OREANDA-NEWS. Fitch Ratings has affirmed Korea Gas Corporation's (KOGAS) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign-currency senior unsecured rating at 'AA-'. Its Short-Term Foreign-Currency IDR and commercial paper (CP) ratings are affirmed at 'F1+'. The Outlook on the long-term IDR is Stable.

KOGAS's ratings and Stable Outlook reflect the company's strong ties with the South Korean government, and its dominant position in the natural gas business.

KEY RATING DRIVERS
Ratings Equalised with Sovereign: The ratings of KOGAS are equalised with Korea's (AA-/Stable) due to their strong strategic and operational ties. The ratings also reflect KOGAS's status as an important state-owned enterprise in the country, with a dominant position in the natural gas business through its monopoly in the wholesale gas segment and its ownership of the country's entire gas transmission infrastructure.

Improved Operating Performance: Fitch expects KOGAS to post slight improvement in operating profit in 2015. Revenue level is expected to fall significantly yoy due to volume decline and lower tariffs linked to lower raw material prices. However Fitch expects overall operating profit to improve yoy due to an increase in supply margin in the wholesale gas tariff formula, offsetting a decline in profit from overseas projects stemming from losses in the new Australian GLNG project. KOGAS posted an EBITDA increase of 4% in 9M15.

Continued Collection of Receivables: KOGAS's collection of receivables, on account of under recovery of costs accumulated during a five-year suspension until 2013 of the cost pass through system, continues as the government has reworked the wholesale tariff formula to enable KOGAS to collect receivables until 2017. During 9M15, KOGAS has collected nearly KRW1trn and the outstanding amount, which peaked at KRW5.8trn in 2012, stood at KRW3.4trn as of September 2015.

Marginal Improvement Expected in Financial Profile: Fitch expects KOGAS' debt levels to remain high but its credit metrics to show a slight improvement from 2015 helped by lower working capital due to lower raw material prices and reduced capex. Fitch also expects the ongoing collection of receivables to contribute to its cash generation and curtailing debt requirements. As a result, Fitch believes the company is on track to meet its annual debt reduction plan submitted to the government.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

- Oil price assumptions as per the Fitch Price Deck ("Revising Our Oil and Gas Price Assumptions", dated 9 November 2015);
- Capex of KRW2.5-3.0trn in 2015-2017;
- Receivables related to the suspension of the cost pass-through system to be reduced by KRW1.2trn in 2015-2017.

RATING SENSITIVITIES
The issuer's rating is 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 KOGAS 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 13 July 2015:

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 or state-linked enterprises
- Evidence that the economy can continue to grow over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the combined 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.