TEXT-S&P rtgs on Chubu & Shikoku Electric lowered to 'A-'
(The following statement was released by the rating agency)
Oct 12 -
-- Chubu Electric and Shikoku Electric, operators of the Hamaoka and Ikata nuclear power plants, continue to face increasing operational and financial risks following the March 2011 disaster at TEPCO's Fukushima No. 1 nuclear plant.
-- Standard & Poor's lowered its long-term corporate credit ratings on Chubu Electric and Shikoku Electric to 'A-' from 'A' to reflect our updated financial projections. At the same time, we lowered our short-term ratings on both companies to 'A-2' from 'A-1'.
-- We have incorporated into our projections a longer time period for the companies to recover from deterioration in key financial ratios than we assumed at our last review in May 2012.
-- The negative outlooks reflect our expectation that strong pressure on the ratings for the companies will continue owing to a delay in the timetable to restart their idle nuclear reactors. It also reflects our expectation that pressure on the ratings will continue owing to still uncertain specific action plans and timelines regarding the existing favorable regulatory framework's review process.
Standard & Poor's Ratings Services today lowered its long-term corporate credit and debt ratings on Chubu Electric Power Co. Inc. and Shikoku Electric Power Co. Inc. to 'A-' from 'A'. We lowered our short-term ratings on the companies to 'A-2' from 'A-1'. The outlooks on the long-term corporate credit ratings are negative. The stand-alone credit profiles (SACP) for Chubu Electric and Shikoku Electric are 'a-'. Our ratings on the companies reflect our opinion that there is a ''moderate'' likelihood of the government providing them with timely and sufficient extraordinary support were they to experience financial distress.
The one-notch downgrades of Chubu Electric and Shikoku Electric reflect our view that prospects for restarting some of their reactors in fiscal 2013 (ending March 31, 2014) have diminished. Recent government comments regarding nuclear energy's future in Japan and the government's general lack of direction regarding reactor restarts or implementation of higher electricity rates lead us to believe that the likelihood that none of the reactors will restart in fiscal 2013 has increased. Therefore, we also see a higher likelihood that Chubu Electric and Shikoku Electric will take longer to recover financially than we expected. Chubu Electric's Hamaoka nuclear power plant and Shikoku Electric's Ikata nuclear power plant remain shut following the March 2011 disaster at Tokyo Electric Power Co. Inc.'s (TEPCO; B+/Negative/B) Fukushima No. 1 nuclear plant. The plants contribute roughly 15% and 40% of the respective companies' total power generation capacity.
We think that based on our updated assumptions, both Chubu Electric and Shikoku Electric's cash flow adequacy--measured by the ratio of their funds from operations (FFO) to total debt--will remain weak for longer than we anticipated in May 2012. We now forecast that their EBITDA margins and FFO to total debt will continue to remain below 10% in fiscal 2012 (ending March 31, 2013) and fiscal 2013.
We note that Chubu Electric is relatively less dependent on nuclear power generation than most of Japan's nuclear operators. However, it has postponed a restart of its Hamaoka plant. Accordingly, we think Chubu Electric's weak financial performance will continue for longer than we assumed in April 2012 if it does not increase electricity rates in the near future.
We still think that Shikoku Electric's Ikata reactors will be among the earliest of Japan's idle reactors to restart. But Shikoku Electric's relatively high dependency on nuclear power generation leads us to believe that key financial ratios for the company will deteriorate further and take longer to recover than we assumed in May 2012.
The ratings on Chubu Electric and Shikoku Electric reflect our opinion that there is a "moderate" likelihood that the government would provide them with timely and sufficient extraordinary support in the event they were to experience financial distress. According to our criteria for government-related entities, a "moderate" likelihood of support does not justify any elevation of the ratings on Chubu Electric or Shikoku Electric to levels higher than the SACPs for the companies.
The negative outlooks on both Chubu Electric and Shikoku Electric reflect our view that uncertain business and operating conditions continue to affect electric utility companies in Japan (AA-/Negative/A-1+) as the nation struggles to map its future energy strategy. They also reflect the still uncertain specific action plans and timelines regarding the government's review process for the existing favorable regulatory framework. Given the many pressing problems likely to occur over the next six months, we believe pressure on our ratings on Chubu Electric and Shikoku Electric will continue.
Given already deteriorated and likely further deteriorating financial ratios for the companies, we may lower the ratings on Chubu Electric and Shikoku Electric again if the government doesn't show any concrete plans to either implement higher electricity rates or approve reactor restarts in the next three-to-six months. We may also lower the ratings further if we think the likelihood of reactor restarts at Hamaoka and Ikata will not increase until well after April 2013 and the likelihood of electricity rate hikes in near future will not increase.
We may revise the outlooks to stable if Chubu Electric and Shikoku Electric's financial performance becomes materially better than we expected. However, any upward pressure on the ratings is limited at this stage.
RELATED CRITERIA AND RESEARCH
Corporate Ratings Criteria 2008, April 15, 2008
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 2008 Corporate Criteria: Commercial Paper, April 15, 2008
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