Our ratings on Okinawa Electric reflect its excellent business profile, underpinned by its
monopoly in Okinawa's electricity market, a favorable regulatory framework, and a transparent
pricing mechanism. Okinawa Electric is the Okinawa region's exclusive provider of power
generation and electricity transmission and distribution. Strong technological and solid
operational capabilities underpin its market position, as do competitive prices and excellent
facilities and maintenance services. In terms of electricity sales, Okinawa Electric is less
susceptible to capital investment trends in the corporate sector than other electric power
companies (EPCOs), because around 80% of its sales are from households and commercial users in
the Okinawa region. Other factors supporting the ratings on the company include little prospect
of substantial change in its competitive environment for the next two to three years and a
stable financing structure. Also, we see prospects for electricity demand in Okinawa to grow
steadily over the next two to three years. The central government and the government-backed
Okinawa Development Finance Corporation give Okinawa Electric preferential treatment
on taxes and low-interest-rate financing. On the other hand, we expect operating losses from
small remote islands to continue, and we regard the company's heavy debt and weak financial
ratios as burdens on the ratings.
In our opinion, Japan's stalled energy strategy following the Fukushima No. 1 nuclear power
plant disaster has gradually weakened the credit quality of the nation's electric utilities
sector. Continuing uncertainty over the regulation of nuclear plants and increasing costs for
their operation could hurt the domestic electric utility company's stable operating profits and
cash flow over the next two years.
However, Okinawa Electric doesn't operate a nuclear power plant and has no plans to
construct one. Accordingly, increasing operational risk and weakening profitability of nuclear
power plants put little pressure on Okinawa Electric's credit quality, in our view.
Standard & Poor's estimates that Okinawa Electric's financial performance will remain stable
for the next one to two years. In fiscal 2012 (ending March 31, 2013), we estimate that Okinawa
Electric's EBITDA margin will remain above 20%, compared with 22.6% in fiscal 2010, and its FFO
to total debt will remain around 15%, compared with 14.5% in fiscal 2010.
The ratings on Okinawa Electric reflect our opinion that there is a "moderate" likelihood of
the government providing the company with timely and sufficient extraordinary support in the
event it suffered financial distress. As seen in the actions of the government following the
Great East Japan Earthquake, tsunami, and nuclear crisis in March 2011, we are of the opinion
that the likelihood of extraordinary government support has slightly increased. A "moderate"
likelihood is equal to those we assign to other rated EPCOs in Japan except for TEPCO. Based on
our criteria for government-related entities (GREs), a moderate likelihood of support does not
justify any elevation of a GRE's ratings to a level higher than its stand-alone credit profile
Our negative outlook reflects uncertainties surrounding the government policy framework for
domestic power utilities. We also take the view that the sovereign ratings on Japan
(AA-/Negative/A-1+) continue to constrain the ratings on Okinawa Electric, mainly because of its
status as a public utility and the heavy dependence of its business on the domestic sector. We
have incorporated into our assessment our expectation of a steady improvement in key financial
ratios for Okinawa Electric after operation of the new No. 2 unit at its Yoshinoura liquefied
natural gas (LNG) power plant begins after May 2013. Accordingly, diminishing prospects for
improvement in key financial measures may pressure the ratings.
Standard & Poor's may consider lowering the ratings on Okinawa Electric if it lowers the
long-term sovereign ratings on Japan. We may also consider lowering the ratings if the company's
EBITDA margin weakens materially to around 15%, from above 20%, or its FFO to total debt falls
to around 15% on a sustained basis. On the other hand, so long as the ratings on Japan and the
outlook on those ratings remain unchanged, there is little likelihood we will raise the ratings
on the company or make an upward revision to the outlook, even if the company greatly enhances
its financial risk profile from the current level.
RELATED CRITERIA AND RESEARCH
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
Corporate Ratings Criteria 2008, April 15, 2008