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Announcement:

Moody's reviews nine Japanese utilities for possible downgrade and changes outlook to negative on another

 The document has been translated in other languages

28 Mar 2011

Tokyo, March 28, 2011 -- Moody's Japan K.K. has placed the long term ratings of nine Japanese utilities on review for possible downgrade and changed the outlook to negative from stable on another.

Placed on review are all long term ratings of Chubu Electric Power Company, Inc.; Chugoku Electric Power Company, Inc., Electric Power Development Co., Ltd. (J-Power); Hokkaido Electric Power Company, Inc., Hokuriku Electric Power Company, Kansai Electric Power Company, Inc., Kyushu Electric Power Company, Inc., The Okinawa Electric Power Company, Inc. , and Tokyo Gas Co, Ltd. Short-term ratings are not on review. In addition, the outlook of Osaka Gas Co., Ltd. has been changed to negative from stable.

The review of the long term ratings of these utilities is prompted by 1) the lasting consequences that the devastating earthquake and tsunami that hit Northeastern Japan will have for the nation's power and utility sector; 2) the challenging economic environment, increasing the risk that there could be a delay in the recovery of higher costs and that the utilities could be pressured to accept lower returns; and 3) their comparatively weak financial profiles relative to the rating category, high debt leverage, and limited financial flexibility.

The earthquake and tsunami on March 11, 2011 has had considerable impact on the energy and power sector in the country, most notably as a result of the damage and subsequent nuclear problems that occurred at the Fukushima Daiichi Nuclear Power Station, whose owner Tokyo Electric Power's ratings are already on review for potential downgrade.

Moody's believes that this nuclear crisis could impact the electric utility sector significantly and result in a fundamental reassessment of the use of nuclear power in Japan, perhaps resulting in earlier than anticipated decommissioning of some nuclear plants and the potential cancellation or indefinite postponement of some new nuclear generation. These developments are likely to result in accelerated decommissioning costs, increased capital expenditures for higher cost replacement generation, lower reserve margins, and higher operating costs at existing nuclear plants as a result of increased scrutiny, more stringent safety procedures, and longer required maintenance outages.

New constraints on the use of nuclear power will likely raise energy costs for residential, commercial, and industrial customers throughout Japan as more expensive thermal and other sources of generation replace lower cost nuclear power. Costs to construct these other generation sources may not be passed on to customers on a timely basis, resulting in delayed cost recovery and further constraining financial performance and increasing debt leverage.

The impact of earthquake and tsunami on gas sector is less significant than on power sector as gas sector does not have exposure to nuclear power generation. However, the economic activity may slow and suppress customer volume for Tokyo Gas, while increased use of thermal generating units to produce electricity may push LNG prices higher, leading to timing lags between changes in the cost of gas and changes in customer rates.

Considering the difficult economic conditions the country faces and rising fuel costs, Moody's is concerned about the increasing risk for power and gas utilities that they are not able to pass on the cost on a timely basis for return on assets stipulated by the regulation could be pressured. The review also reflects the comparatively weak financial and leverage profile of all of these utilities as they face an increasingly challenging operating environment. This financial weakness has traditionally been offset by low business risk and the strong government and banking system support that has historically been in place. However, demands on the Japanese government could also increase as the country struggles to recover from the disruption caused by the earthquake, which could require a substantial government backed stimulus program to facilitate recovery.

Until now, the ratings for Osaka Gas and Tokyo Gas had reflected standalone credit quality at Aa2 and Aa1 respectively, without any uplift for support system; recent events argue for a more cautious assessment across a range of key rating drivers including the supportive regulatory regime and timely and complete cost recovery. The rating for Osaka Gas is still positioned at Aa2, but now reflects a lower standalone assessment combined with an uplift for support system from the Japanese banks and Government. This uplift should not result in a rating higher than that of the supporters, which is why Osaka Gas's rating is now positioned at Aa2/negative rather than Aa2/stable. While Tokyo Gas has historically been positioned one notch higher than Osaka Gas, most of these same concerns apply -- and if its standalone credit quality is similarly determined to be lower than Aa2, its final rating is likely to be capped at Aa2/negative for the same reason.

The review will assess each utility's financial, business and regulatory risk profile. The review will evaluate the extent to which the high level of government and support system is likely to continue given the increased demands on the Japanese government after several years of lackluster economic growth has constrained its own economic and fiscal flexibility.

For the eight electric utilities, the review will consider their reliance on nuclear power as a generation source, including potentially increased scrutiny of reactors with the same or similar design as the boiling water reactors at the Fukushima Daiichi nuclear plant. The review will also take into consideration each utility's current and future plans to construct new nuclear generation and the impact that the Fukushima Daiichi events will have on those plans.

Ratings on review include:

Chubu Electric Power Company, Inc.: Aa2 senior secured and Issuer Rating;

Chugoku Electric Power Company, Inc.: Aa2 senior secured and Issuer Rating;

Electric Power Development Co., Ltd. (J-Power): Aa2 senior unsecured and Issuer Rating;

Hokkaido Electric Power Company, Inc.: Aa2 senior secured;

Hokuriku Electric Power Company: Aa2 senior secured;

Kansai Electric Power Company, Inc.: Aa2 senior secured and Issuer Rating;

Kyushu Electric Power Company, Inc.: Aa2 senior secured;

Okinawa Electric Power Company, Inc.: Aa2 senior secured and Issuer Rating;

Tokyo Gas Co., Ltd.: Aa1 senior unsecured;

Outlook changed to negative from stable:

Osaka Gas Company: Aa2 senior unsecured.

Moody's last rating actions with respect to Chubu Electric, Kansai Electric, and Okinawa Electric were taken on March 8, 2007 upgraded to Aa2 from Aa3, Chugoku Electric, Hokkaido Electric, Hokuriku Electric, and Kyushu Electric were taken on March 8, 2007 upgraded to Aa2 from A1, J-Power was taken on January 21, 2008, when its Aa2 issuer rating was assigned. This was the first time that Moody's has assigned a credit rating to J-Power.

Also, the last rating actions with respect to Tokyo Gas and Osaka Gas were taken on December 14, 2004, when changed outlook to stable from negative.

The principal methodology used in rating these issuers was "Regulated Electric and Gas Utilities" published on September 30, 2010 and available on www.moodys.co.jp.

The rated utility companies are integrated and are the dominant suppliers of electricity and gas in their respective service areas.

Chubu Electric Power Company, Inc. (headquarters in Aichi), Chugoku Electric Power Company, Inc. (headquarters in Hiroshima), Electric Power Development Co., Ltd. (headquarters in Tokyo), Hokkaido Electric Power Company, Inc. (headquarters in Hokkaido), Hokuriku Electric Power Company (headquarters in Toyama), Kansai Electric Power Company, Inc. (headquarters in Osaka), Kyushu Electric Power Company, Inc. (headquarters in Fukuoka), Okinawa Electric Power Company, Inc. (headquarters in Okinawa), and Tokyo Gas Co, Ltd. (headquarters in Tokyo), Osaka Gas Co., Ltd. (headquarters in Osaka).

Tokyo
Kenji Okamoto
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Shinsuke Tanimoto
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's reviews nine Japanese utilities for possible downgrade and changes outlook to negative on another
No Related Data.
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