Why CLP Power Hong Kong gets two thumbs up from Fitch

The agency is getting more confident.

Fitch Ratings has affirmed CLP Holdings Limited (CLPH) and CLP Power Hong Kong Limited (CLP Power HK) Long-Term Foreign and Local Currency Issuer Default Rating (IDRs) of 'A' and their 'F1' Short-term IDRs.

According to a release from Fitch Ratings, the Rating Watch Negative (RWN) on all ratings, meanwhile, has been removed and a Stable Outlook has been assigned to the Long-Term IDRs.

The release also noted that the resolution of the RWN follows from the completion of the acquisition by CLP Power HK of a further 30% stake in Castle Peak Power Company Limited (CAPCO) for HKD12bn and the remaining 51% stake in Hong Kong Pumped Storage Development Company, Limited (PSDC) for HKD2bn in mid-May.

The acquisitions increased CLP Power HK's stake in CAPCO to 70% from 40% and in PSDC to 100% from 49%.

Fitch noted, however, that the ratings have limited headroom and are also subject to event risks, especially any potential additional capex arising from changes to environmental legislation in Hong Kong.

Here’s more from Fitch Ratings:

The affirmation of the ratings and assignment of a Stable Outlook reflect Fitch's expectation that our forecasted credit and coverage ratios for CLPH will remain at levels consistent with the 'A' rating, even as headroom is very limited following the acquisitions.

While we project CLPH's FFO Net Leverage in 2014 to be above our threshold level of 3.5x, we expect it to decrease to the threshold level by 2015, with funds from operations (FFO) interest coverage also increasing to its threshold level of 5.0x.

These expectations also include our view of CLPH's 100% subsidiary, EnergyAustralia's, continued weak earnings and cash flow in 2014-15.

This is attributable to a combination of factors, such as decreased electricity demand and wholesale prices, a highly competitive retail segment, and regulatory uncertainty around renewables and carbon legislation, although an improved trend in earnings is expected from 2015.