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Rating Action:

Moody's changes Kansai Electric's outlook to stable from negative; affirms A3 rating

 The document has been translated in other languages

Global Credit Research - 27 Jan 2017

Tokyo, January 27, 2017 -- Moody's Japan K.K. changed Japanese utility Kansai Electric Power Company, Incorporated's outlook to stable from negative, and affirmed the A3 issuer rating, the A3 senior secured bond rating, and the (P)A3 senior secured rating for the shelf registration.

The following ratings were affirmed:

Issuer rating: A3

Senior secured bond rating: A3

Senior secured shelf registration: (P)A3

RATINGS RATIONALE

"We expect Kansai Electric will remain profitable at least over the coming 12-18 months, and as a result changed the outlook to stable from negative," said Moody's Vice President -- Senior Analyst, Mariko Semetko.

Last fiscal year's second rate hike made the company profitable, and Moody's expects that consistent cost controls will keep the company's EBITDA above D&A, interest and tax levels, even if the utility's nuclear reactors remain shut down.

"At the same time, we don't expect further meaningful improvements in the company's credit metrics over the next 12-18 months" adds Semetko who is also the Lead Analyst for the company.

This is because Kansai Electric will reduce its tariffs if and when its nuclear reactors restart, limiting the upside of earnings and cash flow growth from nuclear generation. Previously, Kansai Electric had planned to reduce its electricity tariffs following the restart of its Takahama 3 and 4 reactors, but had to postpone it after a court injunction shut down the reactors shortly after restarting. The company's customer attrition rate since the electricity retail deregulation in April 2016 has been one of the highest among the Japanese utilities, and nuclear restart, if and when it happens, will allow the company to become more price competitive. Moody's expects that competition in Kansai Electric's service area will be intense relative to many other regions in Japan, especially when gas retail sales are deregulated on 1 April 2017.

Moody's expects the company to remain highly reliant on debt. Multiple years of net losses in the past combined with the need to invest in safety assessments and construction of power plants will protract the deleveraging process. Temporarily high profits last fiscal year has modestly reduced leverage as measured by debt / book capitalization to 77.7% at 30 September 2016 from a peak of 82.8% at 31 March 2015, although it's still very high for the rating and materially higher than the high-sixties / low-seventies levels the company consistently reported prior to Fukushima. Going forward, Moody's expects that it will take a long time for the metric to further materially improve as the company's profit levels normalize from last year's temporarily elevated levels and as debt reliance continues.

Similarly, (CFO pre-working capital changes less dividends) / debt has improved from a trough of -0.9% in the year ended 31 March 2012. A temporary boost from the fuel cost decline in the year ended 31 March 2016 led to the metric surging to 12.6%, although we expect the metric to come down over the coming 12-18 months, especially if the company restarts dividend payments. The metric was in the 12-13% range before Fukushima.

The regulators remain supportive of restarting Kansai Electric's nuclear power plants, thus far approving or granting preliminary approvals to five of its nine nuclear reactors. Having said that, the utility continues to face judicial risks. A court injunction brought on by residents have halted the operations of once-restarted Takahama 3 and 4 reactors despite the regulators approvals, and the company has not been able to reopen them to date.

The A3 senior secured rating reflects the regulatory framework that is fundamentally supportive of the industry from a long-term perspective, the company's prominent position in Japan's second largest metropolitan area of Kansai, and its access to the capital markets. The rating also incorporates expectations that cost recovery will be likely at least over the coming 12-18 months. At the same time, the rating takes into consideration the risks related to nuclear power generation, including capital needs for nuclear safety assessments and legal risk, and on-going deregulation of the industry.

The stable outlook reflects Moody's expectations that the utility's cost recovery will remain relatively certain which limits the likelihood of net losses, the rate of customer losses will not appreciable accelerate, and that the government and the banks will remain supportive of the sector.

Further clarity in policies regarding Japan's nuclear generation, lower legal risk, a steady and predictable business environment, an ability to consistently operate four nuclear reactors, solid cash flows, and significant deleveraging of its balance sheet could have positive implications for the ratings. Gaining enough gas customers which would more than offset any reduction in revenues and profit from losing its electricity customers will also benefit the company's credit profile. These improvements should lead to continued improvements in credit metrics, including but not limiting to (CFO pre-working capital less dividends) / debt exceeding 10% on a sustainable basis.

Any adverse change in support -- as a result of changes in the regulatory environment and/or from financial institutions -- could lead to a negative rating action. Moody's will consider a downgrade if cost recovery or deleveraging becomes less certain once again.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities (Japanese) published in February 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Kansai Electric Power Company, Incorporated, headquartered in Osaka, Japan, is one of the ten major electric utilities in Japan.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

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.

Mariko Semetko
Vice President - Senior 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: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

No Related Data.
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