China

Fitch Ratings has affirmed China Power International Development Limited's (CPI) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with a Stable Outlook. The agency simultaneously affirmed its Short-term foreign and local currency IDRs at 'B'. "The ratings reflect CPI's strategy of investment in the hydro-power segment to reduce its exposure to the fundamental problems facing the thermal power segment," says Steve Cox, Director in Fitch's Asia-Pacific energy and utilities team. CPI reported an EBITDA margin of 27.5% for H111, and for H110 its EBITDA margin was the highest among Fitch-rated Chinese thermal independent power producers (IPPs). The company has also mitigated some of the disparity between high coal prices and government controlled on-grid tariffs by high levels of contract fulfilment - around 90% of coal supply - and tying in coal supply with two thermal stations by offering minority equity stakes to the coal producer. Fitch applies its parent and subsidiary rating linkage methodology to assess the linkages between CPI and its parent China Power Investment Group (CPI Group). CPI Group benefits from an investment portfolio vertically integrating coal, power and aluminium business units. The parent's consolidated credit profile is weaker than CPI's stand-alone 'BB' rating by one notch. Due to the lack of ring fencing of CPI from its parent, CPI 's rating, before any consideration of state support, is constrained by the credit profile of its parent. However in view of CPI Group and CPI's strategic importance to China, Fitch has applied a one-notch uplift in arriving at CPI's final rating of 'BB'. The agency notes that CPI's capex plans, although still aggressive and partly debt financed, are weighted toward hydro power and will further increase the company's protection against low margins or losses in the thermal power segment. These projects include the Baishi and Tuokou hydro projects which will add installed capacity of 1.85GW upon completion. However, CPI is exposed to hydrological risk from concentration of its assets on the Yuanjiang river. The Stable Outlook reflects Fitch's expectation that the Chinese government will take adequate steps to support the Chinese IPPs, as evidenced in the retrospective tariff rises against 2010 production in some plants, and April 2010 tariff rises in some provinces. But it also incorporates Fitch's view that the disparity between coal prices and tariffs will continue and the burden will be primarily born by power producers. Reuters