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Rating Action:

MOODY'S LOWERS RATINGS OF JAPAN'S ELECTRIC POWER COMPANIES

19 Apr 1999
MOODY'S LOWERS RATINGS OF JAPAN'S ELECTRIC POWER COMPANIES Moody's Investors Service lowered the long-term ratings of nine Japanese electric power companies (JEU) based on concerns that the Japanese government's initiatives to further deregulate the nation's electric utility business may lead to changes in the favorable industry operating environment, which has been a critical factor supporting the high investment grade ratings. While such changes will increase credit risks, it should not present an overwhelming threat to the JEU's overall revenue base and position as Japan's dominant power providers. The rating outlook for all nine electric utilities is stable.


The ratings lowered are as follows:



Tokyo Electric Power Co., Inc.: Local-currency-denominated debt and issuer ratings to Aa2

from Aaa; Local-currency self-registration to (P)Aa2 from

(P)Aaa; and Foreign-currency-denominated debt and issuer

ratings to Aa2 from Aa1



Chubu Electric Power Co., Inc.: Local-currency-denominated debt and issuer ratings to Aa2

from Aaa; Local-currency self-registration to (P)Aa2 from

(P)Aaa; and Foreign-currency-denominated debt and issuer

ratings to Aa2 from Aa1


Kansai Electric Power Co., Inc.: Local-currency-denominated debt and issuer ratings to Aa2

from Aaa; Local-currency self-registration to (P)Aa2 from

(P)Aaa; and Foreign-currency-denominated debt and issuer

ratings to Aa2 from Aa1


Hokkaido Electric Power Co., Inc. Local-currency-denominated ratings to Aa3 from Aa1;

Local-currency self-registration to (P)Aa3 from (P)Aa1; and

Foreign-currency-denominated ratings to Aa3 from Aa1


Tohoku Electric Power Co., Inc.: Local-currency-denominated ratings to Aa3 from Aa1;

Local-currency self-registration to (P)Aa3 from (P)Aa1; and

Foreign-currency-denominated ratings to Aa3 from Aa1


Hokuriku Electric Power Co., Inc.: Local-currency-denominated ratings to Aa3 from Aa1;

Local-currency self-registration to (P)Aa3 from (P)Aa1; and

Foreign-currency-denominated ratings to Aa3 from Aa1


Chugoku Electric Power Co., Inc.: Local-currency-denominated debt and issuer ratings to Aa3

from Aa1; Local-currency self-registration to (P)Aa3 from

(P)Aa1; and Foreign-currency-denominated debt and issuer

ratings to Aa3 from Aa1


Shikoku Electric Power Co., Inc.: Local-currency-denominated ratings to Aa3 from Aa1;

Local-currency self-registration to (P)Aa3 from (P)Aa1; and

Foreign-currency-denominated ratings to Aa3 from Aa1


Kyushu Electric Power Co., Inc.: Local-currency-denominated ratings to Aa3 from Aa1;

Local-currency self-registration to (P)Aa3 from (P)Aa1; and

Foreign-currency-denominated ratings to Aa3 from Aa1


The foreign-currency-denominated debt ratings of Tokyo Electric Power, Kansai Electric Power, and Chubu Electric Power were downgraded to Aa1 from Aaa on November 17, 1998 in conjunction with Moody's lowering of Japan's foreign-currency country ceiling for bonds and notes.


The Japanese government intends to implement deregulation measures to further open up the electric utility market in Japan for competition. For the first time, real competition will be introduced in the special-high-voltage retail market, which accounts for approximately 30% and 20% of JEU's overall sales volume and revenues, respectively. However, many such users, especially industrial customers, have an operating scale large enough to warrant use of self-generation to fulfill their energy needs but choose not to do so because of economic reasons and other considerations.


The Japanese government is opening up a market segment that effectively has been subject to competition, and the level of tariff offered has been substantially adjusted to economic reality. Moreover, the principles proposed to ensure fair and effective competition among market participants favor the incumbents and do not provide meaningful regulatory considerations that enhance newcomers' cost competitiveness. As a result, Moody's expects direct competition to occur principally in the special-high-voltage commercial user sector where JEU's cost competitiveness is weak. However, this sector is estimated to account for only a small percentage of JEU's revenue base.


While JEU may not lose meaningful market share to new entrants, the threat of competition is likely to give special-high-voltage commercial customers, as well as some special-high-voltage industrial users who bear relatively high or uneven cost burdens compared to the load, increased leverage to renegotiate their power purchase contracts. In addition, through the deregulation process, JEU's cost transparency is likely to increase over time. This can heighten the rate payers' growing awareness of imbalances that are believed to exist in the regulated tariff structure that have traditionally favored large industrial users. JEU may choose to selectively adjust some of these imbalances, utilizing the flexibility of the liberalized and increased tariff menu, to reduce the risk of a full-scale rate re-balancing discussion. Moody's believes a modest degree of negative revenue pressure exists.


A limited-scope avoid-cost-based bidding system was introduced several years ago to allow independent power producers (IPP) entering the power generation market. While some details are still under discussion, the Japanese government intends to open up the market to include all large-scale thermal power generating units. In the future, incumbents will have to bid against IPPs for their own projects. Most of the bid winners under the existing system rely on idle land-holdings or other existing infrastructures to enhance their cost competitiveness, thereby restricting the number of potential bidders. IPP candidates for large-scale thermal power units will continue to be those with sizable low-cost sites to host such projects. The number should be fairly limited. As a result, the JEU are expected to maintain their position as Japan's dominant power providers.


Recognizing increased business risks, the JEU have implemented aggressive rationalization programs to improve their cost competitiveness. The cost reduction initiatives undertaken by the JEU, which include substantial cuts in planned capital expenditures and operating expenses, are practical and appear achievable. Moreover, liberalization will also give JEU a substantially higher level of management autonomy to allocate the fruits of rationalization to strengthen their capital structure. Nonetheless, there is continued dissatisfaction among Japanese rate payers regarding the country's high electricity tariff. JEU may need to continue applying a large portion of the savings from rationalization to defuse some of these concerns. As a result, the JEU's operating performance and cash flows will improve moderately, but their balance sheet will not strengthen to a significant degree to adequately offset the increased uncertainties in the operating environment.


While liberalization has resulted in modest increases in credit risk, JEU will continue to operate under a rather favorable industry environment that allows them to operate with a low degree of industry risk and a relatively high degree of certainty. Considering JEU's continued role and importance within the Japanese economy, strong regulatory and governmental support can be secured, if required. Moody's downgrades have factored in a high degree of industry uncertainties. The rating agency does not expect additional rating adjustments in the intermediate term. While the Japanese economy continues to be sluggish, it should not deteriorate to a degree that power demand and JEU's operating performance are significantly impacted to cause an additional review of their credit standings.


For a detailed discussion of the liberalization and the impact to the JEU, please refer to our recently published special comment titled "Deregulation Poses Higher Credit Risks for Japan's Electric Utilities."

No Related Data.
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