Zhejiang Provincial Energy Group Co. Ltd -- Moody's: Profit warning for 2021 from listed power subsidiary is credit negative for Zhejiang Provincial Energy

Announcement: Moody's: Profit warning for 2021 from listed power subsidiary is credit negative for Zhejiang Provincial EnergyGlobal Credit Research - 11 Jan 2022Hong Kong, January 11, 2022 -- Moody's Investors Service says that the profit warning for 2021 from the listed power subsidiary of Zhejiang Provincial Energy Group Co. Ltd (ZEG, A1 stable) is credit negative because it could result in the group's leverage continuing to weaken.On 8 January, ZEG's listed power subsidiary, Zhejiang Zheneng Power Co., Ltd. (Zheneng Power), issued a profit warning on the Shanghai Stock Exchange, announcing that it will post a net loss of approximately RMB760 million-RMB1.14 billion for the year ended 31 December 2021. This compares with a net profit of RMB6.086 billion for the same period a year ago. The expected net loss is caused by a significant surge in coal prices in 2021 that is not fully compensated by the prevailing coal power tariff, despite strong power demand growth amid a continuing economic recovery following disruptions caused by the coronavirus pandemic in 2020.Zheneng Power's profit warning for 2021 is credit negative for ZEG because it could result in the group's leverage -- as measured by funds from operations (FFO)/debt -- continuing to weaken. The likely increase in leverage is because Zheneng Power holds most of ZEG's thermal power generation capacity, and is a major revenue and profit contributor to the ZEG Group, with 48% and 74% of the group's consolidated revenue and net profit in 2020, respectively. Moody's expects ZEG's FFO/debt to fall below the rating agency's previous expectation of around 16% and downgrade trigger of 15%.However, Moody's expects ZEG's financial performance to recover in 2022 because the Government of China (A1 stable) implemented measures in the fourth quarter of 2021 to support the coal-fired power sector. The measures include coal power tariff reform, promotion of coal production and supply, along with coal production cost investigation and price supervision. Accordingly, the spot thermal coal price, based on the Bohai-Rim Steam-Coal Price Index, had dropped around 14% by the week of 5 January 2022, from its peak in October 2021.Meanwhile, the implementation of the new coal power tariff mechanism will lead to higher possible realized tariffs for the coal-fired power generators and will relieve the sector's profitability pressure amid high coal prices. Since the National Development and Reform Commission's (NDRC) announcement regarding reforms for the coal power tariff, more than 10 provinces, including Zhejiang, Guangdong, Jiangsu, Henan and Shandong, among others, have announced tariff increases.Moreover, Moody's expects that ZEG's strategic importance to the government and its likelihood of receiving government support will remain high because the expected loss is also the result of ZEG's public policy function to secure power supply for Zhejiang province, which tightens the link between ZEG and the government. For the first three quarters in 2021, Zheneng Power's total thermal power dispatched grew 35.2% year on year.Nonetheless, any continuing failure to pass through the coal price hikes or any aggressive debt-funded capital investment will likely result in ZEG's FFO/debt remaining below its downgrade trigger for a sustained period, which will exacerbate pressure on the company's credit profile.The local market analyst for Zhejiang Provincial Energy Group Co. Ltd is Qingqing Guo, +86 (21) 2057-4093.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Ivy Poon 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.) 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