(The following statement was released by the rating agency)
Aug 16 -
Summary analysis -- Shikoku Electric Power Co. Inc. --------------- 16-Aug-2012
CREDIT RATING: A/Negative/A-1 Country: Japan
Primary SIC: Electric Services
Mult. CUSIP6: 824514
Credit Rating History:
Local currency Foreign currency
29-May-2012 A/A-1 A/A-1
17-Oct-2011 A+/A-1 A+/A-1
27-Jan-2011 AA-/A-1+ AA-/A-1+
Rating Rating Date
JPY20 bil 2.05% bnds ser 237 due 11/22/2018 A 29-May-2012
JPY10 bil 2.00% bnds ser 245 due 06/25/2021 A 29-May-2012
JPY20 bil 1.72% bnds ser 251 due 09/22/2022 A 29-May-2012
JPY20 bil 1.00% bnds ser 253 due 06/23/2023 A 29-May-2012
JPY30 bil 1.39% bnds ser 257 due 02/25/2015 A 29-May-2012
JPY30 bil 1.44% bnds ser 258 due 03/25/2015 A 29-May-2012
JPY30 bil 2.26% bnds ser 264 due 05/25/2027 A 29-May-2012
JPY30 bil 1.79% bnds ser 265 due 08/25/2017 A 29-May-2012
JPY30 bil 1.89% bnds ser 267 due 09/25/2019 A 29-May-2012
JPY20 bil 1.62% bnds ser 268 due 04/25/2018 A 29-May-2012
JPY10 bil 0.50% bnds ser 272 due 11/22/2012 A 29-May-2012
JPY10 bil 0.30% bnds ser 273 due 05/24/2013 A 29-May-2012
JAPANESE CP prog auth amt JPY120 bil A-1 17-Oct-2011
Our ratings on Japan-based electric power company (EPCO) Shikoku Electric Power Co. Inc. (Shikoku Electric; A/Negative/A-1) reflect its “strong” business risk profile--anchored in vertically integrated operations, from power generation to transmission and distribution--and its exclusive position in the electricity market in the Shikoku region’s four prefectures. The company also benefits from a favorable pricing system, featuring cost-plus and fuel cost adjustment mechanisms. Constraints on the ratings include deterioration in the company’s operating profits because of the shutdown of its Ikata nuclear power plant, a reduction in free operating cash flow, and an increase in its already heavy debt over the next two years if the shutdown is prolonged further.
Shikoku Electric is Japan’s eighth-largest EPCO, and it supplies about 3% of the country’s total electricity. Economic cycles have less impact on Shikoku Electric’s sales than on those of other EPCOs because residential demand makes up a greater proportion of total demand in Shikoku than in other regions. Stable operating rates at the Ikata plant have produced stable profits and a stable financial profile compared with those of other Japanese EPCOs. However, measures of the company’s financial performance have deteriorated as a result of the suspension of all three nuclear reactors at the Ikata power plant, which produces roughly 40% of all power the company generates. Fuel costs to replace nuclear power generation following the March 2011 disaster at the Fukushima No. 1 nuclear power plant have eroded Shikoku Electric’s profitability. We believe Shikoku Electric is likely to maintain its policy not to pass costs related to additional fuel to customers for at least the next year.
Standard & Poor’s assesses Shikoku Electric’s financial risk profile to be “intermediate.” Shikoku Electric’s cash flow adequacy, as measured by the ratio of its funds from operations (FFO) to total debt, is weaker than we had anticipated in October 2011, suggesting replacement fuel costs have been higher than we had expected. FFO to total debt for Shikoku Electric was around 12% in fiscal 2011 (ended March 31, 2012), compared with around 20% in our October 2011 forecast. For fiscal 2012, we project continuing deterioration in Shikoku Electric’s cash flow coverage such that FFO to debt for the company will likely drop below 3%, with some chance that it could be negative. While we believe Shikoku Electric has strong relationships with banks it needs to help it refinance maturing debt and pay for rising fuel costs, its financing strategy remains a key factor in our analysis.
Our revised projections reflect base case assumptions that replacement fuel costs rose higher than we anticipated, as a result of continuing strong prices for thermal fuel such as oil and coal in the Asian region. In addition, we believe none of Shikoku Electric’s Ikata nuclear reactors will likely resume operations before March 31, 2013, because of a lack of government direction and strong public opposition. Instead, we think a staggered restart of the reactors is more likely, and our base case assumes a restart will occur at one of the Ikata reactors in fiscal 2013 and at another in fiscal 2014. Previously, we had expected at least one of the reactors to resume operations in the first half of 2012.
We still believe Shikoku Electric is likely to restart its reactors earlier than other electric power companies because they are in less populated areas and at lower risk of tsunamis.
We consider Shikoku Electric a government-related entity (GRE). The ratings on the company reflect our opinion that there is a “moderate” likelihood of timely and sufficient extraordinary government support for the company in the event of financial distress. As seen in the actions of the government following the Great East Japan Earthquake, tsunami, and nuclear crisis, there is a slight likelihood of extraordinary government support, in our view. Our criteria for GREs indicates that a moderate likelihood of support does not justify any elevation of the ratings on an entity to higher than its stand-alone credit profile (SACP), which is ‘a’.
Shikoku Electric’s liquidity is “adequate,” as defined in our criteria. We base our liquidity assessment on the following factors and assumptions. We expect the company’s liquidity sources (including cash, cash deposits, and FFO) to exceed 1.2x uses over the next six months.
-- As of March 31, 2012, long-term financing accounted for around 80% of total outstanding debt. The company had well-diversified maturities for this debt.
-- The company maintains solid relationships with several financial institutions.
-- Refinancing of its bonds and bank loans involves little risk in the long term, in our view. Shikoku Electric has used commercial paper and bank loans to refinance most of its maturing debt ahead of deadlines, and we expect its liquidity to remain adequate in the next six months.
The negative outlook reflects our view that uncertain business and operating conditions continue to afflict electric utility companies in Japan (AA-/Negative/A-1+) as the nation struggles to map its future energy strategy. In Standard & Poor’s opinion, Shikoku Electric will continue to grapple with many pressing problems over the next year, and we expect it to make huge operating and net losses in fiscal 2012.
We may further downgrade Shikoku Electric if key measures of its financial performance remain weak such that we believe FFO to total debt would fall materially below 10% for more than two years. We think this could happen if Shikoku Electric is unable to restart one of its Ikata reactors in fiscal 2013. We may also lower the ratings if the company’s equity erodes further and it takes more than one fiscal year to return to profitability.
We may assign a stable outlook if Shikoku Electric’s financial performance is materially better than we expect, such that FFO to debt recovers to above 10% on a sustainable basis. However, upward pressure on the rating is limited. Key rating factors include the timing of a restart of the Ikata nuclear reactors, any shift in company policy on raising electricity rates, and the government’s ongoing review of the existing favorable regulatory framework and design of a new energy policy.
Related Criteria And Research
Principles Of Credit Ratings, Feb. 16, 2011
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 2008 Corporate Criteria: Analytical Methodology, April 15, 2008