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Fundamental View
AS OF 18 Jun 2024KORGAS is Korea’s sole integrated gas utility company and a quasi-sovereign credit in Korea with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas.
Its credit profile is underpinned by its dominant market position in Korea’s natural gas and hydrogen utility market, and the strong support from the Korean government. This partly mitigates its delayed and incomplete pass-through of gas procurement costs when natural gas price surges, such as in FY22.
We expect its credit profile to improve in FY24 supported by lower natural gas procurement costs and higher gas tariffs, which would partially mitigate concerns over its larger capex planned for FY24 and FY25.
Business Description
AS OF 19 Jun 2024- KORGAS is 54.6% directly/indirectly owned by the Korean Government (Central Government 26.2%, KEPCO 20.5%, Local Government 7.9%). It is Korea's sole integrated gas utility company with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas. It is crucial to Korea's green transition plan to increase LNG generation by 56% by 2036 from 2022. In addition, KORGAS was licensed as Korea's sole hydrogen distribution agency in 2020.
- KORGAS is one of the largest LNG importer in the world and sells imported natural gas to domestic companies in South Korea. As of YE23, KORGAS operates 77 storage tanks at 5 LNG terminals in Incheon, Pyeong Taek, Tong Yeong, Sam Cheok and Jeju. It has 5,178 km of pipeline network nationwide, and is looking to construction additional 440 km by 2026.
- The Korea natural gas industry is divided into wholesale and retail segments. KORGAS is the only wholesaler in Korea, and the regional city gas companies are in charge of supplying natural gas to retail consumers through regional retail pipelines. KORGAS sold 47% of its gas sales to domestic LNG-fired power generation companies (gencos), including the genco subsidiaries of KEPCO and independent power producers (IPPs), and the remaining 53% to city gas companies and heating companies in FY23.
Risk & Catalysts
AS OF 18 Jun 2024Key risks to KORGAS’ standalone credit profile include: (1) Significant depreciation of the KRW against the $ ; (2) Delayed and/or smaller-than-expected retail tariffs hikes; and (3) higher-than-expected capex and investments related to Korea’s green transition.
However, we do not foresee these risks to materially impair KORGAS’ ability to access funding, credit rating and overall credit profile as we expect KORGAS to remain as the sole integrated gas utility company and continue to receive extremely strong financial support from the Korean government.
Key Metric
AS OF 18 Jun 2024| KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 76.6% | 75.7% | 75.8% | 81.3% | 80.7% |
| Net Debt to Book Cap | 75.6% | 74.6% | 74.2% | 79.8% | 79.1% |
| Debt/Equity | 327.2% | 312.4% | 313.3% | 434.4% | 418.0% |
| Gross Leverage | 8.2x | 9.4x | 9.1x | 9.9x | 11.6x |
| Net Leverage | 8.1x | 9.3x | 8.9x | 9.7x | 11.4x |
| Interest Coverage | 3.9x | 3.4x | 4.8x | 5.1x | 2.2x |
| EBITDA Margin | 13.0% | 12.3% | 11.4% | 8.8% | 8.0% |
CreditSight View Comment
AS OF 04 Jul 2024We maintain our O/P recommendation KORGAS. We expect KORGAS’ credit profile to improve in 2H24 supported by higher tariffs and normalizing natural gas procurement costs. We expect KORGAS, which is the sole integrated natural gas utility company in South Korea to continue enjoying solid government support. We view its $ bonds as attractive compared to lower rated Chinese SOEs, BBB-rated low beta Korean corporates and other Korean quasi-sovereigns. In particular, we like its newly issued Jul-29 for the high on-market coupon; for investors looking for defensive short-dated carry, we also like its 27s.
Recommendation Reviewed: July 04, 2024
Recommendation Changed: June 27, 2023
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