KOREA ELECTRIC POWER CORPORATION
Fitch Ratings has assigned
KOSPO will use the net proceeds from the proposed notes for general corporate purposes, including refinancing of existing debt and capacity expansion. The proposed notes are rated at the same level as KOSPO's senior unsecured rating, as they represent its direct, unconditional, unsecured and unsubordinated obligations.
We equalise KOSPO's Issuer Default Rating with that of its parent,
Key Rating Drivers
'High' Operational Incentive to Support: The level of integration between KOSPO 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.
KOSPO'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 KOSPO 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 KOSPO and KEPCO as 'High'.
'High' Strategic Incentive to Support: We believe KOSPO 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 KOSPO contributing 13.8% to KEPCO's generation capacity as of
Largest Share of LNG: KOSPO's capacity was 11,481 megawatts (MW) at
Tight Environmental Restrictions: The government continues to promote LNG and renewable energy as part of efforts to reduce carbon emissions and air pollution as well as cut the country's reliance on coal power. We believe such policies will support KOSPO's revenue growth compared with other gencos, which were negatively affected by lower utilisation of coal-fired plants, as the company has the highest LNG share in its capacity.
Higher Capex: KOSPO's capex is likely to stay elevated with the continued construction of a new LNG plant in Shin-Sejong, increase in capex for replacing coal-fired plants in Hadong and Andong with LNG plants, and increasing investments in renewable energy and overseas expansion. We forecast the capex intensity ratio to increase to the early teens in the short term from high single digits in previous years.
Standalone Credit Profile of 'bbb-': Our assessment of KOSPO's Standalone Credit Profile considers the deterioration in its EBITDA net leverage in 2022 to 7.3x, due to a minimum level of adjusted coefficient and higher environmental charges, resulting in operating profit of
Derivation Summary
Our assessment of KOSPO's ratings is comparable with that of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenue to fall by more than 10% in 2023 on lower system marginal price
EBIT margin to recover to 1%-2% on upward revision of the pricing formula's adjustment coefficient, which was kept at the minimum level in 2022, and lower fuel costs
Capex of
40% of net income to be paid as dividends in 2023
RATING SENSITIVITIES
KOSPO'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 KOSPO 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 KOSPO
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: KOSPO's cash and cash equivalents and short-term investments stood at
Issuer Profile
KOSPO 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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores
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