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Korea East-West Power Co. Ltd. ‘AA’ Ratings Affirmed On Group Support; SACP Lowered To ‘bbb-‘ On Strained Profitability

          HONG KONG (S&P Global Ratings) March 19, 2018--S&P Global Ratings affirmed its unsolicited 'AA' long-term corporate credit rating on Korea East-West Power Co. Ltd. (KEWP). The outlook is stable. At the same time, we affirmed our unsolicited 'AA' long-term issue ratings on the company's senior unsecured notes. 
          We affirmed the ratings on KEWP, despite a weakening in its stand-alone credit profile (SACP), reflecting the company's core group status to parent Korea Electric Power Corp. (KEPCO).
          We revised the SACP to 'bbb-' from 'bbb' based on KEWP's subdued profitability and increasing pressure on debt. We anticipate that higher power generation costs and unfavorable wholesale electricity prices will continue to strain the company's profitability in 2018-2019, weakening its operating cash flows over the next 24 months. At the same time, the company's capital expenditure (capex) is likely to increase, putting pressure on its debt.
          KEWP's power generation costs are likely to remain high. The company's coal costs will remain elevated, given the prolonged hike in coal prices and increased consumption tax. In addition, the government's intention to constrain coal-based power generation will continue to strain the overall utilization rates, given that around 60% of KEWP's total capacity is coal-based.
          We anticipate wholesale electricity prices to be unfavorable for KEWP over the next 12-24 months. The prices are set in a less-than-transparent manner and not directly linked to generation costs. We expect somewhat negative trends in wholesale electricity prices, given KEPCO's strained profitability and its rate-setting mechanism working as a profit sharing tool among KEPCO and its power generating subsidiaries.
          Under our base case, we estimate KEWP's EBITDA to be Korean won (KRW) 0.8 trillion-KRW1.1 trillion in 2018 and 2019, broadly similar to or slightly weaker than that in 2017, but lower than the KRW1.2 trillion in 2016. We anticipate that the company's capex will gradually increase to KRW0.4 trillion-KRW0.6 trillion in 2018 and 2019, from around KRW0.4 trillion in 2017. The increase is mostly from new investments for environmentally friendly power generation capacity. This, together with weaker operating cash flows, will put increasing pressure on the company's debt over the next 12-24 months.
          We continue to view KEWP as a core subsidiary of KEPCO (AA/Stable/A-1+) given the integral nature of power generation to KEPCO's strategy of providing a stable supply of electricity to the nation. KEPCO's subsidiaries (including KEWP) account for a key portion of the company's 80% share of Korea's national electricity generation market. The government aims to gradually reduce reliance on nuclear and coal-based power generation. However, we expect KEWP to maintain its strong position in the medium term considering the long lead time for new policies and the company's significant contribution to Korea's power sector. KEWP accounts for 10% of the country's total power generation.
          The stable outlook on KEWP reflects that on parent KEPCO, given that the ratings on KEWP rely on the company's core subsidiary status to the KEPCO group.
          We may lower the ratings on KEWP if we downgrade KEPCO. We may also lower our ratings on KEWP if the company's relationship with KEPCO weakens significantly, potentially as a result of a significant reduction in ownership of KEWP, though we view such a scenario as unlikely. We may raise the ratings on KEWP if we upgrade KEPCO.