Fitch Ratings has assigned a rating of 'AA-' to Korea East-West Power Co., Ltd. (EWP, AA-/Stable) proposed US dollar senior unsecured green Notes.

EWP will use the net proceeds from the proposed notes to finance or refinance new or existing projects relating to renewable energy and energy efficiency in accordance with the company's Green and Sustainability Bond Framework, which is aligned with the Green Bond Principles 2021, Social Bond Principles 2021 and Sustainability Bond Guidelines 2021 published by the International Capital Markets Association. The proposed notes are rated at the same level as EWP's senior unsecured rating as they represent its direct, unconditional, unsecured and unsubordinated obligations.

We equalize EWP's IDR with that of its parent Korea Electric Power Corporation (KEPCO, AA-/Stable) based on our assessment of 'Weak' legal incentives, 'High' strategic incentives, and 'High' operational incentives for KEPCO to provide support to EWP. This is based on strong parent, weak subsidiary approach under Fitch's Parent and Subsidiary Linkage Rating Criteria.

Key Rating Drivers

'High' Operational Incentive to Provide Support: The level of integration between EWP and KEPCO is 'High' similar to other generation companies (gencos) owned by KEPCO. KEPCO is the only off-taker of electricity and the integration is further supported by the adjusted coefficient in the wholesale tariff formula, which serves to adjust the profit sharing between KEPCO and its six wholly owned gencos.

EWP's operations and financials are closely supervised by the Korean government through KEPCO. Its annual mid- to long-term financial plan submitted to the government includes financial and operational targets and investment plans and is also in line with KEPCO's plans. The capex plans of EWP and KEPCO are also based on the government's Basic Plan of Long Term Electricity Supply and Demand, established every three years. As such we assess management & brand overlap as 'High'.

'High' Strategic Incentive to Provide Support: We believe EWP is integral to KEPCO's power generation capability. Its contribution to KEPCO's generation capacity is around 12% but combined, the five non-nuclear gencos, which have similar size and importance, account for nearly two-thirds of KEPCO's capacity.

Large Base-Load Capacity: As of February 2022, EWP had total installation capacity of 9,568MW. Coal-fired capacity accounted for 67% of the total and LNG 31%. It also has some renewable energy generation. It will begin construction of a new LNG powered plant in 2022 and we expect the share of coal-fired capacity to reduce over the mid to long term with the new LNG plant's operations starting in 2024 and 2026 and replacement of ageing coal fired capacity with LNG power from 2029.

Tighter Environmental Restrictions: The government's tougher environmental policies are likely to continue to put pressure on EWP's operating performance over the medium term given its large share of coal-fired capacity. Its gross generation has declined in recent years as coal-fired generation is capped during December-March under a government policy to reduce air pollution since 2020. In addition, two power plants (one coal-fired and one oil-powered) were closed in early 2022, reducing capacity by more than 10%.

Higher Capex: Fitch expects EWP's cash flow generation to be under pressure over the next few years as the company is scheduled begin construction on a new LNG power plant in 2022. As such we expect capex to increase and the company to continue to post negative free cash flow over the medium term.

SCP of 'bbb': We assess EWP's Standalone Credit Profile at 'bbb'. Its net leverage improved in 2021 due to improved operating performance, but we expect net leverage to rise gradually over the next two to three years due to higher capex requirements. We expect net debt to EBITDA to rise closer to 5x over the period from 4.0x in 2021

Derivation Summary

Our assessment of EWP's ratings is comparable with that of Korea South-East Power Co., Ltd. (KOSEP, AA-/Stable) and Korea Southern Power Co., Ltd. (KOSPO, AA-/Stable), whose ratings are also equalised with those of parent KEPCO under Fitch's Parent and Subsidiary Linkage Rating Criteria. EWP is one of KEPCO's six wholly owned gencos, and like KOSEP and KOSPO, it is one of the five non-nuclear gencos. It accounts for around 7% and 12% of Korea's and KEPCO's generation capacity, respectively, similar to the shares of KOSEP and KOSPO.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Electricity sale volume to decline by around 10% in 2022 reflecting the closure of the Honam plant and Ulsan oil-powered plant in late 2021 and early 2022

Capex of KRW810 billion-950 billion annually in 2022-2024

Dividend payment of KRW5 billion in 2022, no payment in 2023-2024

RATING SENSITIVITIES

EWP's ratings are equalised with those of KEPCO

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on KEPCO, provided KEPCO's incentive to support EWP remains intact

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on KEPCO

A perceived weakening of incentive for KEPCO to support EWP

For KEPCO, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 28 April 2021:

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on the Korean sovereign (AA-/Stable), provided the likelihood of sovereign support remains intact

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on the sovereign.

Weakening in likelihood of sovereign's support for KEPCO

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: EWP's cash and cash equivalents stood at KRW211 billion at end-2021, which is well below its short-term obligations of KRW850 billion. However, we believe liquidity is not a major concern given the company's ready access to Korea's specialty bond market, global capital markets and well-spread out maturity profile. Its strong access to funding is supported by strong ties with KEPCO, and in turn the sovereign. The company also had unused committed credit lines of KRW83.7 billion as of December 2021.

Issuer Profile

EWP is one of six power generation companies wholly owned by KEPCO. As of end-February 2022, it had installed capacity of 9,568MW, accounting for 12% of KEPCO's total capacity and 7% of Korea's total capacity.

Date of Relevant Committee

20 April 2022

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

EWP's IDR is equalized to that of its parent KEPCO.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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