Tokyo, August 26, 2014 -- Moody's Japan K.K. has affirmed its ratings on three Japanese
electric power utilities. The ratings outlooks remain negative
for all three issuers. All of them are regional integrated power
utilities that own nuclear facilities.
Details of the rating affirmations are as follows:
Hokkaido Electric Power Company, Inc (Hokkaido): Senior secured
rating A3; short-term rating Prime-2
Kansai Electric Power Company, Inc (Kansai): Senior secured
and issuer ratings A3, Senior secured shelf registration (P)A3
Kyushu Electric Power Company, Inc (Kyushu): Senior secured
rating A3, Senior secured shelf registration (P)A3
RATINGS RATIONALE
The affirmation of the ratings principally reflects a number of positive
developments for Japan's electricity sector, as well as ongoing
support from bond markets and domestic financial institutions.
However, the negative outlook reflects the continuing uncertainty
surrounding the timing of a return to sustainable levels of profit of
the rated entities as well as our concern that their balance sheets have
been more heavily impacted than their peers, since the Fukushima
disaster.
The continued uncertainty driving the negative outlook can be narrowed
down to one principal issue; the uncertainty on timing and amount
of actual nuclear restart.
The restart process begins with the NRA's (Nuclear Regulation Authority)
approval on the safety assessment on a nuclear facility, as shown
on Kyushu's Sendai plant in July 2014. Agreements with local
governments are also needed. Even after NRA's approval,
timing of local agreements and the time it will take to prepare the facilities
to return to operation remains uncertain. If requirements for local
approvals and/or additional safety equipment are imposed, actual
restarts are not likely within a half year after NRA's approval.
As a result, while waiting for the process of nuclear restart,
the utilities have continuously posted losses. Moody's notes
that all three utilities have applied for and received approval for higher
tariffs, in efforts to compensate the losses. However,
these tariffs are based on cost structures which still assume that about
20% or more of their power originates from nuclear generation which
in reality still stopped. Accordingly, they will suffer from
a prolonged period of negative profits, and more so than some of
their peer companies.
The three utilities -- Hokkaido, Kansai and Kyushu --
recorded operating losses of JPY0.7 billion, JPY39.8
billion and JPY28.1 billion, respectively, in April-June
2014, after posting continuous operating losses for 2-3 consecutive
years after the Fukushima accident.
Furthermore, Moody's has a significant concern on the eroded
capital of the utilities, because of the prolonged negative profitability
and now high gearing and financial leverage. The cumulative damage
to Hokkaido, Kansai, and Kyushu is meaningful and financial
profiles of these three remain extremely weak.
Moody's recognizes that Development Bank of Japan, Inc.
(DBJ, Aa3 stable) has injected preferred stock into Hokkaido and
Kyushu, JPY50.0 billion in July 2014 and JPY100.0
billion in August 2014, respectively. In Moody's view,
these are examples of the utilities' continued access to multiple
funding sources despite their weak operating performance.
However, we see limited positive impact on the utilities'
capital structure, because the preferred stock characteristics are
very similar to those of bonds/normal debt, and the injections are
small in comparison to the weakened balance sheets of these companies.
Accordingly, the necessity to achieve a sustainable profit recovery,
through either nuclear restart or sufficient tariff implementation,
has become more urgent , especially for Hokkaido, Kyushu and
Kansai.
At the same time, we recognize recent positive movements for both
Hokkaido and Kyushu. In July 2014, Hokkaido applied for a
second tariff increase based on the newly introduced approval process
for subsequent rate increases. Also in July 2014, the NRA
approved a safety assessment of Kyushu's Sendai plant, the
first such approval since the accident at Fukushima in March 2011.
Moody's will continue monitoring the progress on nuclear restart
process and whether rate increases would be sufficient to sustain profits
and repair balance sheets of the rated entities.
Given the negative outlook associated with all the three issuers,
and heavily weakened state of their balance sheets and diluted capital
bases, upgrades are unlikely in the near term.
However, the ratings outlook could return to stable in due course
should the utilities re-acquire a sustainable level of operating
profit as a result of sufficient tariff increase or actual restart of
nuclear facilities. In addition, Moody's will observe
the adequacy of future tariff setting and any other arrangements capable
of repairing the extensive balance sheet damage to these entities since
the Fukushima disaster and the likely time to achieve adequate repair.
Such factors will be critical to any stabilization of their ratings.
On the other hand, any change on supportiveness of regulatory environment
and/or financial institutions could lead to further negative rating actions.
The approval processes on Hokkaido's second rate increase and on
Kyushu's Sendai plant would be the key monitoring points.
We will closely observe the future short term profitability of the sector
and particularly the profitability and balance sheet strength of those
rated entities with the highest exposure to nuclear generation.
Should the rapidly deteriorating financial position of these companies
fail to be addressed in the short term, in the absence of other
countermeasures or concrete developments, this would likely lead
to further downgrades.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities (Japanese) published in February 2014. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
The rated utility companies are integrated and dominant suppliers of electricity
in their respective service areas.
Hokkaido Electric Power Company, Inc. (headquarters in Hokkaido),
Kansai Electric Power Company, Inc. (headquarters in Osaka),
and Kyushu Electric Power Company, Inc. (headquarters in
Fukuoka).
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Moody's Japan K.K. is a credit rating agency registered
with the Japan Financial Services Agency and its registration number is
FSA Commissioner (Ratings) No. 2. The Financial Services
Agency has not imposed any supervisory measures on Moody's Japan K.K.
in the past year.
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.
Kazusada Hirose
VP - Senior Credit Officer
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: 813-5408-4110
SUBSCRIBERS: 813-5408-4100
Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100
Moody's affirms ratings of three Japanese electric utilities; maintains negative outlook
