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TEXT-S&P:Ratings on KEPCO, six subsidiaries affirmed; SACP 'bbb-'
December 14, 2012 / 10:31 AM / 5 years ago

TEXT-S&P:Ratings on KEPCO, six subsidiaries affirmed; SACP 'bbb-'

Rationale

Our affirmation of our ratings on KEPCO reflects our view that potential extraordinary support from the government of the Republic of Korea (foreign currency rating A+/Stable/A-1; local currency rating AA-/Stable/A-1+) in the event of financial stress at the company would be “extremely high.” We base this on our view of the “very strong” link between KEPCO and the government of Korea due to the government’s majority ownership and tight supervision and control through the Ministry of Knowledge Economy. We continue to view KEPCO’s role as critical for the Korean economy because it is the sole electricity transmission and distribution operator and has more than a 90% share of the country’s electricity generation market. Our affirmation of our ratings on the six generating subsidiaries reflects our view of each subsidiary’s core status within the group and the high correlation between the operation and financial standing of KEPCO and its subsidiaries.

Our revision of the SACP for KEPCO and its six subsidiaries to ‘bbb-’ from ‘bbb’ reflects our expectation that KEPCO’s financial risk profile will deteriorate owing to its significant capital expenditure program over the coming three years. We expect KEPCO to fund this program primarily with debt. KEPCO is making these capital investments to increase its owned generation capacity in response to limited electricity supply in Korea. Electricity demand has outgrown supply in recent years, resulting in supply reserve margins below 5% in the peak summer and winter seasons.

We expect a decline in fuel costs, backed by a strong Korean won (KRW), and more stable commodity prices. However, offsetting these gains will be lower capacity ratios at nuclear reactors over the next year as KEPCO group replaces components discovered to have forged quality certificates on some of its units, in our view. The safety review of a unit at its Wolseong nuclear power plant that is intended to add 10 years to its operating life is also underway. Until new generation capacity comes online and capacity ratios at nuclear plants return to historical levels, the company will source electricity from independent power producers (mostly liquefied natural gas-fired power generators), limiting its ability to improve its profitability in 2013.Under our base-case scenario, we project KEPCO’s electricity sales volume will grow moderately, in line with Korea’s GDP growth of between 2.5% and 3.5% over the next two years. We assume electricity rates will increase about 5% annually for the next two years and KEPCO’s capital expenditures will exceed KRW19 trillion in 2013 and again in 2014. As a result, we expect FFO to debt for KEPCO on a consolidated basis to deteriorate below 9% and its FFO interest coverage ratio to be below 3x over the next two years. We could further lower our SACP for KEPCO if interest coverage ratios for the company fall below 2x on a sustained basis.

Liquidity

We assess KEPCO’s liquidity to be “adequate” according to our criteria. We expect the company’s sources of liquidity to exceed 1.2x uses over the next 12 months. We estimate the company will have KRW10 trillion in liquidity--comprising cash, short-term investments, FFO, and committed credit facilities--compared with about KRW7.9 trillion in needs for debt maturities in the next six months, working capital needs, and committed capital spending. We base our liquidity assessment on our assumption that the company will not fully commit to its capital spending program until it has secured sufficient funding. Furthermore, in our view, KEPCO has strong access to local and international capital markets and supportive relationships with banks, benefiting from its position as an important government-related entity in Korea.

Outlook

The stable outlook on the ratings on KEPCO and its six subsidiaries reflects the stable outlook on the sovereign ratings on Korea and our expectation of the continued extremely high likelihood of extraordinary support from the government of Korea in the event of financial distress. In our view, KEPCO continues to play an essential role in supplying electric power in Korea as a monopoly transmission and distribution operator and dominant power generator. Our ratings on KEPCO could come under pressure if KEPCO’s policy role weakens or its link to the government loosens, such as through a government decision to reduce its shares in the company.Any change in our sovereign ratings on Korea would lead to a corresponding change in our ratings on KEPCO.

Related Criteria And Research

Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010

Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

Ratings List

Ratings Affirmed

Korea Electric Power Corp.

Korea Gas Corp.

Corporate Credit Rating A+/Stable/A-1

Korea East-West Power Co. Ltd.

Korea Western Power Co. Ltd.

Korea Southern Power Co. Ltd.

Korea South East Power Co. Ltd.

Korea Midland Power Co. Ltd.

Korea Hydro & Nuclear Power Co. Ltd.

Corporate Credit Rating A+/Stable/--

Korea Electric Power Corp.

Senior Unsecured A+

Korea East-West Power Co. Ltd.

Senior Unsecured A+

Korea Gas Corp.

Senior Unsecured A+

Senior Unsecured cnAAA

Commercial Paper A-1

Korea Hydro & Nuclear Power Co. Ltd.

Senior Unsecured A+

Korea Midland Power Co. Ltd.

Senior Unsecured A+

Korea South East Power Co. Ltd.

Senior Unsecured A+

Korea Southern Power Co. Ltd.

Senior Unsecured A+

Korea Western Power Co. Ltd.

Senior Unsecured A+

To From

Korea Electric Power Corp.

Korea Western Power Co. Ltd.

Korea Southern Power Co. Ltd.

Korea South East Power Co. Ltd.

Korea Midland Power Co. Ltd.

Korea Hydro & Nuclear Power Co. Ltd.

Analytical Factors

Local Currency bbb- bbb

Korea Gas Corp.

Analytical Factors

Local Currency bb+ bbb-

Our Standards:The Thomson Reuters Trust Principles.
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