Tokyo, November 25, 2021 -- Moody's Japan K.K. has affirmed Kansai Electric Power Company,
Incorporated's A3 issuer and senior secured bond ratings, as well
as the (P)A3 senior secured rating for its shelf registration.
The outlook remains negative.
"Kansai Electric's outlook remains negative to reflect our
view that weak profits from competition and debt-financed investments
for decarbonization will depress its credit quality over the next 12 to
18 months," says Yukiko Asanuma, a Moody's Analyst.
RATINGS RATIONALE
While Kansai Electric has addressed many of the governance issues uncovered
by the bribery scandal that initially caused the negative outlook in 2020,
the negative outlook now reflects Moody's expectation of that the
company's profit and cash flow will be weaker and less predictable
over the next 12 to 18 months.
Since regulations on retail tariffs and market entry were removed in 2016,
competition in the retail power market has eroded Kansai Electric's
profits. In March 2021, the company lowered its profit target
for the next three years through to the year ending 31 March 2024 (fiscal
2023) to half of its profit in fiscal 2018.
Moody's notes execution risk in Kansai Electric realizing the profit
improvement it envisions, which includes bringing three nuclear
reactors online in fiscal 2023 and receiving capacity contract payments
starting in fiscal 2024. Restarting nuclear plants in Japan is
controversial and prone to delays despite the government's policy
to support nuclear power.
As for capacity contract payments, the financial impact of this
and other new regulatory measures being implemented in the Japanese power
market is uncertain. Japan inaugurated its first capacity market
auction only last year, and the results of this fall's and
future auctions remain to be seen. The interim target for non-fossil
power sources has been imposed on electricity retailers since last year.
Sales of non-fossil certificates could bring incremental profit
to a nuclear generator like Kansai Electric.
Meanwhile, Japan's ambitious carbon neutrality target will
accelerate the need to invest in renewables and increase research and
development costs for new technologies such as combustion and carbon dioxide
capture, utilization and storage. Kansai Electric budgets
growth investments of JPY2.5 trillion over the next five years,
of which JPY340 billion has been allocated for renewables.
Weak cash flow concurrent with large investments will likely result in
Kansai Electric's leverage worsening at a time when it is needing
more financial buffer against rising business risk. Under the company's
current plan and financial strategy, Moody's forecasts the
company's retained cash flow (RCF)/net debt will fall from 12%
in fiscal 2018 over the next 12 to 18 months to the 7%-8%
range.
Moody's affirmation of Kansai Electric's A3 ratings reflects
a business risk profile that is still lower than those of some similarly
rated global peers that operate in more deregulated markets. The
company retains much of its legacy vertical integration and a natural
hedge with its generation assets supplying a still predominant market
share in its home Kansai region. Ownership of the regulated network
provides a base of stable cash flow. Kansai Electric is also one
of only three Japanese utilities that restarted their nuclear plants following
the 2011 nuclear disaster in Fukushima, making it more competitive
in the deregulated, decarbonizing electricity market.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative rating outlook reflects the downward pressure on Kansai Electric's
credit quality over the next 12 to 18 months, as well as the execution
risk in the company realizing the profit improvement it targets in its
mid-term plan, and the uncertain impact of ongoing reforms
in the power market, including the results of the subsequent capacity
market auctions and the development of the non-fossil value market.
Moody's could return the rating outlook to stable if Kansai Electric's
cash flow is sustainably improved from a more favorable competitive environment;
more certainty in a positive impact from ongoing market reforms;
and progress and visibility toward having all seven of its reactors online
as scheduled and budgeted in fiscal 2023. A stable outlook is also
possible if Kansai Electric manages to arrest a rise in debt, such
that it maintains its RCF/net debt comfortably above 10% and funds
from operations (FFO)/net debt above 11%. Given the negative
outlook, an upgrade is unlikely in the foreseeable future.
Moody's could downgrade Kansai Electric's ratings if there is an
adverse change in the regulatory or operating environment that deteriorates
the level and quality of its cash flow; the company undertakes a
large investment that increases its debt or business risk; or RCF/net
debt remains below 10% and FFO/net debt, below 11%.
The principal methodology used in these ratings was Unregulated Utilities
and Unregulated Power Companies (Japanese) published in November 2018
and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1150645.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Kansai Electric Power Company, Incorporated, which is headquartered
in Osaka, Japan, is one of 10 major electric utilities in
Japan.
REGULATORY DISCLOSURES
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Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Yukiko Asanuma
Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
