Hong Kong, April 15, 2021 -- 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 net proceeds from the proposed issuance for debt
refinancing or general corporate purposes.
RATINGS RATIONALE
"The Aa2 rating reflects KHNP's close operational and financial links
with its parent, Korea Electric Power Corporation, and the
company's 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, if and when needed, to contain any material widespread
disruptions to operations of KEPCO's six power generation companies (gencos),
including KHNP. This expectation provides a six-notch uplift
to KHNP's ratings from its standalone credit strength.
KHNP's close operational and financial integration with KEPCO is illustrated
by the parent's heavy reliance on the six gencos for the supply of electricity
in Korea, and a profit-sharing program that balances profits
between KEPCO -- on a standalone basis -- and the gencos,
at least once a year.
Moody's expects that there will be no material changes in the relationship
and integration between KEPCO and the gencos, and that the government
will maintain its tight control and supervision over the gencos over at
least the next 12-18 months. This is mainly because of the
government's focus on the public roles that state-owned and controlled
entities play.
KHNP's standalone credit strength reflects its strong market position
with robust cost competitiveness, as the only nuclear operator in
Korea, and its adequate financial metrics for its credit quality.
At the same time, the company's standalone credit strength takes
into account its concentration in nuclear generation amid the increased
safety control in nuclear power and energy policy, which seeks to
gradually move away from nuclear power, and its exposure to movements
in wholesale power prices.
Moody's projects KHNP's funds from operations (FFO)/adjusted debt will
stay at 21%-23% over the next 12-18 months,
compared with around 22% in 2020. Such a ratio will continue
to support KHNP's credit quality. This projection assumes that
average utilization for its nuclear reactors will be 75%-80%
in 2021-22, only modestly increasing from 75.3%
in 2020, given the tightened safety control on nuclear reactors.
The rating also considers the following environmental, social and
governance (ESG) factors.
KHNP operates in the unregulated utilities and power sector, which
faces high environmental risk. But KHNP's exposure to carbon transition
risk is minimal, although the company is exposed to physical risks
associated with climate change, which are partially tempered by
the insurance coverage.
KHNP's exposure to social risk mainly stems from health and safety regulations,
responsible production requirements, and demographic and societal
trends. The risk is mitigated by the measures KHNP has taken to
satisfy the government's strengthening safety requirements and the public's
increasing awareness around safe power generating practices, and
its capacity to generate power reliably at very competitive costs.
KHNP will increase its capital spending to develop renewables and ensure
the safety of its operational nuclear reactors. However,
the rising capital spending will not increase the governance risk associated
with the company's leverage policy, because of the Korean government's
tight supervision of the financial management of state-owned or
controlled companies, including KHNP, which are strategically
important to Korea's economy and public.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
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 ratings is unlikely unless Korea's sovereign
rating and KEPCO's ratings are upgraded. In such a situation,
an upgrade of KHNP's ratings will depend on Moody's assessment
then of its strategic importance to the Korean economy and its relationship
with KEPCO.
KHNP's standalone credit strength, which is six notches lower
than its Aa2 rating, will improve if its FFO/adjusted debt increases
to 25% on a sustained basis.
A downgrade of KEPCO's ratings will result in a downgrade of KHNP's
ratings. A significant weakening of KHNP's ownership by and
operational and financial relationships with KEPCO — as a result
of the government's review of the policy functions of state-owned
companies — or a decline in its strategic importance to Korea's
economy would also strain its ratings.
KHNP's standalone credit strength will weaken if its FFO/adjusted debt
remains below 18% on a sustained basis. Accordingly,
a weakening of KHNP's financial strength relative to Moody's
expectation could also strain its ratings, depending on Moody's
assessment then of its role, and operational and financial links
with KEPCO.
The principal methodology used in this rating was Unregulated Utilities
and Unregulated Power Companies published in May 2017 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
At 31 December 2020, Korea Hydro & Nuclear Power Co.,
Ltd. (KHNP), a nuclear genco, was wholly owned by Korea
Electric Power Corporation. The parent company is 51% owned
by the government. KHNP was spun off from KEPCO in April 2001.
As of 31 December 2020, KHNP's installed generating capacity totaled
28,601 megawatts (MW), comprising 23,250 MW from its
nuclear reactors and 5,351 MW mainly from its hydro capacity and
renewables. The company accounts for around 22% of total
installed power generation capacity in Korea.
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.
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The first name below is the lead rating analyst for this Credit Rating
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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
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China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
