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Announcement:

Moody's: Ratings of Korea's state-owned infrastructure issuers unaffected by government's new policy guidelines

 The document has been translated in other languages

17 Jun 2016

Hong Kong, June 17, 2016 -- Moody's Investors Service says that the Korean government's (Aa2 stable) announcement of its new plans on the policy functions of state-owned companies will not immediately affect the Aa2 issuer rating or the stable outlooks of Korea Electric Power Corporation (KEPCO), those of its six wholly-owned generation subsidiaries (gencos) and of Korea Gas Corporation (Kogas), as well as the A1 issuer rating or the stable outlook of Korea District Heating Corporation (KDHC).

The six gencos are Korea Hydro and Nuclear Power Company Limited (KHNP), Korea South-East Power Co., Ltd. (KOSEP), Korea East-West Power Co., Ltd. (EWP), Korea Midland Power Co., Ltd. (KOMIPO), Korea Southern Power Co., Ltd (KOSPO), and Korea Western Power Co., Ltd. (KOWEPO).

On 14 June, the government announced broad plans for Korea's state-owned infrastructure issuers, including (1) potential initial public offerings (IPO) of 20%-30% stakes in the six gencos, (2) a gradual opening up of KEPCO's retail electricity sales operations and Kogas' liquefied natural gas (LNG) import operations for wholesaling to the private sector, and (3) KDHC's issuance of new shares to private investors.

"For the six KEPCO-owned gencos, the planned IPOs from 2017 are unlikely to weaken their operational integration with KEPCO because their close relationships with the parent and their strategic importance as major power producers will likely continue," says Mic Kang, a Moody's Vice President and Senior Analyst.

"However, the planned IPOs raise some uncertainty about the future ownership structures of the gencos or other reform initiatives that the government may take over time, thereby clouding the credit profiles of these companies over the medium to long term," adds Kang.

Over the next 1-2 years, KEPCO will likely maintain controlling stakes in the gencos because the government's plan indicates sales of only partial stakes, not controlling shares. Moody's also expects a progressive implementation of the plan, based on the level of private investor interest.

Nevertheless, the listing of these companies will expose them to corporate governance standards that may reduce the level of financial relationship and integration with KEPCO, although Moody's does not see that as a key rating issue at this point.

Moody's further expects that KEPCO will continue to rely heavily on the six gencos to supply power to Korea's economy and remain a dominant buyer of their production. As such, Moody's expects they will stay a part of KEPCO's integrated electricity utility operations, covering generation, transmission, distribution and retail sales, over at least the next 12-18 months.

Moody's notes that the proposed IPOs are mainly aimed at helping KEPCO secure funding sources to develop renewables, as well as boost the economy through the creation of new business for small- and medium-sized enterprises.

"Meanwhile, the government's plan to gradually open up KEPCO's retail electricity sales operations to private companies -- but with no designated timeframe for now -- and Kogas' LNG import operations for wholesaling from 2025 will unlikely reduce the two state-owned integrated utilities' strategic importance to the economy and the government's extraordinary support," adds Kang.

Moody's believes that KEPCO's core operations of electricity generation -- through its six gencos -- transmission and distribution will remain largely unchanged over at least the next 12-18 months.

Similarly, Kogas' very high level of strategic importance will likely remain unchanged over the same timeframe because it will continue to own and operate the majority of Korea's gas assets, such as LNG receiving terminals, storage facilities, and nationwide transmission pipelines.

Moreover, until 2025, private companies will be allowed to only import gas for their own use, which means Kogas will retain its monopoly over the resale of natural gas in the domestic market for the next 8-9 years.

For KDHC, Moody's believes the plan to issue new shares in 2017 and the subsequent dilution of the Korean government's ownership to around 61% from its current 75% -- including stakes held by its controlled entities and the Seoul Metropolitan Government (unrated) -- will not mean a lower likelihood of the government's extraordinary support. However, the new share issuance raises uncertainty about the possibility of further similar initiatives over the medium to long term.

KDHC's proposed new share issuance is mainly for the purpose of supporting its financial profile, given its planned large investments in district heating facilities over the next 2-3 years.

In addition, the two-notch difference between KDHC's rating and those of the core government-related issuers (GRIs) -- Korea Water Resources Corporation (Aa2 stable), Korea Expressway Corporation (Aa2 stable), KEPCO and Kogas -- already reflects KDHC's weaker level of government ownership and strategic importance, and/or the absence of special legislation for the company. Such a situation indicates the company's relatively moderate strategic importance and likelihood of receiving support when compared to the core GRIs.

The stable rating outlooks for KEPCO and Kogas are in line with that on the government's ratings. It reflects Moody's expectation that their strategic importance to Korea' economy and very high support from the government, if and when needed, will remain intact over the next 12-18 months.

The six gencos' stable ratings outlooks reflect Moody's expectation that their close relationships with KEPCO and strong strategic importance to the economy will stay largely unchanged over the next 12-18 months.

The stable outlook for KDHC reflects Moody's expectation of the absence of any adverse changes in its policy role, dominant market presence, and/or financial profile.

An upgrade of Korea's sovereign rating could trigger an upgrade of the ratings of KEPCO and Kogas.

Similarly, a downgrade of Korea's sovereign rating will result in a downgrade of KEPCO and Kogas. In addition, Moody's would review the ratings in the event of significant adverse changes in the companies' relationships with the government and/or policy roles.

An upgrade of the gencos' ratings is unlikely unless Korea's sovereign rating and KEPCO's ratings are upgraded, and while their strategic importance and existing close linkages with KEPCO are maintained.

A downgrade of KEPCO's ratings would result in a downgrade of the gencos' ratings. A significant weakening of the gencos' ownership and operational relationships with KEPCO -- as a result of the government's review of their policy functions -- would also pressure the their ratings.

Furthermore, KHNP's ratings could come under downward pressure if its funds from operation (FFO)/adjusted debt or FFO/interest falls below 16% or 4.0x-4.5x on a sustained basis.

The five thermal gencos' ratings could come under downward pressure if FFO/adjusted debt or FFO/interest falls below 20% or 5.5x-6.0x on a sustained basis.

KDHC's ratings would be upgraded if the government's ability to provide support further strengthens and/or the government provides stronger forms of legal support. In addition, KDHC's ratings would show an upward trend if its FFO/adjusted debt or FFO/interest ratio exceeds 13%-15% or 4.5x-4.7x on a sustained basis.

A material downgrade of Korea's rating could lead to a downgrade of KDHC's ratings. Moreover, a significant weakening in the company's relationship with the government -- as evidenced by materially lower government ownership and a weaker public role -- could also pressure the rating. In addition, KDHC's rating would come under pressure if its FFO/debt or FFO/interest falls below 2.5x-3.0x or 7%-8% over the cycle.

The principal methodologies used in rating Korea Electric Power Corporation, Korea Gas Corporation and Korea District Heating Corporation were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. The principal methodology used in rating Korea Hydro and Nuclear Power Company Limited, Korea East-West Power Co., Ltd., Korea Midland Power Co., Ltd., Korea South-East Power Co., Ltd., Korea Southern Power Co., Ltd and Korea Western Power Co., Ltd. was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Korea Electric Power Corporation (KEPCO) is Korea's only fully integrated electric utility. The state-owned company is the near monopoly operator of the country's electricity transmission and distribution system. It generated around 83% of the power consumed in Korea through six wholly owned generation companies in 2015. KEPCO is 51% owned by the Korean government (Aa2 stable), directly and indirectly, as of 31 March 2016. The KEPCO Act requires the government to maintain a majority stake of at least 51% in KEPCO.

Korea Hydro and Nuclear Power Company Limited is Korea's sole nuclear power generation company. KHNP accounted for around 28% of Korea's installed power generation capacity as of 31 March 2016.

Korea East-West Power Co., Ltd., Korea Midland Power Co., Ltd., Korea South-East Power Co., Ltd., Korea Southern Power Co., Ltd, and Korea Western Power Co., Ltd. are thermal power generation companies and account for 9%-10% each of installed power generation capacity in Korea.

Korea Gas Corporation, as Korea's only fully-integrated natural-gas company, holds a near monopoly over the import, transmission, and wholesale of natural gas in Korea. Kogas was 55%-owned by the Korean government, directly and indirectly, as of 31 March 2016.

Korea District Heating Corporation (KDHC) is the country's largest provider of urban heating services, with a market share of around 55% for all district heating customers. The government had a 75% direct and indirect stake in KDHC as of 31 March 2016.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Mic Kang
Vice President - Senior Analyst
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

Terry Fanous
MD-Public, Proj & Infstr Fin
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

Moody's: Ratings of Korea's state-owned infrastructure issuers unaffected by government's new policy guidelines
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