RATINGS RATIONALE

"Longyuan's Baa3 issuer rating reflects its sizable operating assets, and steadily growing revenue and cash flow, which counterbalance inherent risks of the wind power sector", stated Ivan Chung, a Moody's Vice President and lead analyst for Longyuan, adding "The geographic diversity of its wind farms and solid coal-fired generation partly mitigate the inherent risks in wind power generation such as volatility in wind speed and variation in equipment performance under different physical conditions."

"The issuer rating factors in a one notch downward adjustment to reflect structural subordination," Chung says.

As at the end of 2011, Longyuan's consolidated wind power capacity totaled 8.6 GW, making it the world's second largest wind power producer. Its operating wind farms cover 18 provinces in China. Its average utilization hour was 2,026 hours in 2011 compared with the national average of 1,903 hours but remain below averages for other major power sources.

"As a first mover with a long track record, Longyuan's expertise and management capability put it in a favorable position to benefit from the country's planned expansion in wind power which is supported by a favorable regulatory environment and higher than average tariff," Chung says.

Longyuan has engaged in development and operation of wind farms since its establishment in 1993. In the past few years, its management has successfully executed rapid expansion, which increased its consolidated installed wind power capacities to 9GW as at June 30, 2012 from 1.3GW in 2007. In addition, it is a pioneer in building and operating large scale wind farms and offshore inter-tidal projects in China.

China has launched a number of policies to encourage the use and development of wind power and other renewable energy in order to achieve its target that non-fossil fuel contribution to total primary energy consumption to reach 11.4% by 2015 from 8.3% in 2010 and 15% by 2020. Wind power is given priority over thermal power in getting on-grid and dispatched as well as enjoys a higher benchmark tariff than thermal power's. Wind power enjoys a renewable energy tariff subsidy which was introduced in June 2006. After three subsequent increments this subsidy has reached RMB0.8 cent/kWh since January 2012.

"However, Longyuan's rating is constrained by the lagged grid development," says Chung. "Additionally, given the growth opportunities in the sector, we expect that the company's adjusted debt to total capital ratio will remain between 65% and 70% over the next 2 -3 years, which is high, but consistent with the current rating level."

The development of installed capacities for wind power has outpaced grid development in the past few years. The inadequate grid dispatch capacities have resulted in grid curtailment for wind power in some regions like Inner Mongolia. At the same time, China plans to increase installed wind power capacities to 100GW and 200GW by 2015 and 2020, respectively, from 62GW in 2011. Despite State Grid Corporation of China plans to increase grid investment in next couple of years, there are uncertainties about the pace of improvement in grid connection.

Longyuan plans to add 2GW of new capacity every year for 2013-2015. Moody's projects an annual capex of RMB22 -- 24 billion for the next three years to be mainly financed by external sources. Moody's expects the total debt to total capital will be around 65%-70% in the next two to three years and FFO to debt about 10%. Moody's recognizes that such high leverage is not unusual in China's power sector which is characterized by considerable growth opportunities and good access to debt markets. Longyuan's capital structure is also moderately less geared than major power generating companies. Longyuan also has greater flexibility to adjust the timing and amount of investment in response to market conditions given the shorter construction time for wind projects and lower complexity compared with larger scale thermal or other forms of power generation.

The stable outlook reflects Moody's expectation that Longyuan will maintain its leading position in China's wind power sector, China will continue its supportive regulatory and tariff regimes for the industry, and Guodian will continue to be Longyuan's major shareholder.

Upward rating pressure could emerge over time if (1)there is improvement in Guodian's credit profile, which is the parent company of Longyuan; (2) Longyuan could accomplish its business plan of building a larger and more diversified wind farm portfolio or (3) increase in % of connected capacities free of grid curtailment such that (FFO+interest) /interest exceeds 4x-5x, debt/capitalization falls below 40%-50%, and RCF/debt exceeds 15%-20% on a sustainable basis.

The rating could be downgraded if Longyuan (1) takes on aggressive debt-funded expansion projects or acquisitions beyond what is already planned; (2) deterioration of credit profile of its parent company, China Guodian Corporation, that impacted Longyuan or (3) adverse changes in supportive regulatory environment for wind power generation.

Financial indicators for possible downgrade could include (FFO+interest) /interest below 2.5x, debt/capitalization above 70%, and RCF/debt below 8%, on a consistent basis.

The principal methodology used in rating Longyuan was Moody's' Rating Methodology on "Regulated Electric and Gas Utilities," published in August 2009.

China Longyuan Power Group Corporation Limited primarily engages in wind power operation and is the second largest in the world in terms of installed wind power capacity. As at the end of June 2012, its total consolidated installed wind power capacity was 8,994MW spreading over 18 provinces in China. It also has 1,875MW consolidated capacity for coal-fired generation and 240 MW consolidated capacity for other renewable power generation.

Longyuan was listed on the Hong Kong Exchange in December 2009 and China Guodian Corporation (Guodian) is its largest shareholder with a 63.7% stake. Guodian is one of the five largest power generating companies in China and is 100% owned by the Chinese government.

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Man Kuen Ivan Chung 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 SUBSCRIBERS: (852) 3551-3077 Patrick Mispagel Associate Managing Director Project & Infrastructure Finance JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (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 SUBSCRIBERS: (852) 3551-3077 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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