Hong Kong, July 18, 2018 -- Moody's Investors Service has assigned a Aa2 rating to the proposed senior
unsecured US dollar bonds to be issued by Korea Hydro & Nuclear Power
Co., Ltd. (KHNP, Aa2 stable).
The rating outlook is stable.
The bonds will be issued under KHNP's existing USD5.0 billion Global
Medium Term Note (MTN) program, which is rated (P)Aa2.
KHNP plans to use the proceeds for the financing and/or refinancing of
new or existing projects to develop and operate renewable energy and lower
carbon transportation systems, and to improve energy efficiency
of its facilities and buildings.
RATINGS RATIONALE
"The Aa2 rating reflects KHNP's close operational and financial relationships
with its parent, Korea Electric Power Corporation, as well
as its strategic importance to Korea's economy as a major power generator,"
says Mic Kang, a Moody's Vice President and Senior Credit Officer.
Moody's expects that both Korea Electric Power Corporation (KEPCO,
Aa2 stable) and the Government of Korea (Aa2 stable) will take strong
measures to contain any material widespread disruptions to KHNP's operations,
if and when needed, due to the company's close relationship with
KEPCO and its importance as the largest power generator in the country.
This expectation provides a five-notch uplift to KHNP's final ratings
from its standalone credit profile.
KHNP's close operational and financial integration with KEPCO is
illustrated by the parent's heavy reliance on its six power generation
companies (gencos), including KHNP, for the supply of electricity
in Korea and a profit-sharing program that balances profits between
KEPCO, on a standalone basis, and the gencos.
Moody's believes 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. In June 2016, Korea announced its plan to start
initial public offerings (IPOs) of 20%-30% stakes
in the six gencos, including KHNP, from 2017. However,
whether and how the announced IPOs will proceed remains to be seen,
given the lack of major progress or an updated timeline since then.
In addition, the current administration of Korea emphasizes the
public roles of state-owned or controlled public enterprises,
such as KEPCO and the gencos, thereby implying that privatization
of the gencos will be unlikely over at least the next two to three years.
KHNP's standalone credit profile reflects its strong market position
with robust cost competitiveness, as the only nuclear operator in
Korea, and its adequate financial metrics. At the same time,
these strengths are constrained by KHNP's concentration in nuclear generation
amid tightening safety requirements for its nuclear reactors.
Moody's projects KHNP's funds from operations (FFO)/adjusted debt
and FFO/interest coverage will stay at 26%-30% and
6x-8x, respectively, over the next 12-18 months,
which are weaker than the 29.0%-40.2%
and 7.2x-8.6x in 2015-17 but adequately support
its credit quality.
This projection assumes that most of KHNP's nine stopped nuclear
reactors will be operational in 2H 2018, following extensive inspection
and maintenance under strengthened safety requirements, and that
average utilization for its nuclear reactors will bottom out from the
extraordinarily low 55%-65% in 4Q 2017-1Q
2018 and stay at 75%-80% in 2019-20.
The projection also reflects Moody's expectation that the adjusted
coefficients with KEPCO will not significantly decline from the levels
seen in 2017, owing to a likely recovery of KEPCO's operating
performance from 2019. The coefficients are adjusted at least once
a year as a means to balance profits between KEPCO and the gencos.
The stable rating outlook reflects Moody's expectation that KHNP's
close operational and financial links with KEPCO and its high strategic
importance to Korea's economy will remain intact over the next 12-18
months.
An upgrade of KHNP's rating is unlikely, unless Korea's
sovereign rating is upgraded and KEPCO's ratings are upgraded,
while KHNP's strategic importance to and close links with KEPCO are maintained.
A downgrade of KEPCO's ratings will result in a downgrade of KHNP's rating.
A significant weakening of KHNP's ownership by and operational relationship
with KEPCO, as a result of the government's review of the
policy functions of state-owned companies, would also strain
KHNP's rating. KHNP's credit quality could come under downward
pressure if the company's FFO/adjusted debt or FFO/interest coverage falls
below 16% or 4.0x-4.5x, respectively,
on a sustained basis.
The principal methodology used in this rating 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 this methodology.
At 31 March 2018, Korea Hydro & Nuclear Power Co. Ltd.
(KHNP), a nuclear genco, was wholly owned by Korea Electric
Power Corporation. The parent company is, in turn,
51% owned by the government. KHNP was spun off from KEPCO
in April 2001. As of March 31, 2018, KHNP's installed
generating capacity totaled 27,178 megawatts (MW) (excluding the
permanently shut down Wolseong unit 1), comprising 21,850
MW from its nuclear reactors and 5,328 MW mainly from its hydro
capacity and renewables. The company accounts for around 24%
of total installed power generation capacity in Korea.
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.
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
