Hong Kong, January 11, 2021 -- Moody's Investors Service has downgraded SK E&S Co. Ltd.'s
issuer rating to Baa3 from Baa2.
At the same time, Moody's has revised to stable from negative
the outlook on the issuer rating.
"The downgrade reflects our expectation that SK E&S' aggressive
financial policy will further pressure its financial metrics,"
says Mic Kang, a Moody's Vice President and Senior Credit Officer.
"SK E&S' investment in a US hydrogen business highlights
its aggressive financial policy."
The downgrade follows SK E&S' announcement on 7 January 2021
that it will jointly with its parent SK Holdings Co., Ltd
acquire a 9.9% stake in the US company Plug Power Inc,
which is a provider of hydrogen and zero-emission fuel cell solutions,
for $1.5 billion. SK E&S and SK Holdings will
each invest $0.75 billion. [1]
RATINGS RATIONALE
The Baa3 issuer rating reflects SK E&S' business diversification
into power generation and regulated retail gas distribution, the
cost advantage from liquefied natural gas (LNG) sourcing, and the
likelihood of support from its parent, SK Holdings, when needed.
At the same time, the rating takes into account the exposure of
its profit margin to oil price movements and competition among power generators
in Korea, its business concentration in Korea's utility sector,
and its aggressive financial policy.
The rating benefits from a one-notch parental uplift, based
on Moody's expectation that, if needed, the company
will receive extraordinary parental support from SK Holdings, the
holding company of SK Group, given SK E&S' growing strategic
importance in the group's LNG value chain and the high reputational
risk that could arise from SK E&S' failure. SK Holdings' willingness
to support SK E&S is further evidenced by the former's provision of
a performance guarantee for SK E&S' commitment to use the Freeport
liquefaction facility in the US for 20 years starting in 2020.
Moody's expects SK E&S' funds from operations (FFO)/adjusted
debt to decline to 10%-14% over the next 12-18
months from 15%-16% in 2018-19, in the
absence of material deleveraging measures that could otherwise improve
its financial profile. These projected metrics no longer support
its previous Baa2 rating. Moody's does not expect that SK
E&S will implement such deleveraging measures over the next 12-18
months, given its aggressive financial policy, which has resulted
in excessive dividend payments and debt-funded investments.
The rating also considers the following environmental, social and
governance (ESG) factors.
First, SK E&S operates in the unregulated utilities and power
sector, which faces elevated immediate environmental risk.
However, SK E&S' LNG power plants will remain a power source
in Korea amid the government's aim to move away from nuclear and coal
power gradually.
Second, SK E&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.
Third, SK E&S' credit quality takes into account corporate governance
considerations with respect to its aggressive financial strategy.
Its parent SK Holdings has a strong influence over the company's financial
policies, as demonstrated by SK E&S' track record of its cash
holdings mainly being used for dividend payouts or, to a lesser
extent, capital spending, rather than deleveraging.
The stable rating outlook reflects Moody's expectation that SK E&S'
credit metrics, along with the parental support, will support
its Baa3 rating over the next 12-18 months, in the absence
of sustained excessive dividends and debt-funded investments.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade SK E&S' rating if its FFO/adjusted debt increases
above 15% on a sustained basis, through material deleveraging
measures, or financial policy improvement, or both.
However, if SK E&S' financial policy further weakens,
a rating upgrade could require stronger financial metrics than this threshold.
Moody's could downgrade SK E&S' rating if FFO/adjusted debt falls
below 8% on a sustained basis, if it continues its high dividend
payments, if it deploys material expansionary capital spending,
or if there is a significant and structural weakening in industry fundamentals,
or all.
The principal methodology used in this rating was Unregulated Utilities
and Unregulated Power Companies published in May 2017 and available at
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066389.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
SK E&S Co. Ltd. is a major private independent power
producer operating gas-fired power and co-generation plants
in Gwangyang, Paju, Hanam and Wirye and a fuel-cell
power plant, with a total capacity of 3.8 gigawatts as of
30 September 2020, or around 2.7% of Korea's (Aa2
stable) total power generation capacity. It is also the largest
retail gas distribution company in Korea, with around 22%
market share by sales volume in H1 2020.
At 30 September 2020, SK E&S was 90% owned by SK Holdings
Co., Ltd., with the remaining 10% owned
by financial investors in Korea.
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
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REFERENCES/CITATIONS
[1] Company filing at Data Analysis, Retrieval and Transfer
System of Korea; 07-Jan-2021
Please see www.moodys.com for any updates on changes to
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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
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 61 2 9270 8141
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
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