OREANDA-NEWS. Fitch Ratings has affirmed Beijing Energy Investment Holding Co., Ltd's (BEIH) Long-Term Issuer Default Rating (IDR) at 'A+'. The Outlook is Stable.

Fitch also affirmed BEIH's senior unsecured rating at 'A+', and the ratings on the yuan-denominated notes issued by Jingneng Clean Energy Investment Holdings Limited and euro-denominated notes issued by Beijing Energy Investment Holdings Limited at 'A+'. These notes are supported by BEIH via keepwell, liquidity support, and equity interest purchase covenants deeds to ensure that the issuing subsidiaries have sufficient assets and liquidity to meet their obligations under the notes.

BEIH's ratings are linked to Fitch's internal credit assessment of Beijing Municipality. The municipality's budgetary performance has been robust. It has a strong and well-diversified socio-economic profile, and a close relationship with the China sovereign (A+/Stable) due to its status as the capital. BEIH's ratings reflect its 100% ownership by Beijing Municipality, and the strong operational and strategic linkages between BEIH and the city.

KEY RATING DRIVERS

Strategic Importance: BEIH's importance to Beijing Municipality stems from its leading role in operating the city's largest district heating network that covers the central area of the city, including key government offices and foreign consulates. BEIH (including associates) also provides around 60% of the city's electricity demand, a large portion of which is from gas-fired cogeneration plants located within Beijing. BEIH should continue to be important for Beijing over the long-term because of the country's drive towards cleaner power generation to reduce pollution, and the company's leading role in the consolidation of heating operators in Beijing.

Policy Vehicle: BEIH has taken a leading role in building natural gas co-generators to help Beijing reduce pollution and phase out coal-fired thermal power capacity within the city centre. BEIH's role in leading consolidation in the heating sector is also aimed at reducing pollution by merging less-efficient companies. The Beijing government also uses the company to provide heating to residential and public users at prices lower than operating costs.

Strong Fiscal Support: BEIH has received substantial tangible support from the Beijing government due to its public utility function, including subsidies related to district heating and power generation, and capex for improving district heating infrastructure assets. BEIH received government grants totalling CNY3.4bn in 2014. BEIH has also benefitted from zero-cost asset transfers from the Beijing government, including Jingmei Group, heating assets and branch heating networks over 2010-2014.

Strong Operating Performance: BEIH's power generation operations have continued to perform well in 2015. The share of power generated within Beijing increased to 41% in January-October 2015, from around 35% in previous years, as the city allowed the cleaner gas-fired plants to produce more power than the coal-fired ones, which the gas plants have been replacing. The group's coal-fired power plants, under its subsidiary, Beijing Jingneng Power Co., Ltd., also reported higher utilisation levels than the national average in 2015.

Merger with Jingmei Weakens Credit Metrics: Beijing State-owned Assets Supervision and Administration Commission (SASAC) transferred Jingmei Group to BEIH in December 2014 at zero cost. Jingmei Group is primarily engaged in exploitation and sales of coal, real-estate development, modern logistics, travel and hotels and property management. The consolidation of Jingmei Group, which has a weaker balance sheet than BEIH, weakens BEIH's credit metrics moderately. However, Fitch believes the merger enhances BEIH's strategic position as the sole energy investment and financing platform in Beijing, and improves its vertical integration with the addition of Jingmei Group's coal assets.

Capex Remains High: BEIH's capex will remain high - even after it has completed most of its gas-fired power plants in Beijing - due to investments in gas-fired power plants and renewable power projects outside Beijing. Jingmei also has high capex for its coal mining operations and property construction. In addition, the company is looking for investment opportunities in upstream oil and gas exploration and production, which may lead to additional capex. Fitch has factored in annual capex of CNY15bn-20bn (2014: CNY17.7bn) in the next four years; but capex may be more than this if the company invests more aggressively in oil & gas operations.

Pressure on Standalone Profile: The large investments, and resultant negative free cash flows (FCF) over the next few years, will result in weakening of its credit metrics over the medium term. Fitch expects BEIH's FFO fixed-charge coverage to remain at around 3.0x (2014: 2.8x,) and FFO-adjusted net leverage to be sustained at around 7.0x-7.5x (2014: 6.2x) in the medium term; these are still in line with peers rated in the 'BB' category.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Power generation capacity CAGR in the low-teens in the mid-term
- Utilisation hours for coal-fired power plants to decline, and that for other power plants to be stable
- Stable coal price in the medium term
- Continued support from the Beijing government in the form of subsidies and capex
- Capex of CNY15bn-20bn annually

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action is likely upon an upgrade of Fitch's internal assessment of the creditworthiness of the Beijing Municipality, provided BEIH's strong operational and strategic linkages with the municipality remain intact.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- evidence of weakening of BEIH's operational and strategic linkages with the Beijing Municipality
- A lowering of Fitch's internal assessment of the creditworthiness of the Beijing Municipality.