Tokyo, November 25, 2021 -- Moody's Japan K.K. has affirmed Chubu Electric Power Company,
Incorporated's A3 issuer and senior secured bond ratings,
as well as the (P)A3 senior secured rating for its shelf registration.
Moody's has also changed the outlook to negative from stable.
"The change in Chubu Electric's outlook to negative reflects
our view that weak profits from competition and debt-financed investments
for decarbonization will depress its credit quality over the next 12 to
18 months," says Yukiko Asanuma, a Moody's Analyst.
RATINGS RATIONALE
Moody's expects Chubu Electric's profit and cash flow will
be weaker and less predictable over the next 12 to 18 months. Since
regulations on retail tariffs and market entry were removed in 2016,
competition in the retail power market has lowered Chubu Electric's
profits.
Moody's estimates that Chubu Electric's profit may not improve
significantly until the fiscal year ending March 2025 (fiscal 2024) when
the company starts receiving capacity contract payments from power marketers.
However, the financial impact of this and other new regulatory measures
being implemented in the Japanese power market is uncertain. Japan
inaugurated its first capacity market auction only last year, and
the results of this fall's and future auctions remain to be seen.
In addition, the cost to purchase non-fossil certificates
could weigh on Chubu Electric's profit, given the company's
relatively high reliance on fossil fuel generation, because the
interim target for non-fossil power sources has been imposed on
electricity retailers since last year.
Meanwhile, Japan's ambitious carbon neutrality target will
accelerate the need to invest in renewables and increase research and
development costs for new technologies such as combustion and carbon dioxide
capture, utilization and storage. Chubu Electric budgets
strategic investments of JPY1 trillion for the ten years through fiscal
2030, of which JPY400 billion has been allocated for renewables.
Weak cash flow concurrent with large investments will likely result in
Chubu Electric's leverage worsening at a time when it is needing
more financial buffer against rising business risk. Under the company's
current plan and financial strategy, Moody's forecasts the
company's retained cash flow (RCF)/net debt will fall from over
11% in fiscal 2020 over the next 12 to 18 months to around 7%
to 8%, after proportionally consolidating for its 50%-owned
affiliate JERA Co., Inc.
This ratio calculation recognizes JERA as a strategic holding as an integral
supplier of much of its power supply. On a reported basis,
Chubu Electric's cash flow decreased after the company transferred its
domestic thermal generation assets to JERA in 2019, and now reflects
a portion of JERA's net income as dividends in place of the strong
cash flow from the thermal assets.
Moody's affirmation of Chubu Electric's A3 ratings reflects
a business risk profile that is still lower than those of some similarly
rated global peers that operate in more deregulated markets. The
company retains much of its legacy vertical integration and a natural
hedge with its access to power from JERA and a predominant market share
in its home Chubu region. Ownership of the regulated network provides
a base of stable cash flow.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative rating outlook reflects the downward pressure on Chubu Electric's
credit quality over the next 12 to 18 months as well as the uncertain
impact of ongoing reforms in the power market, including the results
of the subsequent capacity market auctions and the development of the
non-fossil value market.
Moody's could return the rating outlook to stable if Chubu Electric's
cash flow is sustainably improved from a more favorable competitive environment
and more certainty in a positive impact from ongoing market reforms.
A stable outlook is also possible if Chubu Electric manages to arrest
the rising trend in debt, so as to sustain RCF/net debt comfortably
above 10% and funds from operations (FFO)/net debt above 11%,
proportionally adjusted for JERA. Given the negative outlook,
an upgrade is unlikely in the foreseeable future.
Moody's could downgrade Chubu Electric's ratings if there is an
adverse change in the regulatory or operating environment that deteriorates
the level and quality of its cash flow; the company undertakes a
large investment that increases its debt or business risk; or the
company's proportionally adjusted RCF/net debt remains below 10%
and FFO/net debt, below 11%.
The principal methodology used in these ratings was Unregulated Utilities
and Unregulated Power Companies (Japanese) published in November 2018
and available at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1150645.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Chubu Electric Power Company, Incorporated, which is headquartered
in Nagoya, Japan, is one of 10 major electric utilities in
Japan.
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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Yukiko Asanuma
Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
