OREANDA-NEWS. Fitch Ratings has assigned a final rating of 'BBB+' to the USD500m 3.625% senior unsecured bonds issued by Shanghai Electric Power Finance Limited (SEP Finance), and guaranteed by Shanghai Electric Power Co., Ltd. (SEP, BBB+/Stable). SEP Finance is 100%-owned by SEP. The assignment of the final rating on the bonds follows the receipt of documents conforming to information already received. The final ratings are in line with the expected rating of 'BBB+ (EXP)' assigned on 22 July 2015.

SEP's ratings are credit-linked but not equalised with Fitch's internal credit assessment of its 59.8% parent - China Power Investment Corporation (CPI), one of China's five largest fully stated-owned power generation groups. This is because SEP is one of CPI's most strategically important subsidiaries, and one of only three power suppliers in Shanghai. The ratings also take into consideration the fragmented ownership of the CPI group operations by its various subsidiaries - relative to the other four large state-controlled IPPs; SEP accounted for around 9% of CPI's installed capacity at end-2014.

KEY RATING DRIVERS

Core Asset of CPI: SEP is one of CPI's most important subsidiaries - it is CPI's only subsidiary located in a Tier 1 city, and crucial to the energy security of Shanghai, China's financial and commercial centre. CPI will face severe reputational risk if SEP is not supported on a timely basis. SEP is also one of CPI's largest subsidiaries, with an 8.9 gigawatt (GW) installed capacity as of March-2015, and a leader in thermal power technology among CPI's subsidiaries. SEP is also CPI's largest onshore financing platform, and the headquarters of its eastern China operations. SEP has received tangible support from CPI, including asset injections and allocation of the central government's substantial fiscal subsidies.

Pillar IPP in Shanghai: SEP was formerly the Shanghai Municipal Power Company, and is the city's oldest IPP. It is now one of three IPPs in the city, with roughly one-third of the city's power generation capacity. The three IPPs are crucial to Shanghai's power supply security because they account for about 60% of the electricity to the city, and the Shanghai government ensures their market positions are well protected.

Stable Core Generation Business: The power demand in Shanghai and eastern China is stable due to the diverse economic activity in the region. Competition is also limited because there are only a small number of operators. In addition, the IPPs enjoy higher thermal power on-grid tariffs - and thus a wider power generation margin compared with the rest of China, which provides the producers with a buffer under stress situations.

High-Quality Generation Assets: In March 2015, 70.6% of SEP's coal-fired units were of 600 megawatt (MW) capacity and above, and the per unit coal consumption rate reached 283.7 grams per kilowatt hour (g/kWh), ranking first among all CPI's subsidiaries and more than 10% lower than China's national average. In addition, 100% of SEP's coal-fired units had completed both desulfurisation and denitration upgrades by June 2014. Its emission rates of sulphur dioxide and nitrogen oxide are 70%-80% lower than the industry average. SEP should continue to benefit from its technology advancement and high environmental standards, with China moving gradually toward a more liberalised power market.

Moderate Expansion Risks: SEP is focused increasingly on renewable energy and overseas power projects, as there is an abundance of power generation capacity in Shanghai and eastern China. SEP's investments in these two areas have proved to be cautious and selective, with most overseas projects including either contractual guaranteed dispatch-or-return (such as investments in Japan and Malta) or political risk insurance (Tanzania). Fitch expects business and operational risks to remain manageable as long as management sticks to the current investment strategy and criteria, although capex will be high over the next three to four years due to expansion and investment.

'BB' Category Standalone Profile: SEP's standalone credit profile is constrained to the 'BB' category by its asset concentration and forecast negative FCF that is due to its high capex programme. Fitch expects the geographic diversification to improve once its projects in western China and overseas are completed, although eastern China is still likely to account for over 70% of total capacity by 2018. Fitch forecasts negative FCF at CNY4bn to CNY6bn per year in the next four years after factoring in the capex for the company's planned projects, and FFO-adjusted net leverage at around 5x-5.5x (end-2014: 6.3x).

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
- Total power generation installed capacity to reach around 15GW by 2018;
- Annual capex of CNY7bn to CNY11bn by 2018;
- Power tariff and utilisation hours to remain stable until 2018;
- Fuel price to remain stable at around the first-half 2015 level.

RATING SENSITIVITIES

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- An improvement in the credit profile of CPI, provided the linkages between CPI and SEP remain intact;
- Strengthening of linkages between SEP and CPI group, although this is only likely if SEP accounts for a significantly higher share of CPI's assets and/or operations, which is not envisaged in the short to medium term.

Negative: Developments that may, individually or collectively, lead to negative rating action include:

- Weakening of the credit profile of CPI;
- Weakening of linkages between CPI and SEP.