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