Fitch Ratings has assigned China-based Foran Energy Group Co.,Ltd. a Long-Term Issuer Default Rating (IDR) of 'BBB+'.
The Outlook is Stable.
Foran Energy is the monopoly high-pressure piped-gas distributor in Foshan municipality. Its IDR is closely aligned, but not equalised with, our internal assessment of its 41.7% parent, Foshan Investment Holdings Group Co., Ltd, under the strong parent, weak subsidiary approach in our Parent and Subsidiary Linkage (PSL) Rating Criteria. We assess Foshan Investment has a 'High' strategic incentive and 'Medium' operational incentive to support Foran Energy, while the legal incentive is 'Low'.
Foshan Investment's credit profile is aligned with Fitch's internal assessment of Foshan municipality, which owns a 91% interest, to reflect the strong likelihood of government support under Fitch's Government-Related Entities (GRE) Rating Criteria.
We assess Foran Energy's Standalone Credit Profile (SCP) as 'bbb-', supported by stable operating cash flow generation from its concession-based city-gas distribution business and conservative leverage, and tempered by a small operating scale and single-market concentration.
Key Rating Drivers
Parent's Strong Government Linkage: We assess Foshan Investment's status, ownership and control as 'Very Strong', reflecting the Foshan municipal government's very tight control and oversight. The government has strong influence over Foshan Investment's strategy and investment, controls the board, appoints key management, grants concessions and regulates gas tariffs. We assess the support record as 'Strong', reflecting past asset injections and subsidies that have enabled the company to maintain a healthy SCP.
Strong Implications of Parent's Default: We assess Foshan Investment's socio-political implications of default as 'Strong'. It is the only high-pressure piped-gas distributor, the largest water supplier and one of several thermal power plant operators in the city. We believe a default would severely disrupt the provision of essential public services and have strong social implications.
A default would also likely have severe political implications, as Foshan Investment is the largest Foshan-based GRE by revenue and profit, and the local government has expanded the company's role from a utility platform to a state capital investment platform to lead the city's industrial development, further enhancing its public profile. We assess the financial implications of a default as 'Very Strong', reflecting the high policy intensity of Foshan Investment, in combination with its larger exposure to capital markets and lower cost of funding among Foshan GREs.
'High' Strategic Incentives to Support: We believe Foran Energy has 'High' competitive advantages for its parent, as it plays a critical role in safeguarding local gas supply at an affordable cost and enhancing gas penetration in Foshan, which are key policy mandates for the parent. Foran Energy's financial contribution to the parent is 'High', as we expect it to account for at least half of the parent's operating EBITDA in the medium term. Its growth potential is assessed as 'Medium'.
'Medium' Operational Incentives: Our 'Medium' assessment of operational incentives reflects the parent's board control as the largest shareholder and a moderate degree of board overlap between Foran Energy and Foshan Investment. Still, the presence of a large minority shareholder and Foran Energy's autonomy in most operational matters as a listed company partly dilute the assessment. We assess the operational synergies as 'Low', as Foshan Investment's main subsidiaries operate in different sectors and have limited vertical integration.
'Low' Legal Incentive: Foshan Investment has a 'Low' legal incentive to provide support for Foran Energy, due to a lack of debt guarantees and cross-defaults.
Robust Gas Sales Volume: We forecast Foran Energy's annual gas sales volume growth to hover at the mid-teens in 2023-2027, against 18% CAGR in 2018-2022. This is underpinned by the strong organic demand growth from industrial users in Foshan and its expansion into new concessions in Guangdong province. Demand from Foshan's newly built gas-fired-power stations will also support volume growth.
Resilient Dollar Margin: We expect Foran Energy's dollar margin for industrial users, which accounted for the majority of gas sales volume in 2022, will remain stable in 2023, as gas prices fall, but part of the decline will be passed on to users. Its access to liquefied natural gas (LNG) terminals may also provide opportunities to source lower-cost LNG.
Foran Energy's dollar margin increased materially in 2022, while most Fitch-rated Chinese city-gas distributors recorded a decline amid soaring gas costs, due to better cost pass-through for industrial users and a higher share of gas supply from contracted piped gas.
Geographical and End-Market Concentration: Foran Energy's operation is geographically concentrated in Foshan, with some sales exposure to other cities. This raises the business risk resulting from adverse changes in a single market, and its industrial-dominant customer base may also increase demand risk amid widespread industrial downturns. However, the risks can be offset by the resilience of end-user demand during past economic cycles, a generally friendly local business environment for gas distribution, and a smooth cost pass-through record.
Stable Cash Flow: We expect around 70% of Foran Energy's EBITDA will in the near to medium term come from gas distribution, which collects quasi-regulated asset-based earnings. Its exposure to one-off connection earnings is also lower than many rated city-gas peers. Earnings from integrated energy, which has higher risk than gas distribution but offers some diversification, will remain relatively modest.
Investment-Grade SCP: Foran Energy's 'bbb-' SCP is supported by stable cash flow generation from gas distribution and conservative financial leverage, partly tempered by smaller scale and more limited geographic diversification than other investment-grade-rated utility peers. We expect EBITDA net leverage to increase to around 3.0x in 2023-2027 (2022: 2.5x) as capex continues to rise to support gas expansions, integrated energy developments and gas storage. Even so, the financials will remain commensurate with the SCP.
Derivation Summary
Foran Energy's IDR is aligned with our internal assessment of Foshan Investment based on the PSL criteria. We assess the legal, operational and strategic incentives to support the company as 'Low', 'Medium' and 'High', respectively.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Total gas sales volume to grow by around 13% a year, on average, in 2023-2027;
The dollar margin to trend down from 2022 levels, as contributions from lower-margin gas-fired power plants increase; the gas transmission tariff to remain at 2022 levels;
Cash investments, including capex, acquisitions and investment in joint ventures, to stay at around CNY1.4 billion-2.2 billion a year;
No equity proceeds from share placements or government injections;
Integrated energy revenue to increase by 26% a year, on average, in 2023-2027, with a gross profit margin slightly lower than the 2022 level.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Higher internal assessment of the creditworthiness of Foshan Investment;
Higher incentives for Foshan Investment to provide support.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Weaker internal assessment of the creditworthiness of Foshan Investment;
Weaker incentives for Foshan Investment to provide support.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: Foran Energy reported consolidated cash of CNY1.4 billion as of end-2022, sufficient to cover its short-term debt of CNY1.33 billion. We believe its back-loaded debt maturity profile minimises refinancing pressure in the near-term. Liquidity will also be supported by its large, undrawn bank facilities of CNY16.5 billion as of end-2022, mostly provided by investment-grade-rated Chinese banks.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Issuer Profile
Foran Energy is the dominant downstream city-gas distributor in Foshan, a city in Guangdong province, southern China. It is also expanding city-gas concessions outside of Foshan, while venturing into new segments, including LNG and petrochemical trading, renewable energy, hydrogen and fuel cells.
FORAN ENERGY GROUP CO., LTD. 
