Hong Kong, July 09, 2012 -- Moody's Investor Services continues to review for downgrade the Baa3 issuer and senior unsecured ratings of ENN Energy Holdings Ltd.

Moody's originally placed the ratings on review on 13 December 2011 after ENN made a voluntary conditional cash offer to acquire China Gas Holdings Limited (unrated) for a maximum cash consideration of approximately HK$16.7 billion through a consortium formed with China Petroleum & Chemical Corporation (Sinopec, unrated), the listed subsidiary of China Petrochemical Corporation (Aa3 stable).

It is expected that, if completed, this transaction would lead to material weakening in ENN's financial profile and liquidity if the acquisition proceeded. The transaction also represents the emergence of a more aggressive growth strategy and higher level of risk appetite.

Moody's also considers that the financial profile of China Gas is much weaker than ENN and has a history of internal control problems.

The rating review will continue to focus on: 1) the final consideration and conditions of the transaction; 2) potential synergies from investing in China Gas; 3) the refinancing plan for the bridge loan; and 4) the post-acquisition financial profile and liquidity position of ENN.

ENN's ratings will likely be downgraded by one-notch if the transaction is closed as presented and if it incurs additional debt within Moody's expectation.

RATINGS RATIONALE

"Extension of the review follows the consortium's decision to extend the long stop date of the voluntary cash offer to 6 August 2012," says Peter Choy, a Moody's Associate Managing Director.

"The consortium is finding it difficult to acquire majority stakes in China Gas, and uncertainties over the outcome of the transaction remain," adds Choy, who is also Moody's international lead analyst for ENN.

The transaction is being reviewed for approval by the Chinese government and China Gas has not allowed the consortium to conduct due diligence. Both are pre-conditions in the tender offer.

In addition, China Gas's existing shareholders, including newly joined Beijing Enterprises Group, continue to increase their shares in China Gas.

The combined equity stakes of the three largest shareholders already add up to over 50% of China Gas' total shareholding and thus will have a significant influence over the tender result, thereby increasing the challenges and uncertainties for the transaction.

"Moreover, China Gas' existing shareholders' purchase price and China Gas' recent market price are higher than the indicated price offered by the consortium, making it less likely that China Gas' shareholders will accept the tender offer, if the consortium does not raise the offer price," says Hu.

"Other uncertainties include the possibility that the consortium may change its offer conditions, or the composition of the consortium changes. It is also possible that a member of the consortium decides to walk away from the deal. Given the uncertainties, we have decided to extend the review for downgrade," continues Hu.

If ENN drops the acquisition eventually, Moody's will monitor how ENN uses its cash balance -- totaling to RMB6 billion as of 30 April 2012 -- its deleverage plan, and its capex plan in the near term.

The principal methodology used in this rating was Regulated Electric and Gas Utilities published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

ENN Energy Holdings Limited -- formerly, Xinao Gas Holdings Limited -- is listed on the Hong Kong Stock Exchange. The company is principally engaged in the construction and operation of facilities for piped natural gas distribution to residential and commercial/industrial customers in a number of cities in China. In addition, it supplies natural gas to vehicles.

The Local Market analyst for this rating is Kai Hu, +86 (10) 6319 6560.

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