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Rating Action:

Moody's affirms Kansai Electric's A3 ratings; outlook remains negative

 The document has been translated in other languages

25 Nov 2021

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

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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

No Related Data.
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