Hong Kong & China Gas Co Ltd has just issued a HKD600m REGS bond with a coupon of 2.84% and a maturity of 11/17/2027 via bookrunner CACIB. The provisional rating from Moody’s is A1. Current pricing (11/13/2017), according to Bloomberg:
HKCGAS 3.6 04/27 @ 107.5: yield of 2.7% (z-spread: 56bps)
HKCGAS 3.4 07/27 @ 106: yield of 2.7% (z-spread: 56bps)
HKCGAS 2.65 07/27 @100: yield of 2.5% (z-spread: 40bps)
At a yield of 2.8% (z-spread: 63bps), the new green bond is attractively priced. It is the longest HKD-denominated bond of the issuer and, at a size of HKD600m, is the third largest bond outstanding.
The issuer, also known as “Towngas Group”, is the only provider of town gas in Hong Kong, supplying 85% of households. It is expanding in Mainland China with 241 projects in 26 provinces, including city-gas, water supply, waste water and food waste treatment. It has assigned the use of proceeds to landfill gas projects, biomass waste-to-energy projects, waste treatment projects, wastewater treatment projects and any other projects targeting the production of energy from renewable or sustainable sources, and not towards fossil-fuel-reliant operations.
Use of Proceeds:
In the bond’s accompanying documentation, it is said that “the proceeds of the bonds will be used to finance or refinance expenditures related to investments in the company’s utilities and gas-production assets with the aim of improving their environmental performance”. This falls within the Pollution Prevention and Control category of the Green Bond Principles (green gas control, waste recycling and energy/emission-efficient waste to energy). The proceeds of the bond will target a 5% increase in energy efficiency in the next 3-5 years and improve water quality “beyond what is legally required by the Chinese national standard”. This appears in line with the Green Bond Principles.
Process for Project Evaluation and Selection:
The use of proceeds is decided at board level by the Green Bond Committee (including the CFO and the senior executive team). Separately, the Board of Directors of the Hong Kong-listed utility company is composed of 3 independent non-executive Directors, alongside 6 executive and non-executive Directors and subject to the regulations governing listed companies. There appears to be a solid process in place for the evaluation and selection of the said project.
Management of Proceeds:
The funds will be dedicated to identified projects, or otherwise held by the company’s Treasury. An annual report will update stakeholders on the use of proceeds from the issued green bonds. The company has already reduced the carbon emissions per unit of gas by 23% since 2005. Its direct and indirect greenhouse gas emissions have reduced against 2015, despite rising town gas sales in Hong Kong and in mainland China. This appears in line with market practice.
Reporting:
The company wants to become “Asia’s leading energy supplier with an environmentally-friendly focus”. It is true that the company has put in place a ‘Green Bond Framework’ in line with the Green Bond Principles 2017 and it has the “intention to transition away from less-brown fossil-fuel sources to a waste-to-energy approach”. The sustainability report published by the company is prepared in collaboration with an independent consultant, who engages with internal and external stakeholders on the matter of sustainability. Its reporting is transparent and demonstrates a clear commitment towards a transition towards a more climate-resilient energy utilization, despite some aggressive growth targets, in particular in Mainland China.
Although EarthWake has not had access to the company to verify the claims made in the context of this Green Bond issue, it appears that this bond issue fits the requirements set by the Green Bond Principles. A further assessment of the use of proceeds will need to be made, as new information becomes available (Update: November 2017).
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