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Rating Action:

Moody's assigns Aa2 to Korea Hydro & Nuclear Power's USD notes

18 Jul 2017

Hong Kong, July 18, 2017 -- Moody's Investors Service has assigned an Aa2 rating to Korea Hydro & Nuclear Power Co., Ltd.'s (KHNP, Aa2 stable) proposed senior unsecured US dollar-denominated notes.

The rating outlook is stable.

KHNP plans to use the proceeds for general corporate purposes, including refinancing.

RATINGS RATIONALE

"The Aa2 rating is primarily driven by KHNP's close operational and financial relationships with, and ownership by its parent Korea Electric Power Corporation, as well as its strategic importance to the Korean government as one of the major power generators in Korea," says Mic Kang, a Moody's Vice President and Senior Analyst.

Moody's believes both Korea Electric Power Corporation (KEPCO, Aa2 stable) and the government will take strong measures to contain any material widespread disruption of KHNP's operations, if and when needed, due to its important role as a major power generator in Korea (Aa2 stable).

KHNP's high operational and financial integration with KEPCO is evidenced by KEPCO's heavy reliance on its power generation subsidiaries (gencos), including KHNP, for power supply for Korea's economy, and by the profit-sharing program that balances profits between KEPCO on a standalone basis and the gencos.

KEPCO and the gencos, including KHNP, balance profits through adjustments of coefficients, which form a key component for the settlement prices for electricity between KEPCO and the gencos, at least once a year.

The planned initial public offering (IPO) for a 20%-30% stake in KHNP starting from 2017, which is part of the government's review of the policy functions of state-controlled entities announced in June 2016, is unlikely to weaken its integration with KEPCO over at least the next 12-18 months. Moody's expects KEPCO will maintain its controlling stake in KHNP, and that KHNP's close operational and financial linkage with the parent and KHNP's strategic importance as a major power producer will remain intact.

In addition, whether and how the planned IPO will proceed will depend on the new administration, which has been in place since May 2017.

However, the IPO -- if it proceeds as planned -- raises some uncertainty over the future ownership structures of KHNP and the other gencos, and over other reform initiatives that the government may take over time. Such uncertainty could cloud the credit profiles of the gencos over the medium to long term, subject to the pace and clarity of any reform initiatives.

Moody's expects KHNP's funds from operation (FFO)/interest and FFO/adjusted debt to stay strong at 9.0x-10.0x and 39.0%-43.0%, respectively, over the next 12-18 months, similar to the 8.6x and 40.2%, respectively, recorded in 2016, absent any material changes in its operational and financial relationship with KEPCO.

These projected financial metrics are consistent with KHNP's standalone credit profile, which is five notches lower than its Aa2 rating.

KHNP's standalone credit profile reflects the company's (1) robust cost competitiveness as the sole nuclear power generator, with the largest power generation capacity in Korea; and (2) strong financial metrics. However, KHNP's standalone credit profile is constrained by the company's concentration in nuclear generation and weak-to-moderate wholesale electricity prices.

Korea's new administration has indicated its focus on environmental issues and safety regarding nuclear generation. In June 2017, the new administration also revealed its intention to stop KHNP's nuclear reactors upon expiration of their original design life and then decommission them and halt construction of new nuclear reactors currently at a planning stage.

However, the new administration's intention will have minimal effect on KHNP's credit metrics over at least the next three to five years because the first decommissioning will start from 2022, cash decommissioning costs will be spread out over the long term, and the majority of nuclear reactors will remain operational until then. The commissioning of new nuclear reactors (with a combined capacity of 5,600 MW) in 2016-19 and a KRW15-KRW17 trillion reduction in capital expenditure from 2018-27 from the government's decision to abolish new nuclear projects that are still at a planning stage will mitigate the adverse effects from the closure of nuclear reactors.

In addition, Moody's expects the profit-sharing program between KEPCO and the gencos will partly mitigate the weak to moderate wholesale electricity prices in Korea. Furthermore, the Korean government is unlikely to materially change a merit order (under which power generated from cheaper fuel sources, such as nuclear and coal, is dispatched first) and the fuel mix in the country, because the cost competitiveness of fuel is an important consideration in determining the fuel mix.

KHNP's stable rating outlook reflects our expectation that the company's close relationship with KEPCO and its high strategic importance to Korea's economy will remain largely unchanged following the government's review of the policy functions of state-owned companies.

An upgrade of KHNP's rating is unlikely, unless Korea's sovereign rating and KEPCO's ratings are upgraded and KHNP's strategic importance and its existing close relationship with KEPCO are maintained.

A downgrade of KEPCO's ratings would result in a downgrade of KHNP's rating. A significant deterioration in KHNP's ownership 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. Furthermore, KHNP's rating could come under downward pressure if the company's funds from operations (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.

Korea Hydro & Nuclear Power Co., Ltd. (KHNP), a nuclear genco, is wholly owned by Korea Electric Power Corporation (KEPCO, Aa2 stable). The parent company is in turn 51% owned by the Government of Korea (Aa2 stable). As of June 30, 2017, KHNP's installed generating capacity totaled 28,439 MW, comprising 23,116 MW from its nuclear reactors and 5,323 MW mainly from its hydro and renewables. The company accounted for around 26% of the 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
Vice President - Senior Analyst
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

No Related Data.
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