On October 22, S&P Global confirmed the long-term issuer credit rating of Hong Kong & China Gas Company Limited (00003.HK) as "A-", while its subsidiary Towngas Smart Energy Company Limited (01083.HK) has a long-term issuer credit rating of "BBB+", with a stable outlook. The strategic importance of Towngas Smart Energy within the group is increasingly evident, evidenced by the growth in its operational and financial contributions. For instance, in 2024, Towngas Smart Energy is expected to account for 27% of the group's consolidated EBITDA. The company's distributed solar energy business is also expanding steadily, becoming a significant element of the group's long-term strategic plans. Furthermore, Hong Kong & China Gas's stake in Towngas Smart Energy will continue to rise, increasing from 65.98% in 2021 to 68.38% by the end of 2024. The subsidiary shares senior management and board members with the group, enhancing operational integration. As a result, S&P has upgraded the subsidiary's group status from "strategically important" to "highly strategic." Towngas Smart Energy's capacity expansion in the distributed solar sector is balanced with prudent capital expenditures. By June 30, 2025, the company plans to develop 2.6 gigawatts of distributed solar projects for its industrial gas customers in mainland China, aiming for 6 gigawatts by 2030. S&P projects that between 2025 and 2027, this business will contribute HK$600-700 million in EBITDA annually, representing approximately 16% of Towngas Smart Energy's total EBITDA and about 5% of Hong Kong & China Gas's total EBITDA. Since 2021, Towngas Smart Energy has been advocating a renewable energy strategy that aligns with the group's development plan and responds to China's climate transformation commitments. Although the skills required in this field differ from the group's core gas business, the company has successfully leveraged its gas customer base to mitigate execution risks while maximizing new business returns through synergies with energy services such as storage and electricity trading. S&P considers Towngas Smart Energy's efforts to balance capacity expansion and debt growth prudent. Approximately 30% of the existing 2.6-gigawatt projects are developed through equity cooperation, and the company is employing innovative financing tools such as quasi-REITs. Its goal is to maintain a portfolio of 3 gigawatts of self-owned projects by 2030, with the remaining solar projects conducted via joint ventures, which allows it to maintain a "light-asset" operating model while accelerating capital turnover for new projects. S&P believes the current development pace is appropriate. Some projects have downside protection through contracts for difference, reflecting the company’s awareness of market risks associated with renewable energy developers—especially after the issuance of Document No. 136, which mandates all renewable energy projects participate in market-based electricity trading. S&P forecasts a 5%-7% annual decline in the average electricity price for Towngas Smart Energy's solar projects from 2025 to 2027, with utilization remaining above 80%. Although the cost pass-through mechanism for gas is improving, growth in new user connections will remain slow until the recovery of the real estate market in mainland China. S&P anticipates that, supported by improved cost pass-through mechanisms for residential users and decreased upstream gas costs, the unit gross margin will slightly recover in 2025. Towngas Smart Energy's unit gross margin is expected to increase from HK$0.56 per cubic meter in 2024 to HK$0.57 per cubic meter from 2025 to 2027, while Hong Kong & China Gas's margin is projected to rise from HK$0.52 to HK$0.54 per cubic meter. In terms of gas distribution in mainland China, due to the group's project layout along the coast, Towngas Smart Energy and Hong Kong & China Gas are forecasted to have better unit gross margins than their peers in 2024. Gas connection businesses in China will continue to face pressure as the real estate market remains in a downturn. S&P predicts that the group's gas connection volumes will decrease by 10% in 2025, followed by annual declines of 5% in 2026 and 2027. However, growth in other sectors such as solar power generation and value-added services may partially offset this decline. Hong Kong & China Gas's gas supply business in Hong Kong will continue to be the group's largest profit contributor. S&P expects sales volumes to remain around 27,000 terajoules from 2025 to 2027. Profit drivers include regular pricing adjustments, new connection demands generated by the Hong Kong government's Northern Metropolis plan, and new applications such as hydrogen and gas cooling systems. The group is set to maintain its financial resilience. With a rebound in unit gross margins, S&P projects that the operating cash flow to debt ratio for Hong Kong & China Gas will rise from 17.4% in 2024 to 19%-21% during 2025-2027. During the same period, the ratio for Towngas Smart Energy will improve from 16.5% to 17%-19%. Both companies' ratios align with their expected financial risk levels. Both Hong Kong & China Gas and Towngas Smart Energy possess strong credit profiles and diversified financing channels. Additionally, Towngas Smart Energy is leveraging low-cost financing in mainland China to lower funding costs. As U.S. interest rates gradually decrease, S&P projects that the overall financing cost for the group will decline from 4.2% in 2024 to between 3.6% and 3.8% over the next three years. The stable outlook for Hong Kong & China Gas and Towngas Smart Energy reflects S&P’s view that both companies will continue to see improvements in their financial performance over the next 24 months. S&P believes that despite weak economic conditions putting pressure on sales growth, the profitability of their core gas distribution business will improve. The expansion of Towngas Smart Energy's distributed solar business will contribute to the group's cash flow, with associated capital expenditures remaining controllable. The stable outlook also reflects S&P's expectation that Towngas Smart Energy will maintain its position as a highly strategic subsidiary of Hong Kong & China Gas. S&P may downgrade Hong Kong & China Gas's rating in the following situations: if its FFO/debt ratio consistently falls below 20%. This could result from (1) aggressive debt financing capital expenditures or sustained high dividend payments; or (2) structural changes in gas demand or margins that weaken cash flow; or a decline in business portfolio stability. A significant increase in the company's risk exposure in mainland China compared to Hong Kong, or a substantial venture into more volatile non-utility sectors could also trigger such a downgrade. S&P might downgrade Towngas Smart Energy's rating under the following conditions: if S&P lowers the rating for Hong Kong & China Gas; or if it deems Towngas Smart Energy's importance to the Hong Kong & China Gas group to decline. This could occur if effective control of Towngas Smart Energy by Hong Kong & China Gas significantly weakens. S&P may downgrade Towngas Smart Energy's standalone credit status in the following scenarios: if its FFO/debt ratio declines and remains below 15%. This could be due to (1) significant margin declines resulting from failure to pass on gas costs, substantial economic downturns affecting its sales, or adverse regulatory policies; or (2) if the company undertakes more aggressive debt financing expansions in the renewable energy sector than S&P’s benchmark assumptions. Conversely, S&P may upgrade Hong Kong & China Gas's rating if the company improves its leverage while maintaining a stable business portfolio. An FFO/debt ratio approaching 35% would indicate such improvement. A clear financial policy aimed at maintaining capital expenditures and dividend payment flexibility at improved levels would support this. S&P may upgrade Towngas Smart Energy's rating contingent upon an upgrade to Hong Kong & China Gas's rating. Additionally, S&P may upgrade Towngas Smart Energy's standalone credit status if its FFO to debt ratio consistently stays above 25%. Healthy cash flow growth combined with moderate expansion could lead to this outcome, coupled with Towngas Smart Energy displaying financial prudence in its capital structure and liquidity.