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Rating Action:

Moody's affirms KEPCO's and its generation subsidiaries' Aa2 ratings; outlooks stable

 The document has been translated in other languages

18 Oct 2018

Hong Kong, October 18, 2018 -- Moody's Investors Service has affirmed the ratings for Korea Electric Power Corporation (KEPCO) and KEPCO's six wholly-owned generation subsidiaries (gencos).

At the same time, Moody's has maintained the stable outlooks on the ratings.

The companies and ratings affected by today's rating actions are as follows:

• KEPCO, Aa2 issuer and senior unsecured ratings, (P)Aa2 senior unsecured medium-term notes program (MTN) rating

• Korea Hydro & Nuclear Power Co., Ltd. (KHNP), Aa2 issuer and senior unsecured ratings, (P)Aa2 senior unsecured MTN rating

• 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, (P)Aa2 senior unsecured MTN rating

• Korea South-East Power Co., Ltd. (KOSEP), 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, (P)Aa2 senior unsecured MTN rating

Moody's has also downgraded KEPCO's baseline credit assessment (BCA) to baa2 from baa1.

RATINGS RATIONALE

"The affirmation of KEPCO's ratings reflects Moody's assessment that the company's ratings will continue to benefit from a very high likelihood of support from the Korean government, if and when needed," says Mic Kang, a Moody's Vice President and Senior Credit Officer. "KEPCO's ratings therefore remain resilient at its current ratings level, despite a weakening in its BCA."

KEPCO's Aa2 ratings are primarily driven by the very high likelihood of the company receiving extraordinary support from the Korean government (Aa2 stable) in times of need, which results in a six-notch uplift from the company's baa2 BCA.

This assessment is underpinned by KEPCO's essential public policy role and strategic importance as Korea's only integrated power utility, as well as the Korean government's low tolerance for reputational and contagion risks, particularly in relation to funding access for various Korean issuers and the sovereign itself, should KEPCO encounter financial or operating difficulties.

In addition, the government has established a track record of closely monitoring and managing KEPCO's and other government-related issuers' (GRI) financial health, indicating its commitment to preventing KEPCO from facing financial distress.

As such, Moody's has maintained its assessment of support at "Very High" for KEPCO, under Moody's Joint Default Analysis (JDA) for GRIs.

Moody's has also continued to assess dependence at "Very High" for KEPCO, given the company's close links to the Korean government, mainly stemming from its status as an implementer of mandated policy roles for the country's power sector under the government's supervision, and its reliance on the same revenue base as the Korean government, and its exposure to common credit risks.

The lowering of the BCA takes into account Moody's assessment that KEPCO's weaker credit metrics in 2018-19 will no longer support a BCA of baa1, hence, positioning its BCA at baa2 is deemed more appropriate.

Moody's expects KEPCO's funds from operation (FFO)/adjusted debt to be in the 14%-16% in 2018-19, which is lower than Moody's previous expectation, and lower than the 24% recorded in 2017 and 25%-30% in 2015-16.

The weakening of KEPCO's credit metrics will mainly stem from the: 1) adverse impact from higher fuel costs (mainly coal and liquefied natural gas), against the backdrop of an expected prolonged delay in timely cost pass-through; 2) heightened regulatory risk on nuclear and coal power under Korea's evolving energy policy to gradually move away from high catastrophe risks and pollutant emissions; and 3) growing capital spending to develop its renewable power capacity.

For these reasons, the stand-alone credit strengths of the gencos have weakened within their ratings. For the five thermal gencos, their ratings now incorporate seven notches of uplift, instead of the previous six notches that applied prior to today's ratings affirmation. For KHNP, its ratings now incorporate six notches of uplift instead of the previous five notches that applied prior to today's rating affirmation.

"Notwithstanding the weakening in their stand-alone credit strengths, the affirmation of the six gencos' ratings reflects their close operational and financial links to their parent, KEPCO, and their strategic importance to Korea's economy as dominant power generators; factors which together offset pressure on their standalone credit strengths," adds Kang.

The gencos' close operational and financial integration with KEPCO is illustrated by the parent's heavy reliance on the six gencos for the supply of electricity to Korea, and a profit-sharing program that balances profits between KEPCO — on a standalone basis — and the gencos, at least once a year. As such, Moody's believes that both KEPCO and the government will take strong measures — if and when needed — to contain any material widespread disruptions to the gencos' operations.

Moody's expects that there will be no material changes in the gencos' relationships with KEPCO, and that the gencos will remain under the close supervision of the government over at least the next two to three years.

For KHNP, Moody's projects that FFO/adjusted debt will weaken to 24%-27% in 2018-19 from 29% in 2017 and 40% in 2016, mainly due to a likely lower profit allocation, which would in turn be because of KEPCO's weakening operating performance on a consolidated basis and higher capital spending levels. These projected credit metrics position KHNP's standalone credit strength at a level consistent with a Baa2 rating, down from the previous Baa1, particularly given heightened regulatory risk to its nuclear operations.

For the five thermal gencos, Moody's forecasts that FFO/adjusted debt for EWP and KOSEP will stay at 13%-16% in 2018-19, down from 23%-25% in 2017 and 27%-35% in 2016. And, for KOMIPO, KOSPO and KOWEPO, FFO/adjusted debt will stand at 10%-14%, down from 12%-18% and 16%-18% during the same periods.

Those projected credit metrics weaken the thermal gencos' standalone credit strengths to a level consistent with a Baa3 rating from the previous Baa2.

The stable ratings outlook for KEPCO reflects Moody's expectations that, over the next 12-18 months, KEPCO's key public policy role and the government's ability to support KEPCO will remain intact, based on the stable outlook on the sovereign rating. The very high likelihood of extraordinary government support could mitigate a weakening in KEPCO's BCA.

The stable rating outlooks for the six gencos reflect Moody's expectation that their close operational and financial links with KEPCO and high strategic importance to Korea's economy will remain intact over the next 12-18 months.

Moody's could upgrade KEPCO's ratings if the government's ability to support the company strengthens; a situation which would be indicated by an upgrade of the sovereign rating.

Moody's could upgrade KEPCO's BCA to baa1 if its FFO/adjusted debt improves on a sustained basis to above 25%-27%, mainly through deleveraging. However, an upgrade in its BCA would not result in an upgrade of the company's ratings, given that KEPCO is already rated on par with Korea's sovereign rating.

On the other hand, Moody's could downgrade KEPCO's ratings if the government's ability to support the company weakens, which would be indicated by a downgrade of the sovereign rating. In addition, any significant adverse changes in KEPCO's relationship with the government or a change in the company's policy role would exert downward pressure on its ratings.

Moody's could downgrade KEPCO's BCA to baa3 or below, if its FFO/adjusted debt weakens to below 10%-12% on a sustained basis, or if it makes substantial investments, particularly in overseas projects, or both. However, a moderate weakening in KEPCO's BCA may not have an immediate impact on its final ratings, because the very high likelihood of extraordinary support from the government provides a buffer to the company's ratings and can mitigate the pressure on its BCA.

An upgrade of the six gencos' ratings is unlikely, unless Korea's sovereign rating and KEPCO's ratings are upgraded. In such a situation, an upgrade of the gencos's ratings will depend on Moody's assessment of their strategic importance to the Korean economy and their relationship with KEPCO.

The likelihood of an improvement in the gencos' standalone credit strengths will be limited over the next 12-18 months, given Moody's expectation of a weakening in the operating performance.

A downgrade of KEPCO's ratings will result in a downgrade of the six gencos' ratings. A significant weakening of the gencos' ownership by and operational and financial relationship with KEPCO — as a result of the government's review of the policy functions of state-owned companies — or their lower strategic importance to Korea's economy, would also strain their ratings.

For KHNP, its standalone credit strength will weaken to a level consistent with a Baa3 rating or below, if its FFO/adjusted debt falls below 20% on a sustained basis. For the five thermal gencos, their standalone credit strengths will weaken to levels consistent with a Ba1 rating or lower, if their FFO/adjusted debt falls to below 8%-10% on a sustained basis.

Accordingly, a weakening in the financial strength of the gencos relative to Moody's expectation could also pressure their ratings, depending on Moody's assessment then of their ongoing role and operational and financial links with KEPCO.

The principal methodologies used in rating Korea Electric Power Corporation were Regulated Electric and Gas Utilities published in June 2017, and Government-Related Issuers published in June 2018. The principal methodology used in rating Korea Hydro & Nuclear Power Co. Ltd., 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 May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Korea Electric Power Corporation (KEPCO) is the only fully integrated electric utility in Korea. The state-owned company is the near monopoly operator of the country's electricity transmission and distribution system. It generated around 72% of the power consumed in Korea through six wholly owned generation companies in 1H 2018. KEPCO was 51% owned by the Korean government, directly and indirectly, at 30 June 2018. The KEPCO Act requires the government to maintain a majority stake of at least 51% in KEPCO.

Korea Hydro & Nuclear Power Co., Ltd. (KHNP) is Korea's sole nuclear power generation company. KHNP accounted for around 23% of Korea's installed power generation capacity at 30 June 2018.

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 accounted for 8%-10% each of installed power generation capacity in Korea at 30 June 2018.

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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