Fitch Ratings has affirmed the 'AA-' Long-Term Issuer Default Ratings (IDRs) and senior unsecured ratings of Korea Electric Power Corporation (KEPCO) and four fully owned generation companies (gencos) - Korea Hydro & Nuclear Power Co., Ltd., Korea South-East Power Co., Ltd., Korea Southern Power Co., Ltd. and Korea East-West Power Co., Ltd.
The Outlook on the Long-Term IDRs is Stable.
A full list of the rating actions is below.
KEPCO's ratings are equalised with those of the South Korean sovereign (AA-/Stable) under Fitch's Government-Related Entities (GRE) Rating Criteria. The integrated electricity utility company is one of the major GREs in Korea and has a monopoly in power generation, transmission and distribution. The Standalone Credit Profile (SCP) of KEPCO is reassessed at 'bbb-', reflecting deteriorating financial metrics because tariff increases are insufficient to cover the increased fuel and power purchase costs.
The ratings of the four gencos are equalised with KEPCO's under our Parent and Subsidiary Rating Linkage criteria on high strategic and operational incentives to support. The ratings reflect the gencos' status as key subsidiaries of KEPCO, with Korea Hydro & Nuclear Power accounting for 35% of KEPCO's total capacity and each of the other non-nuclear gencos accounting for 11%-14% of generation capacity at end-2021.
Key Rating Drivers
Strong State Incentive to Support: Fitch assesses the socio-political and financial implications for the Korean government, should KEPCO default, as 'Very Strong'. KEPCO is a major electricity provider in the country. It is also a major borrower in the domestic bond market, a key source of funding for GREs, and a default would have a significant impact on the GREs' access to funding and cost of borrowing. As a result, the government has strong incentive to extend extraordinary support to the company, if needed.
Strong State Linkages: KEPCO's status, control and ownership by the state and the state's record of providing support are assessed as 'Strong'. The Korean government directly and indirectly owns 51% of KEPCO and the company's operations are generally supervised by the government. There is limited evidence of direct tangible support, but we assume the government's willingness to support KEPCO, should it face financial difficulties, is strong because of KEPCO's strategic importance to the state and the support record to other major GREs.
Insufficient Tariff Hike: We forecast KEPCO's profitability to weaken further in 2022, on higher fuel prices and power purchase costs and an inability to fully pass-through incremental input costs. The implementation of the cost pass-through system has been inconsistent, as the government's priority is economic stability and has suspended tariff hikes at certain periods. Even if there is a tariff increase, the annual cap on fuel cost adjusted charges of KRW5 per kWh appears unlikely to lead to a sufficient tariff adjustment.
However, the recent tariff hike of KRW5 per kWh by removing the quarterly cap of KRW3 per kWh is a positive development in the new government's electricity policy; however, further measures are not yet specified and remain to be seen.
Environmental Costs to Rise: Tight environmental protection policy will probably put pressure KEPCO's operating performance over the mid to long term. Stricter measures on reducing fine dust emissions will limit the overall use of coal-fired generation with restrictions on coal power generators. The costs related to reducing carbon emissions and renewable portfolio standards are likely to increase too.
Leverage to Remain High: We forecast KEPCO's financial leverage to peak in 2023 after an EBITDA loss in 2022 and then to decrease gradually along with stabilising energy prices as per Fitch's commodity and oil price assumptions. Expansion of renewable power generation in line with government policy and high spending on transmission and distribution infrastructure related to these new facilities appears unlikely to ease KEPCO's consolidated capex burden in the near term. We expect KEPCO's capex to remain at KRW13 trillion-15 trillion a year over the medium term.
Consistent implementation of the cost pass-through system is required for KEPCO to sustain its operations without building additional debt over the long term.
Strong Incentive to Support Gencos: We believe that the parent has 'High' operational and strategic incentives to support the gencos given the high level of integration, as KEPCO is the only off-taker of electricity. The gencos are integral to KEPCO's power generation capability. Korea Hydro & Nuclear Power contributes around 35% of KEPCO's generation capacity and five non-nuclear gencos (including two non-rated), which have similar size and importance, account for nearly two-thirds of KEPCO's capacity.
Gencos' Standalone Credit Profile: We assess the SCPs of Korea Hydro & Nuclear Power (bbb+), Korea East-West Power (bbb), Korea South-East Power (bbb-) and Korea Southern Power (bbb-) on their profitability, generation mix and credit metrics. The assessments also consider their strong access to funding sources, which provide robust liquidity and financial flexibility. These offset the high financial leverage of thermal gencos, which have been impinged by the government's capacity expansion plans and stricter environmental regulations.
Derivation Summary
KEPCO's ratings are equalised with those of its major shareholder, Korea, on its status as a strategically important state-owned enterprise. We assess the likelihood of state support as strong and similar to those of other Fitch-rated state-owned enterprises whose ratings are equalised with the state, such as Korea Gas Corporation (KOGAS, AA-/Stable) and Korea National Oil Corporation (KNOC, AA-/Stable).
We assess KEPCO's status, ownership and control as 'Strong', similar to KOGAS. The government directs and supervises the companies' investments and financial plans and monitors their financial profiles. The factor for KNOC is assessed as 'Very Strong', reflecting its 100% government ownership, compared with KOGAS and KEPCO, which are listed companies.
KEPCO's support record and expectations are assessed as 'Strong', as we expect support to be forthcoming in times financial distress, similar to KOGAS. The 'Very Strong' assessment of KEPCO's socio-political and financial implications of default is the same as for KOGAS and KNOC. A default by the three companies would disrupt Korea's supply of natural gas, power supply and energy security.
The three companies are also major borrowers in the international and domestic bond markets, a key source of funding for GREs, and a default would have a significant impact on access to funding and cost of borrowing for GREs in Korea.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue growth of around 13% in 2022;
Oil prices in line with Fitch's base-case price deck for Fitch's price deck;
Coal prices in line with Fitch price deck assumptions;
EBIT to decline in 2022 and generate operating losses due to higher fuel costs and power purchase costs;
Capex of KRW14 trillion-15 trillion a year in 2022-2023;
No dividend payment in 2022.
RATING SENSITIVITIES
KEPCO
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the sovereign, provided the likelihood of sovereign support remains intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on the sovereign;
Weakening in likelihood of sovereign's support for KEPCO
Korea Hydro & Nuclear Power, Korea South-East Power, Korea Southern Power, Korea East-West Power
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on KEPCO, provided that KEPCO's incentives to support the gencos remain intact.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative rating action on KEPCO;
Weakening of KEPCO's incentives to support the gencos.
For the Korea sovereign rating, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 22 January 2022
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Public Finances: A significant rise in government debt/GDP, for example, as a result of sustained increases in fiscal deficits or materialisation of contingent liabilities.
Structural: Tensions on the Korean peninsula sufficient to severely worsen Korea's economic metrics or security situation.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Structural: A structural easing of geopolitical risk to levels more in line with rating peers.
Structural: Improved governance standards, for example, through reforms to reduce ties between politics and business.
External: Continued current account surpluses that contribute to a sustained improvement in the net external creditor position and greater resilience to external financial shocks.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Liquidity Remains Adequate: KEPCO's cash and cash equivalents and short-term investments stood at KRW3.4 trillion at end-March 2022, which partly covered its short-term obligations of KRW16.4 trillion. For KEPCO, liquidity is not a major concern because of the company's ready access to Korea's specialty bond market, global capital markets and well-spread-out maturity profile.
Issuer Profile
KEPCO is Korea's only fully integrated electric utility and a monopoly operator in the country's electricity transmission and distribution network. The company is also responsible for the generation of electricity and the development of electric power projects, including those in nuclear power, wind power and coal.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
KEPCO's ratings are equalised with the sovereign ratings as per GRE criteria. Gencos' ratings are equalised with the KEPCO as per PSL criteria. (KHNP, KOSEP, KOSPO and EWP)
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
KOREA ELECTRIC POWER CORPORATION 
