(The following statement was released by the rating agency)
Oct 12 -
-- Chubu Electric and Shikoku Electric , operators of the Hamaoka andIkata nuclear power plants, continue to face increasing operational andfinancial risks following the March 2011 disaster at TEPCO's Fukushima No. 1nuclear plant.
-- Standard & Poor's lowered its long-term corporate credit ratings onChubu Electric and Shikoku Electric to 'A-' from 'A' to reflect our updatedfinancial projections. At the same time, we lowered our short-term ratings onboth companies to 'A-2' from 'A-1'.
-- We have incorporated into our projections a longer time period for thecompanies to recover from deterioration in key financial ratios than weassumed at our last review in May 2012.
-- The negative outlooks reflect our expectation that strong pressure onthe ratings for the companies will continue owing to a delay in the timetableto restart their idle nuclear reactors. It also reflects our expectation thatpressure on the ratings will continue owing to still uncertain specific actionplans and timelines regarding the existing favorable regulatory framework'sreview process.
Standard & Poor's Ratings Services today lowered its long-term corporate credit and debtratings on Chubu Electric Power Co. Inc. and Shikoku Electric Power Co. Inc. to 'A-' from 'A'.We lowered our short-term ratings on the companies to 'A-2' from 'A-1'. The outlooks on thelong-term corporate credit ratings are negative. The stand-alone creditprofiles (SACP) for Chubu Electric and Shikoku Electric are 'a-'. Our ratingson the companies reflect our opinion that there is a ''moderate'' likelihoodof the government providing them with timely and sufficient extraordinarysupport were they to experience financial distress.
The one-notch downgrades of Chubu Electric and Shikoku Electric reflect ourview that prospects for restarting some of their reactors in fiscal 2013(ending March 31, 2014) have diminished. Recent government comments regardingnuclear energy's future in Japan and the government's general lack ofdirection regarding reactor restarts or implementation of higher electricityrates lead us to believe that the likelihood that none of the reactors willrestart in fiscal 2013 has increased. Therefore, we also see a higherlikelihood that Chubu Electric and Shikoku Electric will take longer torecover financially than we expected. Chubu Electric's Hamaoka nuclear powerplant and Shikoku Electric's Ikata nuclear power plant remain shut followingthe March 2011 disaster at Tokyo Electric Power Co. Inc.'s (TEPCO;B+/Negative/B) Fukushima No. 1 nuclear plant. The plants contribute roughly15% and 40% of the respective companies' total power generation capacity.
We think that based on our updated assumptions, both Chubu Electric andShikoku Electric's cash flow adequacy--measured by the ratio of their fundsfrom operations (FFO) to total debt--will remain weak for longer than weanticipated in May 2012. We now forecast that their EBITDA margins and FFO tototal debt will continue to remain below 10% in fiscal 2012 (ending March 31,2013) and fiscal 2013.
We note that Chubu Electric is relatively less dependent on nuclear powergeneration than most of Japan's nuclear operators. However, it has postponed arestart of its Hamaoka plant. Accordingly, we think Chubu Electric's weakfinancial performance will continue for longer than we assumed in April 2012if it does not increase electricity rates in the near future.
We still think that Shikoku Electric's Ikata reactors will be among theearliest of Japan's idle reactors to restart. But Shikoku Electric'srelatively high dependency on nuclear power generation leads us to believethat key financial ratios for the company will deteriorate further and takelonger to recover than we assumed in May 2012.
The ratings on Chubu Electric and Shikoku Electric reflect our opinion thatthere is a "moderate" likelihood that the government would provide them withtimely and sufficient extraordinary support in the event they were toexperience financial distress. According to our criteria forgovernment-related entities, a "moderate" likelihood of support does notjustify any elevation of the ratings on Chubu Electric or Shikoku Electric tolevels higher than the SACPs for the companies.
The negative outlooks on both Chubu Electric and Shikoku Electric reflect ourview that uncertain business and operating conditions continue to affectelectric utility companies in Japan (AA-/Negative/A-1+) as the nationstruggles to map its future energy strategy. They also reflect the stilluncertain specific action plans and timelines regarding the government'sreview process for the existing favorable regulatory framework. Given the manypressing problems likely to occur over the next six months, we believepressure on our ratings on Chubu Electric and Shikoku Electric will continue.
Given already deteriorated and likely further deteriorating financial ratiosfor the companies, we may lower the ratings on Chubu Electric and ShikokuElectric again if the government doesn't show any concrete plans to eitherimplement higher electricity rates or approve reactor restarts in the nextthree-to-six months. We may also lower the ratings further if we think thelikelihood of reactor restarts at Hamaoka and Ikata will not increase untilwell after April 2013 and the likelihood of electricity rate hikes in nearfuture will not increase.
We may revise the outlooks to stable if Chubu Electric and Shikoku Electric'sfinancial performance becomes materially better than we expected. However, anyupward pressure on the ratings is limited at this stage.
RELATED CRITERIA AND RESEARCH Corporate Ratings Criteria 2008, April 15, 2008
Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 20102008 Corporate Criteria: Commercial Paper, April 15, 2008