Japan#s Shikoku Electric Upgraded To #A-# On Steadier Earnings P Outlook Stable

Stocks and Financial Services Press Releases Friday April 21, 2017 18:13
TOKYO--21 Apr--S&P Global Ratings

TOKYO (S&P Global Ratings) April 21, 2017--S&P Global Ratings today said it has raised by one notch to 'A-' both its long-term corporate credit and senior secured debt ratings on Japan-based regulated electric utility company Shikoku Electric Power Co. Inc. We have also affirmed our 'A-2' short-term corporate credit and commercial paper program ratings on the company. We base the upgrades on our view that Shikoku Electric is progressing the restoration of its provision of a stable electricity supply and stabilization of its profits. Thanks to a restart of the No. 3 reactor at its Ikata nuclear power plant and a likelihood crude oil prices will remain low, we see a reduced risk of the company's profitability and operating cash flow deteriorating substantially. The outlook on the long-term corporate credit rating is stable.

We estimate Shikoku Electric generated about ¥13 billion of ordinary profit in fiscal 2016 (ended March 31, 2017), broadly matching its guidance. Ordinary profit in fiscal 2017 is likely to exceed fiscal 2016 levels and is likely to remain solid for the next two years or so. We base this expectation on our view that the Ikata No. 3 reactor has operated steadily since its restart in September 2016, partially restoring the company's provision of a stable electricity supply. Also, the burden of fuel costs for thermal power generation, which the company has reverted to as an alternative to nuclear power generation, is unlikely to balloon because we expect crude oil prices to remain low. Accordingly, we continue to assess Shikoku Electric's business risk profile as strong.

Cash flow-related measures for Shikoku Electric are likely to improve as the company's profits and operating cash flow stabilize further. But repairs and maintenance, which it held back during the shutdown of the Ikata nuclear power plant, and investment in the plant's mid- to long-term safety will keep costs and capital expenditures at heightened levels for some time. As a result, free cash flow will not materially improve, causing related measures to improve only at a moderate pace. In particular, we expect funds from operations (FFO) to debt, a key cash flow measure, to range between 10% and 12% in the next two years. Also, we adopt the FFO interest coverage ratio as a supplemental ratio, reflecting the company's stable funding ability and strong relationships with creditor banks. Accordingly, we continue to assess Shikoku Electric's financial risk profile as significant.

The unchanged combination of a strong business risk profile and significant financial risk profile produces a 'bbb' anchor. A positive assessment in our comparable ratings analysis, which reflects steady improvement in the company's provision of a stable electricity supply and in its profitability, adjusts upward the anchor one notch. As a result, we have raised the stand-alone credit profile (SACP) one notch to 'bbb+'. We maintain our view of a moderately high likelihood that the government of Japan would provide the company with extraordinary support if it were to experience financial distress.

The stable outlook on Shikoku Electric reflects our view it will maintain its provision of a stable electricity supply and solid profits thanks to the restart of its Ikata No. 3 reactor together with stable crude oil prices. The outlook also incorporates our expectation cash flow-related measures for the company will take time to substantially improve because costs for repairs, which the company restrained during the shutdown of the nuclear power plant, will stay at heightened levels.

We might upgrade Shikoku Electric if we see a heightened likelihood its cash flow-related measures will substantially improve. This would be the case if its FFO to debt exceeded 13% and sustainably improved toward 18% or so. This could occur under a scenario in which heightened costs for repairs shrink to ordinary levels and the Ikata No. 2 reactor resumes operations without incurring an excessive increase in costs. However, we view this scenario as unlikely to materialize in the next one to two years.

Conversely, we might downgrade Shikoku Electric if we expect further deterioration in its provision of a stable electricity supply or stability of its earnings performance. This could occur if operations of the Ikata No. 3 reactor are suspended for a prolonged period owing to reasons other than periodic inspections, such as legal risk. We would also consider lowering our ratings on the company if we downgraded our sovereign rating on Japan.


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