OREANDA-NEWS. Fitch Ratings has assigned Korea Gas Corporation's (KOGAS, AA-/ Stable) proposed US dollar senior unsecured notes an expected rating of 'AA-(EXP)'. The notes will be issued under the company's global medium-term note (GMTN) programme, which is also rated 'AA-'. The company has also increased the size of its GMTN programme to USD11bn from USD8bn. The rating on the GMTN programme remains unchanged.

KOGAS will use the net proceeds from the notes to refinance existing debt and for general corporate purposes.

The notes are rated at the same level as KOGAS's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. However, the final rating is contingent upon the receipt of final documents conforming to information already received.

KEY RATING DRIVERS

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

Improving Operating Performance: Fitch expects KOGAS to post a slight improvement in operating profit in 2016. We expect its revenue to fall further in 2016 due to tariff cuts caused by lower raw-material prices. However, Fitch expects its overall operating profit to improve from 2015 due to an increase in supply margin in the wholesale gas tariff formula, offsetting continued losses in the Australian GLNG project in which KOGAS owns a 15% stake. KOGAS posted an EBITDA increase of 6% yoy in 2015.

Receivables Collection to Continue: KOGAS will continue to collect receivables until 2017 after the government reworked the wholesale tariff formula to allow the company to recover costs that accumulated during a five-year suspension until 2013 of the cost-pass-through system. KOGAS collected KRW1.6trn in 2015; the outstanding amount, which peaked at KRW5.5trn in 2012, stood at KRW2.7trn as of December 2015.

No Immediate Impact from Restructuring: The government recently announced a plan to restructure the policy functions of the energy-related state-owned entities (SOEs). According to the plan, KOGAS will focus on developing core existing assets in its overseas exploration and production (E&P) and the government will gradually allow private companies to resell liquefied natural gas (LNG) from 2025. KOGAS currently has a monopoly on wholesale gas as private companies are only allowed to import LNG for their own consumption. Fitch believes the recently announced plan will have no immediate impact on KOGAS's credit profile as it has already been selling down non-core E&P asset as part of its debt reduction plan and the opening up of the LNG import market will not happen until after 2025. KOGAS will continue to own Korea's entire gas transmission infrastructure, which underpins the strong strategic linkage with the government.

Slight Credit-Profile Improvement: Fitch expects KOGAS's debt levels to remain high but its credit metrics to continue to improve slightly in the next 18-24 months, helped by lower working capital resulting from cheaper raw materials and reduced capex. Fitch also expects the ongoing collection of receivables to contribute to its cash generation and reduce the need for additional debt.

KEY ASSUMPTIONS

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

- Oil-price assumptions as per the Fitch Price Deck (see Oil Price Assumption for Fitch Corporate Analysis Lowered to USD35 for 2016 dated 24 February 2016);

- Capex of KRW2.5trn-3.0trn in 2015-2017;

- Receivables related to the suspension of the cost-pass-through system to be reduced to zero by end-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 2 February 2016:

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 and state-linked enterprises

- Evidence that the economy can grow at a relatively high rate over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the aggregate 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.