New York, August 23, 2018 -- Moody's Investors Service has today assigned a Green Bond Assessment (GBA)
of GB1 (Excellent) to the $300 million senior unsecured US dollar
notes due 2023, issued by Korea Water Resources Corporation (K-water,
Aa2 stable) in May 2018.
"K-water's debut green bond supports the company's
strategy to invest in sustainable development and climate change mitigation
and adaptation activities", said Anna Zubets-Anderson,
a Moody's vice president and senior analyst.
"The use of funds, coupled with the establishment of a green
bond framework and comprehensive governance structure, underpins
our GB1 assessment, despite some weaknesses in how proceeds are
managed", adds Zubets-Anderson.
ASSESSMENT RATIONALE
Korea Water has adopted the K-water Green Bond Framework under
which it is planning to issue multiple debt issuances. The framework
sets out several eligible project categories that look to integrate the
United Nations Sustainable Development Goals and help the company develop
a sustainable water cycle system resilient to the effects of climate change,
expand its renewable energy business, and ensure the safety of drinking
water supplied to communities served by the system. Specifically,
eligible project categories include:
• Climate change adaptation - such as embankments and other
flood protection infrastructure
• Sustainable water supply - such as pipeline, purification
plant and other infrastructure upgrades to increase efficiency and accessibility
of the water delivery system
• Renewable energy - such as hydro power plants and solar
power energy storage systems
• Water management - such as replacement of wastewater and
sewage facilities
We note that these projects align with the eligible categories under the
Green Bond Principles.
The framework aligns with the company's overall mission, which is
to develop and manage Korea's water resources and improve the quality
of water. The company has been actively responding to abnormal
weather conditions in the region observed over the last few decades,
such as the development of information management and early warning systems
designed to better prepare for and respond to disasters such as floods
and droughts. Furthermore, the company is a leading domestic
renewable energy provider, operating 1,352MW of clean energy
power generation facilities, such as hydro, wind and photovoltaic
solar power, which collectively supplied 2,170GWh of renewable
energy in 2016.
The issuer has also established a robust process for project selection
and evaluation, which involves close cooperation between several
teams within the organization.
Korea Water has committed to reporting on the allocation and environmental
impact of projects financed by the green bond one year after the issue
date and annually thereafter until the proceeds have been allocated in
full. The green bond framework sets out that these reports should
include, at a minimum, allocation per eligible project categories
and example of projects financed by the proceeds, including their
descriptions (including information related to the date, location,
category and progress of projects) and corresponding allocated amounts.
Based on discussions with management, we expect that the report
will also discuss the expected environmental benefits of the projects,
including, where feasible, expected quantitative results and
measurement methods. We note that Korea Water already provides
robust reporting of environmental impacts from its existing company-wide
initiatives in its annual sustainability reports.
The main weakness of the company's expected disclosures is that
the reporting is expected only until the funds are fully allocated and
not for the entire duration that the notes are outstanding.
The allocation of the proceeds will be tracked by the company's
treasury department. The balance of unallocated proceeds will be
calculated based on eligible green project expenses identified by the
treasury. These balances will be held in line with the company's
treasury management policies, in the form of cash and cash equivalent
instruments.
Outside of these procedures, however, the bond proceeds will
not be segregated in a separate account, and no screening for green
eligibility will be performed every time an expense is made. Although
reconciliation of eligible expenditures to remaining unallocated balances
will be regularly performed as part of the company's accounting practices,
there will be no separate internal or external audit function to specifically
address proceeds management. We note the absence of both a separate
green bond account and independent audit on the green bond funds as weaknesses
in the proceeds management process.
Korea Water Resources Corporation operates a state-owned water
utility in Korea and is fully owned by the Korean government, directly
and indirectly through Korea Development Bank (Aa2 stable) and municipal
governments.
K-water constructs, operates and manages multi-purpose
dams, and multi-regional and local water supply systems.
It is also involved in developing industrial complexes assigned by the
government.
The principal methodology used in this rating/analysis was Green Bonds
Assessment (GBA) published in March 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
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.
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Anna Zubets-Anderson
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653