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Kunlun Energy Company Limited -- Moody's affirms Kunlun Energy's A2 ratings; outlook stable

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Rating Action: Moody's affirms Kunlun Energy's A2 ratings; outlook stable

Global Credit Research - 24 Dec 2020

Hong Kong, December 24, 2020 -- Moody's Investors Service has affirmed Kunlun Energy Company Limited's (Kunlun) A2 issuer rating and senior unsecured debt rating.

The rating outlook remains stable.

Moody's rating action follows an announcement on 22 December 2020 where the company has entered into an agreement to dispose its 60% equity stake in PetroChina Beijing Pipeline Co., Ltd (Beijing Pipeline) and 75% equity stake in PetroChina Dalian LNG Co., Ltd. (Dalian LNG).

RATINGS RATIONALE

"The proposed disposals, if materialized, will weaken Kunlun's financial position and business profile, but its pro-forma credit metrics will be manageable within its rating," says Boris Kan, a Moody's Vice President and Senior Credit Officer.

"We understand that the company will focus on downstream city gas operations in China following completion of the proposed disposal and will continue to have high strategic importance to its state-owned parent," adds Kan.

On 22 December 2020, Kunlun announced that it has entered into an agreement with China Oil & Gas Pipeline Network Corporation (PipeChina, not rated). Under the agreement, Kunlun will sell to PipeChina its 60% stake in Beijing Pipeline and 75% stake in Dalian LNG at a total consideration of about RMB 40.9 billion, to be settled in full by cash.

Kunlun also announced that about 50% of the net proceeds from the disposal will be used for dividend distributions to shareholders; about 40% will be used for developing downstream city gas business, and about 10% will be used for repayment of existing debts.

Beijing Pipeline owns and operates the Shaanxi-Beijing Pipelines, which are one of the nation's major midstream transmission pipelines that transmit natural gas from Shaanxi Province to Beijing. Dalian LNG owns and operates the Dalian liquefied natural gas (LNG) terminal.

PipeChina is the state-owned national pipeline company established by the Chinese government in December 2019 to form a unified national oil and gas pipeline network in the nation.

Moody's believes that the proposed transaction, if materialized, will weaken Kunlun's financial position. Such a view is based on the fact that about half of the net proceeds from the disposal will be distributed to shareholders as dividends, and that company will lose cash flows from Beijing Pipeline and Dalian LNG. These two entities accounted for about 47% of the company's reported pre-tax profits in 2019. The company's financial position will also depend on the level of capital spending following the transaction.

At the same time, Kunlun's business profile in the natural gas sector will weaken after the completion of the transaction. Such a view is based on the fact that the Shaanxi-Beijing Pipelines are one of the major transmission pipelines in the nation and are major cash flow contributors to the company. The company will mainly focus on expanding its downstream city gas business and, to a less extent, new energy businesses. Kunlun's future business profile will depend on the level of success on such business strategies.

That said, Moody's believes that the company's projected credit metrics over the next 1 to 2 years should still remain within our rating expectation even after taking into account the impact of the proposed transaction.

Moody's also expects that the company's status as the listed flagship platform for China National Petroleum Corporation's (CNPC, A1 stable) downstream natural gas business will remain intact.

The agreement is not legally binding and is still subject to various conditions precedent, including approvals by (1) the shareholders of Kunlun and PipeChina and (2) other relevant regulatory authorities.

Kunlun's A2 issuer rating incorporates a two-notch uplift from the company's standalone credit strength, based on the high level of support we expect for the company from CNPC. We expect CNPC to continue to provide a high level of support to Kunlun Energy in times of stress, given the latter's integral role in CNPC's gas business and CNPC's track record of parental support.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectations that over the next 12-18 months, Kunlun will (1) maintain a stable standalone credit profile and stable financial metrics, (2) maintain strong gas volume growth in, and focused commitment on, its downstream piped gas operations, and (3) continue to receive a strong level of support from CNPC.

Kunlun's upward rating potential is limited, given that the high level of support from CNPC has already been incorporated into the rating. However, Kunlun's standalone credit profile could rise if the company (1) strengthens its operating performance on the city gas operations, or (2) deleverages successfully such that its retained cash flow (RCF)/debt rises above 40% over a prolonged period.

On the other hand, Kunlun's standalone credit profile could be lowered as a result of (1) a material increase in leverage because of, for instance, heavily debt-funded acquisitions, or (2) adverse changes in China's regulatory environment, and (3) weakening demand in the company's upstream and LNG operations, or both. The rating could also be lowered if CNPC's ratings are downgraded.

Key metric that could lead to a rating downgrade includes RCF/debt falling below 25% over a prolonged period.

The rating also takes into account the following ESG considerations.

Kunlun has low carbon transition risk within the utility sector in China as the government aims to increase consumption of natural gas, a cleaner fuel than coal, to control air pollution.

Kunlun faces moderate social risk in terms of worker health and safety in relation to its construction and operation of natural gas transmission pipeline and city gas projects.

Kunlun has moderate governance risk. Management's current business strategy is to expand its city gas business in China as CNPC's listed platform for its downstream natural gas operations. This will increase the company's capital spending and leverage position. However, such risk is mitigated by Kunlun's corporate governance structure as a listed company in the Hong Kong Stock Exchange, with a board of directors and independent directors, as well as a number of supervisory committees.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Kunlun Energy Company Limited (Kunlun) is the major listed platform of CNPC's downstream natural gas operations, particularly its city gas and LNG-related businesses. The company mainly engages in natural gas transmission via its interprovincial long-distance pipelines (the Shaan-Jing pipelines), downstream city gas operations, LNG processing and storage, sales of LNG/compressed natural gas (CNG) and gas refilling stations for vehicles, and oil and gas exploration and production.

As of June 2020, CNPC owned 57.58% of Kunlun Energy, mainly through its major listed subsidiary, PetroChina Company Limited (PetroChina). CNPC is the largest oil and gas company in China. CNPC is wholly owned by the Chinese government and is supervised by the central State-Owned Assets Supervision and Administration Commission.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Boris Kan VP - Senior Credit Officer Project & Infrastructure Finance Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Terry Fanous MD-Public Proj & Infstr Fin Project & Infrastructure Finance JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077

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