OREANDA-NEWS. Fitch Ratings has affirmed the ratings on Korea Electric Power Corporation (KEPCO) and its six fully-owned generation companies (gencos). Their Long- and Short-Term Foreign-Currency Issuer Default Ratings (IDR) are affirmed at 'AA-' and 'F1+', respectively. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEPCO has strong operational and strategic ties to the state and its ratings are equalised with those of South Korea (AA-/Stable) as per Fitch's parent-subsidiary linkage methodology. Similarly, the ratings of the six gencos are equalised with those of KEPCO due to the strong linkages between them.

KEY RATING DRIVERS
Ratings Equalised with Sovereign's: The ratings of KEPCO are equalised with Korea's (AA-/Stable) due to their strong strategic and operational ties. The company is an important state-owned enterprise 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.

Improved Performance: KEPCO's operations improved significantly in 2014 following tariff increases in January 2013 and November 2013, lower fuel costs, a stronger Korean won against the U.S. dollar, and a higher proportion power generated by lower-cost nuclear plants. As a result, the company's EBITDA rose 53% to KRW13.7trn in 2014. Fitch expects 2015 profitability to improve as lower fuel costs are likely to offset the impact of a weaker Korean won and a possible tariff cut.

Debt Reduction Plan on Track: Fitch expects KEPCO to be able to reduce its debt in 2015 for the first time in years, with improved operations and the sale of its head office building in 2014, which is likely to be completed in September 2015. The cash proceeds from the sale will total more than KRW9trn in 2015; after 10% of the sale proceeds of KRW10.55trn were paid in 2014. As such Fitch expects the company to be on track to fulfil its debt reduction plan submitted to the government in 2014.

Capex to Peak: Fitch also expects capex to peak in 2015 and decline gradually in 2016-2017, which will help to improve the consolidated financial profile from 2016. As such, we expect KEPCO's FFO net leverage to remain below 4.0x over the next two to three years (2014: 4.0x). Fitch expects most of its gencos to continue to post negative free cash flow in 2015-2017 based on their sizable capex plans.

Gencos' Ratings Equalised with KEPCO's: The ratings of the six gencos are equalised with KEPCO's due to strong strategic and operational ties. The ratings of the six gencos reflect their status as strategically important subsidiaries of KEPCO. Korea Hydro and Nuclear Power Co., Ltd. (KHNP) is Korea's sole nuclear genco and accounts for 36% of KEPCO's total capacity. The five non-nuclear gencos each account for 12%-14% of KEPCO's 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 KEPCO include:
- Oil prices in line with Fitch's base case price deck as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 11 February 2015
- Coal prices to remain broadly flat over the next two to three years
- Electricity demand growth of 1.5%-1.9% for 2015-2017
- Marginal tariff cut in 2015 and tariffs to remain broadly stable thereafter
- Consolidated capex to peak at KRW15.5trn in 2015 and decline gradually in 2016 and 2017

RATING SENSITIVITIES
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 19 August 2014:

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

-A significant reduction in general government indebtedness
-A sustainable decrease over time in the indebtedness of state-linked enterprises
-Evidence that the economy can grow over time, thereby narrowing the income gap with rating peers, without an ongoing rise in household indebtedness

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

-A change of policy on the broader public sector's finances leading to tolerance for sustained rises in general government debt or broader public sector debt
-Crystallisation of risks in the financial sector leading to disruption of economic and financial stability, such as a sharp pick-up in defaults among households

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

KEPCO:
Long-Term Foreign Currency IDR affirmed at 'AA-'; Outlook Stable
Short-Term Foreign Currency IDR affirmed at 'F1+'
Senior unsecured rating and guaranteed notes affirmed at 'AA-'

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-'.