured notes guaranteed by CGNPC. This follows the upgrade of CGNPC's senior unsecured rating.

The upgrade of CGNPC's senior unsecured ratings to 'A+' follows Fitch's decision to align this debt class rating with the company's IDR. Fitch has reviewed its treatment of secured and unsecured debt for CGNPC, which is rated on a top-down basis as per Fitch's Parent and Subsidiary Linkage criteria. It has concluded that should CGNPC require support from its parent, then this support would be unlikely to differentiate between senior secured and senior unsecured debt.

The notes issued by CGN Meiya and China Uranium are rated at the same level as CGNPC's senior unsecured debt rating, based on Fitch's view that the keepwell deeds and equity interest purchase undertaking deeds for CGN Meiya's bond, and the guarantees for China Uranium's and CGNPC International's bonds provide confidence that CGNPC is strongly committed to ensure that these subsidiaries have sufficient liquidity to honour their debt obligations.

The IDRs on CGNPC are equalised with the China sovereign (A+/Stable) under Fitch's Parent and Subsidiary Linkage criteria, reflecting CGNPC's strategic importance to the state and substantial tangible support it consistently received from the state.

KEY RATING DRIVERS
Strategic Importance to China: CGNPC is China's top nuclear power operator by both operational and pipeline nuclear power capacity, and importantly, one of only three companies designated by the central government to operate nuclear power plants in China. CGNPC is of strategic importance to the state because nuclear power is important to China's efforts to mitigate air pollution while optimising the mix of power generation sources. Nuclear power is superior to alternative renewable power sources in terms of reliability, predictability, affordability and proximity to demand centres. The central government plans to triple operational nuclear power capacity to 58GW by 2020, with CGNPC continuing to account for a significant portion of the capacity. The company has 14 nuclear power generating units and a total installed capacity of 14.9GW.

CGNPC's improving technical abilities also allow it to take on overseas nuclear power projects that contribute to the central government's "Go Global" policy, which calls for outward investment by Chinese enterprises. In addition, around one-fourth of Hong Kong SAR's electricity consumption is met by CGNPC's Daya Bay Power Station, and the reliance is likely to increase from 2015.

Substantial Tangible Support: The nuclear power sector in China generally benefits from favourable policies, such as priority in power grid dispatch, tax rebates and high administrative entry barriers. As the industry leader, CGNPC has received direct state support in different forms, including equity injections and subsidies. The state-owned banks such as China Development Bank also provide CGNPC with sufficient funding for expansion with the central government's support.

Capex to Remain Elevated: CGNPC has 12 units (including four associate units) with total nuclear generating capacity of 14.5GW under construction. It also plans to add 22.8GW in non-nuclear clean energy capacity in the next six years. In 2014, the company's capex was about CNY50bn (including investments in associate companies). We have assumed the annual capex will remain high at slightly above historical levels because of the projects under construction and planned new clean energy capacity.

Financial Profile Remains Stretched: CGNPC's reported 2014 financials were slightly better than our previous forecast, mainly due to higher-than-expected proceeds from its main nuclear power subsidiary's (CGN Power Co., Ltd) IPO and better-than-expected power generation volume. However, the elevated capex will continue to pressure its financial profile. As a result, CGNPC's leverage, as measured by the ratio of funds flow from operations (FFO) to net adjusted debt, is likely to remain above 10x (2014: 9.1x) in the medium-term, although we expect its financial profile to benefit from a number of new units due to start operation between now to 2016 .

Strong Liquidity: The company's liquidity is sufficiently supported by large committed credit facilities from domestic banks as well as the aforementioned state support.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- New nuclear power units in Yangjiang, Taishan, and Fangchenggang to become operational in 2015 to 2019
- Assumption of average utilisation hours for the nuclear power units is reduced from our prior assessment to reflect the slower economic growth norm and lower power consumption patterns. The revised assumption is 7,200 hours for new units in Guangdong and Guangxi, 6,500 hours for new units in Fujian, and 6,000 hours for new units in Liaoning.
- Nuclear power on-grid tariff to remain stable
- Capex to remain elevated at slightly above historical levels

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the China sovereign provided the linkages between CGNPC and the state remain intact.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the China sovereign
- Weakening linkages between CGNPC and the China sovereign, such as significant shareholding reduction by the Central State-Owned Assets Supervision and Administration Commission or material adverse policy changes for China's nuclear power sector

The ratings on the notes issued by CGN Meiya and China Uranium are equalised to the senior unsecured rating of CGNPC. As such, any action on CGNPC's senior unsecured rating will result in a similar change in the ratings of the notes. CGNPC's senior unsecured rating is sensitive to any change in its IDR.

For the sovereign rating of China, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 31 March 2015:

The main factors that individually, or collectively, could trigger positive rating action on China include:
- Progress on structural reform oriented towards sustainable longer-term growth;
- Increasing evidence that the economy was adjusting smoothly;
- Greater clarity on the strategy to address the debt problem in the economy, including at local governments.

The main factors that individually, or collectively, could trigger negative rating action on China include:
- A sharper growth slowdown than currently anticipated, leading to a rise in unemployment and/or a materialisation of risks to financial stability;
- A rise in estimated general government indebtedness well above Fitch's current estimate;
- A change in policy direction that increased economic imbalances and structural vulnerabilities, thereby increasing the risk of an eventual disorderly adjustment.