OREANDA-NEWS.  Fitch Ratings has affirmed Korea Electric Power Corporation (KEPCO) and its six fully owned generation companies' (gencos) Long- and Short-Term Foreign-Currency Issuer Default Ratings (IDR) at 'AA-' and 'F1+', respectively. The Outlook is Stable. The guaranteed bonds under KEPCO have been reclassified as senior unsecured notes as the guarantees are no longer provided. A full list of rating actions is at the end of this commentary.

KEPCO has strong operational and strategic ties to the Korean state (AA-/Stable), leading to the equalisation of its ratings with the state as per Fitch's Parent and Subsidiary Linkage methodology. Similarly, the ratings of the six gencos are equalised with those of KEPCO due to the strong linkages between them. KEPCO's financial results have improved significantly and we assess KEPCO's standalone ratings to be mid to high 'BBB'.

KEY RATING DRIVERS

Ratings Equalised with Sovereign's: KEPCO's ratings reflect its strong strategic and operational ties with the state. The company is one of the most important state-owned enterprises in South Korea; it has a monopoly in electricity transmission and distribution, and its six 100%-owned gencos account for more than 80% of Korea's power generation.

Strong Operating Results Continues: Lower fuel costs and the expansion of base-load capacity have significantly improved KEPCO's financial performance. Fitch expects the benchmark West Texas Intermediate crude oil price to remain low at around USD35 per barrel and thermal coal prices to remain depressed in the near term. We estimate that 85%-90% of Korea's total power output would come from base-load generation from 2016. KEPCO is likely to deliver solid operating result with EBITDAR margin of over 30% in 2016 (2015: 33.3%) with the improvement in fuel mix.

Marginal Tariff Cut: A significant cut in electricity price is unlikely given the government's commitment to energy conservation and Korea's relatively lower electricity end-user price compared to other developed countries. In addition, KEPCO and its gencos are likely to increase capex to expand renewable capacity, which would make it difficult to justify a substantial cut in tariffs. Fitch assumes low-single-digit tariff cuts in 2016 and 2017 in its forecasts.

Additional Capex Slows Deleveraging: The government's new initiatives in promoting green energy and reducing carbon dioxide emissions will increase KEPCO's (consolidated) capex burden in the mid to long term. This is likely to delay a further improvement in its financial leverage. The Ministry of Trade, Industry and Energy announced plans for government-related energy companies to spend KRW6.4trn in developing alternative energy capacity in 2016. We expect KEPCO's FFO-adjusted leverage will increase to over 3.0x in 2016 from 2.8x in 2015 despite of the strong operating cash generation.

Gencos' Ratings Equalised with KEPCO's: The ratings of the six gencos are equalised with KEPCO's (AA-/Stable) due to strong strategic and operational ties. The ratings of the six gencos reflect their status as key subsidiaries of KEPCO, with Korea Hydro & Nuclear Power Co., Ltd. accounting for 36% of KEPCO's total capacity and each of the other five non-nuclear generation companies accounting for 12%-14% of generation capacity. The government suspended plans to privatise the gencos in 2008 and we believe the companies will remain wholly owned and supported by KEPCO in the foreseeable future.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Revenue to remain broadly flat with soft demand and a low-single-digit tariff cut in 2016-2017
- Oil prices in line with Fitch's base case price deck as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 24 February 2016
- Coal prices to remain broadly flat over the next two to three years
- EBIT margin to stay similar to that in 2015 and then gradually slide as fuel costs recover
- Capex to increase with the government's new energy initiatives
- Dividend payout ratio to increase as per the government's guideline

RATING SENSITIVITIES

KEPCO
KEPCO's rating is currently equalised with that of Korea.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A negative rating action on the sovereign.
- The government's inability to curtail the rate of increase in public-sector entities' debt, resulting in deterioration in the state's ability to provide timely and adequate support to key public-sector entities.
- Weakening of linkages with the state.

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A positive rating action on the sovereign, provided that the rating linkages between KEPCO and the state remain intact and that the state's ability to support key state-owned entities remains strong.

For the sovereign rating of Korea, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 2 February 2016:

The main factors that, individually or collectively, could trigger positive rating action are:

- A convincing strategy to reduce the broader public debt burden, which would be reflected in lower debt to GDP ratios for the general government and state-linked enterprises.
- Evidence that the economy can grow at a relatively high rate over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the aggregate household balance sheet.

The main factors that, individually or collectively, could trigger negative rating action are:

- An unexpected large rise in the public-sector debt burden caused by a deviation from the current prudent fiscal policy framework or crystallisation of financial sector or other contingent liabilities.
- Evidence that GDP growth will be structurally lower than expected, potentially reflecting medium- to long-term challenges for Korea's economic model.

GENCOS
The six genco's ratings are equalised with KEPCO's.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A negative rating action on KEPCO
- Weakening of linkages with KEPCO

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A positive rating action on KEPCO, provided that the rating linkages between KEPCO and the six gencos remain intact

FULL LIST OF RATING ACTIONS
Korea Electric Power Corporation (KEPCO)
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-' and 'F1+'

Korea Hydro & Nuclear Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-'

Korea East-West Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating at affirmed 'AA-'

Korea Midland Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-'

Korea South-East Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-'

Korea Southern Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-'

Korea Western Power Co., Ltd.:
Long-Term Foreign-Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1+'
Senior unsecured rating affirmed at 'AA-'.