OREANDA-NEWS. Fitch Ratings has assigned Korea Midland Power Co., Ltd.'s (KOMIPO, AA-/ Stable) USD300m 2.5% senior unsecured bond due 2021 a final rating of 'AA-'.

KOMIPO will use the net proceeds from the bond to refinance existing debt and for capital expenditures and other general corporate purposes.

The notes are rated at the same level as KOMIPO's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The assignment of the final rating follows the completion of the bond issuance and receipt of documents conforming to the information previously received. The final rating is the same as the expected rating assigned on 13 January 2015.

KEY RATING DRIVERS
Ratings Equalised with Parent: KOMIPO's ratings are equalised with those of the parent, Korea Electric Power Corporation (KEPCO, AA-/Stable) due to their strong strategic and operational ties in accordance with Fitch Ratings' Parent and Subsidiary Linkage methodology. The ratings also reflect KOMIPO's position as one of the six generation companies (gencos) that are wholly-owned by KEPCO. Each genco accounts for 9%-10% of the country's total generation capacity, except Korea Hydro & Nuclear Power Co., Ltd (AA-/Stable), which accounts for a higher share of 28%.

Proximity to Metropolitan Areas: We expect KOMIPO to continue to benefit from the geographical proximity to industrial as well as urban centres. KOMIPO operates 58 power plants, including renewable energy operations, which are located in densely populated areas, including Seoul, Incheon and other industrial complexes. It is the only genco that provides electricity to the new administrative city, Sejong City. The company provided 9% of country's electricity as of end-September 2015.

Diversified Fuel Mix: KOMIPO has a balanced electricity generation load mix, which continues to generate relatively stable revenue streams. The company operates coal-fired units (4,400MW), liquefied natural gas (3,730MW), oil-fired (285MW) and others (29MW). Base-load and peak-load represent 52% and 44% of KOMIPO's total capacity, respectively.

Profitability Improves: Cheaper LNG fuel cost will result in higher margin in 2015. EBIT margin increased to 7.6% in end-September 2015 from 3.1% in 2014 while revenue decreased by 21.9% to KRW3.0trn due to lower utilisation as a result of nationwide capacity expansion. KOMIPO sold 37,687 gigawatt hours (GWh) of electricity to KEPCO until the nine months to end-September 2015, accounting for 9% of Korea's total generation.

High Capex, Leverage Increases: We expect KOMIPO's leverage ratio to deteriorate in the short term due to substantial investment in new plants. KOMIPO estimates its capex for 2015 will rise to around KRW1.4trn from KRW1.2trn in 2014. However, the commissioning of new base load generation units should improve the operating profile and cash flow generation over the medium term. Two thermal plants near Seoul (800MW) and two in Boryeong (2,000MW) will start operations by late 2016 and 2017, respectively.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to decrease over 20% in 2015 and increase after capacity expansion in 2017;
- Margin to expand due to cheaper fuel costs in 2015;
- Capex to stay at an elevated level in 2015 and 2016;
- Leverage to deteriorate slightly due to heavy investment

RATING SENSITIVITIES
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 the parent.

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 KOMIPO and KEPCO remain intact.