Hong Kong, June 07, 2016 -- Moody's Investors Service has affirmed the Aa2 ratings of the six power
generation companies (gencos) that are wholly owned by Korea Electric
Power Corporation (KEPCO, Aa2 stable).
The outlooks on all ratings remain stable.
The issuers affected by today's rating actions are as follows:
• Korea Hydro and Nuclear Power Company Limited (KHNP), Aa2
issuer and senior unsecured ratings, and (P)Aa2 senior unsecured
MTN rating
• Korea South-East Power Co., Ltd. (KOSEP),
Aa2 issuer and senior unsecured ratings
• Korea East-West Power Co., Ltd. (EWP),
Aa2 issuer and senior unsecured ratings
• Korea Midland Power Co., Ltd. (KOMIPO),
Aa2 issuer and senior unsecured ratings
• Korea Southern Power Co., Ltd (KOSPO), Aa2 issuer
and senior unsecured ratings
• Korea Western Power Co., Ltd. (KOWEPO),
Aa2 issuer and senior unsecured ratings, and (P)Aa2 senior unsecured
MTN rating
RATINGS RATIONALE
"The gencos' Aa2 ratings are underpinned by their close operational
integration with, and ownership by KEPCO, as well as their
strategic importance to the Korean government as dominant power producers,"
says Mic Kang, a Moody's Vice President and Senior Analyst.
KHNP's standalone credit profile is consistent with the Baa1 rating
level, while the standalone credit profiles of the five thermal
gencos are consistent with the Baa2 rating level.
The multiple-notch uplifts reflect the gencos' close operational
and financial linkages with KEPCO and strategic importance to Korea's
(Aa2 stable) economy. However, the ratings could be negatively
affected if the Korean government's review of the policy functions
of state-owned companies -- scheduled to be completed
in June 2016 -- reveals a weakening in the strategic importance and
policy functions of these entities.
"All six gencos exhibit investment-grade standalone credit
profiles, reflecting their cost competitiveness and strong market
positions and credit metrics," adds Kang. "At
the same time, their standalone credit profiles consider their exposure
to the likely tightening of carbon emission standards and regulations."
KHNP's higher standalone credit profile than the five thermal gencos'
takes into account its cost competitiveness as the sole nuclear power
generator with the largest power generation capacity in Korea, as
well as its stronger credit metrics.
Moody's expects KHNP's funds from operation (FFO)/adjusted
debt to stay at 32%-38% over the next two to three
years, which is higher than most of the thermal gencos' 25%-32%.
Moody's also expects the risk associated with KHNP's nuclear
operations will remain manageable, because of its strong track record
of operating nuclear reactors without major disruptions. KHNP in
2013 also raised its safety standards by implementing countermeasures
against the use of faulty parts.
Among the thermal gencos, KOSEP will likely record stronger credit
metrics than EWP, KOMIPO, KOSPO and KOWEPO, owing to
the cost competitiveness stemming from its almost full power generation
from coal-fired power plants. However, this strength
is offset by its higher exposure to environmental regulations, due
to its concentration on coal-concentrated power generation.
Moody's expects the power plants of the remaining four thermal gencos
will remain diversified in natural gas and coal relative to KOSEP over
the next one to three years. In addition, the gap in credit
metrics between KOSEP and the four gencos will likely narrow owing to
the incremental operating cash flows from their new coal-fired
power plants scheduled to commission in 2016-18.
The gencos' high operational integration with KEPCO is evidenced
particularly by the fact that KEPCO relies heavily on the gencos for power
supply to Korea's economy, and by the profit-sharing
program that balances profits between KEPCO on a standalone basis and
the gencos.
Moody's expects the gencos will continue to benefit from the profit
sharing program and incremental cash flows from their newly commissioned
power plants, which together mitigate the weakening wholesale power
prices in the country's power generation market.
Moreover, Moody's believes both KEPCO and the government will
take strong measures to contain any material widespread disruption of
the gencos' operations, if and when needed, due to their important
roles as major power generators in the country.
The six gencos' stable ratings outlooks reflect Moody's expectation
that their close relationship with KEPCO and strong strategic importance
to the economy will remain largely unchanged, following the government's
review of policy functions of state-owned companies.
An upgrade of the gencos' ratings is unlikely unless Korea's
sovereign rating and KEPCO's ratings are upgraded while the strategic
importance of the gencos 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 relationship with KEPCO as a result of the government's
review of the policy functions of state-owned companies would also
pressure the gencos' ratings.
Furthermore, KHNP' ratings could come under downward pressure if
its 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.
The principal methodology used in these ratings 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 this methodology.
Korea Hydro and Nuclear Power Company Limited (KHNP) is Korea's sole nuclear
power generation company, and accounted for around 28% of
Korea's installed power generation capacity at end-2015.
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 each account for 9%-11%
of Korea's installed power generation capacity at end-2015.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
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 affirms Aa2 ratings of KEPCO's six generation subsidiaries
