OREANDA-NEWS. Fitch Ratings has assigned Taiwan Power Company (Taipower) a Long-Term Foreign Currency Issuer Default Rating (IDR) of 'A+'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

Taipower's ratings are equalised with that of its 94% parent, Taiwan (Long-Term Foreign Currency IDR: A+/Stable; Long-Term Local Currency IDR: AA-/Stable), in line with Fitch's parent and subsidiary rating methodology. Taipower is considered to be irreplaceable in ensuring Taiwan's power security and supplying affordable electricity to the public. Its strategic importance is highlighted by Taiwan's Electricity Act, which states that Taipower is the only integrated company with the concession rights to operate across Taiwan's power value chain. The act also protects the company's monopoly status in the transmission and distribution segment.

KEY RATING DRIVERS

Credit Linked to Sovereign: In Fitch's opinion, the Taiwanese government uses Taipower as an essential public service vehicle. Taipower has a public service obligation to provide affordable electricity to the Taiwanese economy, and the company provides subsidies to various groups without much financial compensation from the government. Although there is no explicit guarantee from the sovereign, which is also the case for other Taiwanese government-owned companies, the operational and strategic ties between Taipower and the government are strong.

Liberalisation Not a Near-Term Prospect: Liberalisation of the electricity sector and privatisation of Taipower are unlikely within the next four years unless Taipower obtains consent from the government and its labour union to kick-start the process. Privatising Taipower would require the government to find another platform or mechanism to perform power related public service obligations and to influence the domestic prices of electricity.

Benefits from New Tariff Formula: A new electricity formula has been in place since the beginning of 2015; this is effective for a period of two years, until the next review. The formula allows a maximum increase in electricity tariff of 3% semi-annually, or 6% annually (tariff decrease is not capped) to allow power producers to pass through costs to consumers. Should the cost increase require a tariff rise of more than 6%, the excess will be covered by adjustments in the next tariff review. Fitch believes the new formula will be beneficial for Taipower's margin, despite a potential time lag in cost pass-through during periods of rapidly rising generation costs.

Financial Fundamentals Weak: Taipower's standalone creditworthiness is materially constrained by its policy tool status. Taipower had an accumulated loss of TWD135.4bn in 2014, due largely to its inability to pass on increases in generation costs to consumers. Taipower's operating EBIT rose to TWD31.6bn in 2014 from TWD38.8m in 2013 due to an increase in electricity tariff and Fitch expects the company's cash generation capacity to improve in the next two years due to the new tariff formula, with operating EBIT margin remaining around 3%.

Material Capex Programme: Taiwan is likely to face power capacity shortages in the medium term if all the island's nuclear power plants are decommissioned as scheduled. Taipower will have to construct new plants and upgrade existing plants, and debottleneck current transmission capacity to ensure Taiwan's power security. Fitch expects its total capex and acquisition spending in 2015-2016 to be around TWD230bn, which would continue to put pressure on the company's credit metrics.

Reliance on Debt Funding: Taipower's cash flow generation has been weak relative to its capex due to government control of the electricity tariff before the new tariff formula came into effect in the beginning of 2015. Taipower relies on domestic bond issuance - it raised a total of TWD63.6bn via domestic bonds in 2014 - to support its capex programme. In 2014, the company's debt decreased by TWD26.8bn, but Fitch expects debt to increase in the next four years. Taipower also maintains good access to funding from banks.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Global oil price of USD55/bbl in 2015, USD65/bbl in 2016 and USD80/bbl thereafter in line with Fitch's oil and gas price deck;
- Electricity and lighting consumption growth of 1.7% in 2015, 1.6% in 2016 and 1.7% in 2017;
- The increase in the cost of purchasing electricity from IPPs closely tracks the rise in costs of Taipower's generation unit.
- Current electricity tariff formula to continue for the next four years; increase in electricity tariff capped at 6%;
- Capex of about TWD336bn in 2015-2017;
- No dividend payout.

RATING SENSITIVITIES

The rating on Taipower is equalised with that of the Taiwan sovereign.

Negative: Future developments that may, individually or collectively, lead to negative rating action include
-Negative rating action on the Taiwan sovereign
-Significant weakening of linkages between Taipower and the sovereign

Positive: Future developments that may, individually or collectively, lead to positive rating action, include
-Positive rating action on the Taiwan sovereign, provided the linkages between Taipower and the state remain intact

For the sovereign rating of Taiwan, the following sensitivities were outlined by Fitch in its
Rating Action Commentary of 18 July 2014:

The main factors that could lead to a positive rating action, individually or collectively, are:
- Increased confidence that the ratio of gross general government debt to GDP is on a firm downward trend over the medium term, most likely driven by a combination of stronger GDP growth and fiscal consolidation.

The main factors that could lead to a negative rating action, individually or collectively, are:
- A swift deterioration in the banking sector's asset quality, in light of the macro-prudential risks stemming from real estate and rising China exposure.
- Adverse macroeconomic or financial shocks, either domestic or exogenous, that significantly slow the economic recovery, adversely affecting the public finances and the financial sector.

FULL LIST OF RATING ACTIONS

Taiwan Power Company
Long-Term Foreign Currency IDR assigned at 'A+'; Outlook Stable
Short-Term Foreign Currency IDR assigned at of 'F1'
Long-Term Local Currency IDR assigned at 'AA-'; Outlook Stable
National Long-Term Rating assigned at 'AAA(twn)'; Outlook Stable
National Short-Term Rating assigned at 'F1+(twn)'
Senior unsecured National Ratings assigned at 'AAA(twn)'