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Rating Action:

Moody's revises outlook on SK E&S' Baa2 rating to negative

 The document has been translated in other languages

15 Feb 2019

Hong Kong, February 15, 2019 -- Moody's Investors Service has revised to negative from stable the outlook on the Baa2 issuer and Ba1 preferred stock ratings of SK E&S Co. Ltd.

At the same time, Moody's has affirmed the Baa2 issuer and Ba1 preferred stock ratings.

RATINGS RATIONALE

"The change in outlook reflects SK E&S' weakening financial buffer stemming from the announced high dividend payout and likely increase in debt to fund potential growth in capital spending," says Mic Kang, a Moody's Vice President and Senior Credit Officer, adding "the company's use of a large internal cash source for dividends rather than debt reduction means a weaker visibility on its deleveraging strategy compared to our previous expectation."

On 14 February 2019, SK Holdings Co., Ltd., the parent company of SK E&S, announced SK E&S' dividend of KRW671.5 billion, an amount which is much higher than the dividend range of KRW152.1 -- KRW265.5 billion paid during 2016-18, and higher also relative to Moody's rating expectation. Moody's believes the high dividend mainly takes into account SK E&S' improved operating results in 2018 and cash proceeds from the sale of its 49% stake in the Paju power plants in November 2018.

Moody's expects that the use of internal cash for dividend payment will lead SK E&S to rely more on debt for funding capital expenditure requirements in 2019-21. SK E&S' funding needs for a new LNG-fired power plant with a capacity of 1 gigawatt in Korea will challenge the company's leverage, particularly given the announced high dividend payment.

Moody's expects SK E&S to proceed with the LNG power project, which is reflected into Korea's 8th basic plan for power demand and supply.

Moody's expects SK E&S' funds from operation (FFO)/adjusted debt to decline to 14%-16% in 2019 compared to an estimated 16%-17% in 2018. The credit metrics will likely further weaken to 11%-13% in 2020-21, mainly because of likely growing capital spending amid its lower financial buffer and weaker operating environment.

Such leverage positions SK E&S weakly relative to the rating tolerance, which includes FFO/adjusted debt of around 12%-14%. Moody's expects a lower likelihood of SK E&S implementing a deleveraging strategy, as had been previously expected by Moody's, thereby lowering visibility around the company's financial policy.

SK E&S' issuer rating reflects its standalone credit profile, which is consistent with the Baa3 rating level, and also incorporates a one-notch uplift, based on Moody's expectation for extraordinary parental support from SK Holdings.

Moody's believes that SK Holdings Co., Ltd., a holding company of SK Group, will maintain a strong willingness to support SK E&S, in case of need, owing to SK E&S' growing strategic importance as a core subsidiary in the group's LNG value chain — spanning from the sourcing of LNG to power and heat generation — and the high reputational risk that could arise from a distress of the subsidiary.

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 that SK Holdings will maintain an adequate ability to provide support to SK E&S, if and when needed, over at least the next one to two years, given the presence of its solid core associates — SK Telecom Co., Ltd. (A3 negative) and SK Innovation Co. Ltd. (Baa1 stable) — its well-diversified business portfolio, and its strong access to the domestic capital markets.

The negative ratings outlook reflects Moody's expectation that SK E&S' credit quality will remain under pressure over at least the next 12-18 months, owing to the projected weakening of its credit metrics and financial buffer.

Moody's could revise the negative ratings outlook to stable if SK E&S' FFO/adjusted debt comfortably stays above 12%-14% and/or adjusted debt/capitalization stays below 60%-62%, through the implementation of material deleveraging measures, a meaningful cut in its capital spending, or both.

Conversely, Moody's could downgrade SK E&S' ratings if its FFO/adjusted debt falls below 12%-14% or debt/capitalization exceeds 60%-62% on a sustained basis, against the backdrop of the deployment of material expansionary capital expenditure, continued high dividend payments, and/or a significant structural weakening in industry fundamentals.

The principal methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in May 2017. 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, with a total capacity of 3.8 gigawatts as of 30 September 2018, or around 3% of Korea's (Aa2 stable) total power generation. It is also the largest retail gas distribution company in Korea, with around 22% market share by sales volume in 2017.

At 30 September, SK E&S was 90% owned by SK Holdings Co., Ltd., which is in turn the holding company of SK Group.

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 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.

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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
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
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
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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