Hong Kong, September 29, 2022 -- Moody's Investors Service has assigned Aa2 ratings to the proposed senior unsecured US dollar notes to be issued by Korea Electric Power Corporation (KEPCO, Aa2 stable).
The rating outlook is stable.
The notes will be issued under KEPCO's USD11.0 billion global medium-term note (MTN) program, which is rated (P)Aa2.
Moody's understands that KEPCO plans to use all or part of the proceeds to fund or refinance existing and future debt for the development and operations of projects associated with renewable energy, clean transportation and energy efficiency.
RATINGS RATIONALE
"The Aa2 ratings primarily reflect Moody's assessment of a very high likelihood of extraordinary support for KEPCO from the Korean government (Aa2 stable), given the company's essential public policy role and strategic importance, and the government's low tolerance for the reputational and contagion risks that would result from a default," says Mic Kang, a Moody's Vice President and Senior Credit Officer.
The very high likelihood of support from the Government of Korea results in a six-notch uplift from KEPCO's baa2 Baseline Credit Assessment (BCA). Moody's assessment is also based on the Korean government's very high willingness and strong ability to support KEPCO, given the sovereign's ample financial reserves, as reflected in its Aa2 rating with a stable outlook.
Moody's expects the Korean government to provide timely support to KEPCO if the utility's viability is at risk, considering the company's important strategic policy role in supplying power to Korea's economy as the only integrated power utility in the country.
In addition, the government will provide assistance in the event of a disruption at KEPCO to prevent contagion risks to local financial markets and the government-related issuer (GRI) sector.
As such, Moody's has maintained its "Very High" support assessment for KEPCO, under the rating agency's Joint Default Analysis for GRIs.
Moody's has also continued to assess KEPCO's dependence on the government as "Very High", given the company's close links with the government. This assessment mainly stems from KEPCO's mandated policy role in the country's power sector under the government's supervision, and its reliance on the same revenue base as the government and exposure to common credit risks.
KEPCO's baa2 BCA incorporates the company's dominant position in Korea's power sector and fuel diversification particularly into nuclear power, which can partly temper high coal and gas prices. However, the BCA also factors in KEPCO's lack of a track record of timely tariff adjustments amid a surge in fuel costs and its exposure to environmental and safety regulations; and its increasing debt to fund capital spending amid weakening profit.
Moody's expects KEPCO's funds from operations (FFO)/adjusted debt to weaken to the negative or low-single digits in 2022, because of insufficient tariff increases to compensate for a surge in fuel costs. Moody's expects KEPCO's FFO/adjusted debt to recover from 2023-24 to mid-single digits to low teens, mainly because the company will realize full-year benefits from tariff increases in April and July 2022. Moody's also assumes that KEPCO will implement measures including passing at least part of cost movements on to the retail power tariff; increasing its use of nuclear power, which is a key component for its fuel diversification; avoiding excessive debt-funded capital spending through adjustments of investment plan, or all of them. KEPCO's debt/capitalization will also likely begin to recover from 2024, or remain similar to the projected 2022-23 levels of 68%-72%.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
KEPCO's exposure to environmental risk is moderately negative, mainly because of its exposure to carbon transition risk, waste and pollution risk and physical climate risk, all of which are partially tempered by its transmission and distribution business.
KEPCO's exposure to social risk is moderately negative, mainly because the operation of nuclear facilities heightens the risk of responsible production and health and safety, while demographics and societal trends that increase public concern over environmental, social or affordability issues could lead to adverse regulatory political intervention.
KEPCO's neutral-to-low governance risk is supported by its financial strategy and risk management, management credibility and track record, and compliance and reporting track records, which mitigate the risks stemming from its concentrated ownership.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook for KEPCO reflects Moody's expectations that the company's key public-policy role and the government's ability to support the company will remain intact over the next 12-18 months, given the stable outlook on the sovereign rating.
Moody's could upgrade KEPCO's ratings if the government's ability to support the company strengthens, as indicated by an upgrade of the sovereign rating.
Moody's could raise KEPCO's BCA to baa1 if its FFO/adjusted debt improves to above 18% or if its debt/capitalization declines to 65% or below, mainly through leverage reduction. However, a BCA upgrade would not result in an upgrade of KEPCO's ratings because the company is already rated on par with Korea's sovereign rating.
Moody's will downgrade KEPCO's ratings if the government's ability to support the company weakens, as indicated by a downgrade of the sovereign rating. In addition, any significant deterioration 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 lower KEPCO's BCA to baa3 or lower if its FFO/adjusted debt weakens to below 10% on a sustained basis, if its debt/capitalization increases to 70% or above, or both. However, a moderate weakening in KEPCO's BCA may not have an immediate effect on its ratings because the very high likelihood of extraordinary support from the government provides a buffer to the company's ratings and can mitigate the strain on its BCA.
The methodologies used in these ratings were Regulated Electric and Gas Utilities published in June 2017 and available at https://ratings.moodys.com/api/rmc-documents/68547, and Government-Related Issuers Methodology published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/64864. Alternatively, please see the Rating Methodologies page on https://ratings.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 69% of the power consumed in Korea through six wholly-owned generation companies in 2021. KEPCO was 51% owned by the Korean government, directly and indirectly, as of 30 June 2022. The KEPCO Act requires the government to maintain a majority stake of at least 51% in the company.
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 on https://ratings.moodys.com/rating-definitions.
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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
Yian Ning Loh
Associate Managing Director
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
