Hong Kong, January 21, 2020 -- Moody's Investors Service has assigned an Aa2 rating to the proposed senior
unsecured USD notes to be issued by Korea South-East Power Co.,
Ltd. (KOSEP, Aa2 stable).
The rating outlook is stable.
KOSEP plans to use the net proceeds to finance new projects or to refinance
existing projects associated with renewable energy, pollution prevention
and control, terrestrial and aquatic biodiversity conservation and
green buildings.
RATINGS RATIONALE
"The Aa2 rating reflects KOSEP's close operational and financial relationship
with its parent, Korea Electric Power Corporation, and 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, if needed, to contain any material widespread disruptions
to the operations of KEPCO's six power generation companies (gencos),
including KOSEP. Consequently, KOSEP's rating incorporates
a seven-notch uplift from its standalone credit strength.
KOSEP'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 change 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
current administration's focus on the public roles that state-owned
and controlled entities play.
KOSEP's standalone credit strength reflects its solid market position
as one of the major power generators in Korea, its high cost competitiveness,
and its adequate financial metrics to maintain its current standalone
credit strength.
At the same time, the company's standalone credit strength reflects
its concentration in coal power amid tightening environmental regulations
and its exposure to coal price movements.
Moody's estimates that KOSEP's funds from operations (FFO)/adjusted debt
will register 12%-15% for 2019 and stay at this level
over the next 12-19 months, because a recovery in adjusted
coefficients for coal power generation and moderating coal price will
likely continue to mitigate the higher costs associated with the purchase
of carbon emission rights and increasing debt to fund capital spending.
These estimated and projected credit metrics are similar to or slightly
lower than the 14.8% recorded in 2018, and remain
within Moody's expectation for KOSEP's standalone credit strength.
In terms of environmental, social and governance (ESG) factors,
KOSEP operates in the unregulated utilities and power sector, which
faces elevated-immediate environmental risk. Accordingly,
the rating reflects KOSEP's exposure as a fossil-based power plant
operator to increasing competition for dispatch and environmental compliance
costs, under the Korean government's energy policy to move
toward renewable power sources.
KOSEP's exposure to social risk — mainly stemming from health and
safety regulations, responsible production requirements, and
demographic and societal trends -- is mitigated by the measures it
has taken to satisfy the government's strengthening safety requirements
and the public's increasing awareness around safe power generating
practices.
KOSEP will likely increase its capital spending to develop renewables
and to satisfy strengthening environmental regulations. However,
the increasing capital spending will not raise governance risk associated
with the company's leverage policy, because of the Korean
government's tight supervision over financial managements of state-owned
or controlled companies, including KOSEP, which are strategically
important to Korea's economy and public.
The stable rating outlook reflects Moody's expectation that KOSEP'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 KOSEP's rating is unlikely, unless Moody's upgrades
Korea's sovereign rating and KEPCO's ratings. Even in such situation,
an upgrade of KOSEP's rating will depend on Moody's assessment then of
the company's strategic importance to the Korean economy and its relationship
with KEPCO.
Moody's does not expect a material improvement in KOSEP's standalone
credit strength over the next 12-18 months, absent a strong
rebound in the company's credit metrics. Nevertheless, the
company's standalone credit strength could improve if FFO/adjusted debt
increases to 20% on a sustained basis.
A downgrade of KEPCO's ratings would result in a downgrade of KOSEP's
rating.
KOSEP's rating could also be pressured if (1) there is a significant weakening
in its ownership by, and operational and financial relationship
with, KEPCO as a result of the government's review of the state-owned
companies' policy functions; or (2) KOSEP's strategic importance
to Korea's economy lessens.
KOSEP's standalone credit strength will weaken if its FFO/adjusted debt
falls below 8% on a sustained basis. Accordingly,
a weakening in KOSEP's financial strength relative to Moody's
expectation could also strain its rating, depending on Moody's assessment
then of the company's ongoing role in Korea's economy and its operational
and financial links with KEPCO.
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 South-East Power Co., Ltd. (KOSEP) is
a thermal power generation company in Korea, wholly owned by Korea
Electric Power Corporation. The parent company is in turn 51%
owned by the Korean government.
At 30 September 2019, KOSEP's installed generation capacity totaled
10,376 megawatts (MW), comprising 9,189 MW from its
coal-fired units, 922 MW from its LNG units and 265 MW from
renewables and others. The company accounted for around 9%
of Korea's total installed power generation capacity as of September 2019.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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Please see www.moodys.com for any updates on changes to
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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
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
