KOREA ELECTRIC POWER CORPORATION
Fitch Ratings has assigned
EWP will use the net proceeds from the proposed notes for general corporate purposes, including repayment of existing debt and capex to maintain and expand generation capacity as well as to enhance generating systems in future. 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 equalise EWP's Issuer Default Rating with that of its parent,
Key Rating Drivers
'High' Operational Incentive to Support: The level of integration between EWP and KEPCO is 'High', similar to the other generation companies (gencos) KEPCO owns. KEPCO is the only off-taker of electricity. The integration is further supported by the adjusted coefficient in the wholesale tariff formula, which serves to adjust 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 in line with KEPCO's plans. The capex plans of EWP and KEPCO are also based on the government's Basic Plan for Long-Term Electricity Supply and Demand, established every two years. We therefore assess the management and brand overlap of EWP and KEPCO as 'High'.
'High' Strategic Incentive to Support: We believe EWP is integral to KEPCO's power generation capability. The five non-nuclear gencos, which have similar size and importance, together account for nearly two-thirds of KEPCO's capacity, with EWP contributing 12% to KEPCO's generation capacity.
Large Base-Load Capacity: EWP had a total installation capacity of 9,574MW as of
Tight Environmental Restrictions: The government's tougher environmental policies are likely to continue putting pressure on EWP's operating performance over the medium term, given its relatively large share of coal-fired capacity. Its gross generation has declined in recent years, as coal-fired generation is capped from December to 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 due to the construction of the new LNG plant. As such, we expect capex to increase and the company to continue posting negative free cash flow over the medium term.
SCP of 'bbb': We assess EWP's Standalone Credit Profile at 'bbb'. Its net leverage deteriorated in 2022 as a result of weak operating performance, which we believe will be maintained due to the higher capex requirements. We expect net EBITDA leverage to stay closer to 5x over the period (2022: 5.1x)
Derivation Summary
Our assessment of EWP's ratings is comparable with that of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to fall by 11% in 2023 on lower system marginal price
EBIT margin to recover to 1%-2% on upward adjustment of the pricing formula's adjustment coefficient, which was kept at the minimum level in 2022
Capex of
40% of net income to be paid as dividends in 2023
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 that 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
Lower incentive from KEPCO to support EWP
For KEPCO, the following sensitivities were outlined by Fitch in its Rating Action Commentary of
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 the likelihood of the 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 '
Liquidity and Debt Structure
Adequate Liquidity: EWP's cash and cash equivalents stood at
EWP's debt has risen slightly over the past few years, more than 70% of which is long term. The company relies primarily on domestic and global capital markets for its funding. We expect debt to continue to grow over the next few years due to ongoing capex needs such as the LNG plant construction during 2022-2026.
Issuer Profile
EWP is one of six power-generation companies wholly owned by KEPCO. As of
Date of Relevant Committee
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.
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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