President Kim Sung-hee of Korea District Heating Corp.

Koreas District Heating Corp. (KDHC) is in charge of supplying energy to 1.3 million households in the country, especially in Gyeonggi Province and the Seoul area, to heat homes this winter. 

Its power generation facilities generate 800 megawatts annually, which is equivalent to 1.6 nuclear power generators.

Most of the energy the company generates is for powering residential houses, not necessarily for industrial use, therefore it is not a widely known fact in Korea. The company has also been one of the 17 companies named by the government as suppliers of “new recycled energy.” The government designated the companies, which produce more than 500 megawatts of power, to join the government plan to build a new and recycled energy generating pool in an effort to develop new energy sources as RPS companies.

The KDHC has done its job as an RPS company to fulfill its responsibility by producing “recycled energy.” An RSP company earns “REC credits” if it generates more than 2 percent of its energy in “new recycled energy” every year. A REC equals 1kw of electricity.

Moody's Investors Service says that the strong year-on-year improvement in Korea District Heating Corporation's (KDHC) operating results for the first half of 2015 is credit positive. The improved results are within Moody's expectations and will not immediately impact KDHC's A1 issuer rating or stable outlook. 

"The higher profits will help reduce KDHC's reliance on debt in expanding its district heating business over the next 12-18 months, and therefore will likely support its credit quality," says Mic Kang, a vice president and senior analyst. 

According to KDHC's preliminary earnings release, it recorded an unaudited operating profit of 157 billion won in the first half of this year, up from 74 billion won from the same time period the year before. The strong improvement was mainly due to an increase to 89 billion won from 19 billion won in the operating profit of its core district heating business. 

The stronger operating profit in KDHC's district heating business in the first half was the result of: lower fuel costs following a sharp decline in oil and gas prices; and 6.8 percent year-on-year growth in sales volume, following the absence of the extraordinarily warm weather seen in the first quarter. 

Moody's expects that the operating performance of KDHC's core district heating business will continue to improve over the next six-12 months. This expectation is based on Moody's belief that the Korean government (Aa3 positive) is unlikely to lower the company's tariffs to the same extent as the fall in global fuel prices over that time period, to compensate for previous delays in raising tariffs in response to rising liquefied natural gas prices and lower-than-budgeted sales volumes in its district heating business. 

In addition, the improving profit margin in KDHC's core district heating business will likely offset margin pressure in the company's supplementary power business, mainly stemming from low fuel prices and Korea Electric Power Corporation's (Aa3 positive) commissioning of new base load nuclear and coal power plants. 

As such, Moody's expects KDHC's EBITDA margin to improve to 15-17 percent over the next 12-18 months from 12 percent in 2014. The stronger performance will likely lead KDHC's funds from operation/debt ratio to improve to 8-11 percent from 8 percent in 2014, despite an increase in debt to fund high annual capital expenditure of 400 billion won-570 billion won. 

These projected credit metrics are consistent with its baseline credit assessment (BCA) of baa2. 

KDHC's A1 ratings take into consideration its BCA and expected strong support from the government, in times of need. This likely government support results in a four-notch uplift to KDHC's final A1 ratings from its BCA. The Korean government holds a 75 percent direct and indirect stake in KDHC. The remainder of the company's shares are held by the public.

President Kim is seen while inspecting the company’s heat generation facilities around the country.(Photos:KDHC)