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Korea Hydro & Nuclear Power ‘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 today affirmed its 'AA' long-term corporate credit rating on Korea Hydro & Nuclear Power Co. Ltd. (KHNP). The outlook remains stable. At the same time, we affirmed our 'AA' long-term issue ratings on the debt issued by the Korean electricity provider. 
          We affirmed the ratings on KHNP despite a weakening in its stand-alone credit profile (SACP), reflecting the company's core group status to the Korea-based electricity utility provider Korea Electric Power Corp. (KEPCO; AA/Stable/A-1+).
          We revised the SACP to 'bbb-' from 'bbb' based on KHNP's strained profitability and gradually increasing debt. We anticipate that higher power-generation costs and unfavorable wholesale electricity prices will keep pressure on KHNP's profitability in 2018-2019, weakening the company's operating cash flows over the next 24 months. At the same time, its capital expenditure (capex) is likely to increase, gradually pushing up debt.
          KHNP's power generation costs are likely to remain high. The government's intention to tighten safety requirements for nuclear power plants will continue to strain the utilization rates of KHNP. Moreover, increasing pressure to recognize the future cost for retirement of nuclear fuel plants and treatment of nuclear waste could add a further cost burden.
          We expect wholesale electricity prices to remain unfavorable for KHNP over the next 12-24 months. Prices are set in a less-than-transparent manner and are not directly linked to generation costs. KEPCO's rate-setting mechanism works as a profit-sharing tool among KEPCO and its power generating subsidiaries, including KHNP. Given KEPCO's strained profitability, we expect a somewhat negative trend in wholesale electricity prices for nuclear power generation.
          Under our base case, we estimate KHNP's EBITDA to be Korean won (KRW) 3.7 trillion-KRW4.2 trillion in 2018- 2019. This is similar to that in 2017 but much lower than around KRW6.0 trillion in 2015-2016.
          We anticipate that the company's capex will gradually increase to KRW2.3 trillion-KRW2.6 trillion in 2018- 2019, up from KRW1.7 trillion-KRW2.0 trillion in 2017. The increase is mostly from the construction of scheduled nuclear plants. This, together with weaker operating cash flows, will lead to a gradual increase in the company's debt over the next 12-24 months.
          We continue to view KHNP as core subsidiary of KEPCO given the integral nature of power generation to KEPCO's strategy of providing a stable supply of electricity in Korea. KEPCO's subsidiaries (including KHNP) account for a key portion of its 80% share of the national electricity generation market. Although the government aims to gradually reduce the reliance on nuclear and coal-based power generation, we expect KHNP will 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 (around 30% of the country's total power generation).
          The stable outlook on KHNP reflects the outlook on its parent, KEPCO, given that we equalize the ratings on KHNP with those on KEPCO based on KHNP's core subsidiary status to the KEPCO group.
          We may lower the rating on KHNP if we lower the ratings on KEPCO. We may also lower our rating on KHNP if the company's relationship with KEPCO weakens significantly, potentially as a result of a significant reduction in ownership of KHNP. However, we view such a scenario as unlikely.
          We may raise the ratings on KHNP if we raise the ratings on KEPCO.