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Rating Action:

Moody's downgrades Electric Power Development to A2; revises outlook to stable

 The document has been translated in other languages

21 May 2020

Tokyo, May 21, 2020 -- Moody's Japan K.K. has downgraded to A2 from A1 the issuer and senior unsecured bond ratings of Electric Power Development Co., Ltd. (J-Power).

The outlook on J-Power has been changed to stable from negative.

RATINGS RATIONALE

"The downgrade reflects J-Power's high leverage in context of a single-A rated unregulated power company and relative to its peers globally, and our expectation that its debt level will not decline materially given its capital commitments," says Yukiko Asanuma, a Moody's Analyst.

"Nevertheless, J-Power's stable outlook is supported by its very stable cash flow that allows the company to maintain its financial profile," adds Asanuma.

J-Power's debt is unlikely to decline as the company invests in wind power in Japan and the UK, and gas power in the US. In addition, the company continues to make large outlays to construct its first nuclear power plant at Ohma.

Moody's expects J-Power's leverage, for example, in terms of retained cash flow (RCF)/debt to stay around 7%-7.5% over the next two to three years. These levels map to single-B in the Unregulated Power methodology scorecard and are lower than average ratios recorded in recent years by domestic gas companies (around the 20% range) as well as some global unregulated power companies, such as Statkraft AS (A3 stable) and Southern Power Company (Baa1 stable)(both in the mid-teens).

In addition, J-Power's business risk is gradually rising as it increases its sales in the spot market as a consequence of the ongoing deregulation of Japan's electric retail market. The volume that J-Power sells to the spot market is still limited, but earnings will become more volatile longer term from that portion of its sales price and volume becoming exposed to market conditions. These spot sales are a shift from J-Power's legacy business model based on wholesale sales of power under long-term contracts with the ten major electric utilities in Japan.

A2 ratings continue to reflect the company's (1) stable cash flow from its wholesale power operations, supported by long-term bilateral contracts with the 10 utilities; (2) diverse base of offtakers, given J-Power's position as a nationwide provider to all 10 regional utilities; (3) cost-competitive power plants; and (4) important role in Japan's energy policy, given its contribution to the stable supply of electricity, ownership of an integral transmission network, and its material generation capacity.

In terms of environmental risk, J-Power has elevated carbon transition risk with a high reliance on coal-fired generation (nearly half of its power generation capacity for the domestic market). J-Power might see an increase in stranded assets in the future if coal-fired plants under construction are forced to stop operations or lose cost-competitiveness.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook is based on J-Power being able to manage its investments to avoid further increase in leverage, retains stable cash flow supported by long-term power purchase agreements and competitiveness of its generation assets.

Moody's does not expect positive credit pressure in the near future, considering the company's weak credit metrics, the uncertainties surrounding nuclear power generation in Japan and ongoing deregulation. However, longer term it could be possible if J-Power significantly reduces its debt and maintains stronger credit metrics, such as RCF/debt sustained above 15%.

Downward rating pressure will build if further cash flow volatility rises as a result of an increasing portion of sales going into wholesale without long-term contracts, or if large investments heighten business risk and weaken credit metrics, such as RCF/debt sustained below 7%.

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.

Headquartered in Tokyo, Electric Power Development Co., Ltd. is a major wholesale power company in Japan, supplying power to all 10 regional electric utilities in the country.

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.

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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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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