Moody’s: Stable outlook for Asia Pacific power sector reflects consistent regulatory returns, manageable cost increases
Moody’s Investors Service says that the stable outlook for the power sector in Asia Pacific over the next 12-18 months is mainly underpinned by consistent regulatory returns and Moody’s expectation of manageable increases in fuel costs over the same period, as well as the absence of significant changes to regulatory environments. “Transparent tariff-setting mechanisms will continue to benefit the regulated power utilities in Australia, Hong Kong and Singapore,” says Mic Kang, a Moody’s Vice President and Senior Analyst. “As for other power companies operating in weaker tariff systems specifically those with a lower ability to recover increased costs the low likelihood of a steep rise in fuel costs should generally result in continued stable business conditions over the next 12-18 months,” adds Kang.
Moody’s outlook reflects its expectations for fundamental business conditions in the power industry across Asia Pacific over the next 12-18 months. Moody’s report points out that stable industry conditions will in general support the credit metrics of most Moody’s-rated power companies across Asia Pacific, despite increasing environmental compliance costs associated with government-led decarbonization initiatives, and growing competitive pressure stemming from new renewable and baseload power plant capacity. In addition, Moody’s believes that most power companies can fund cash shortfalls through debt market issuance, while state-controlled power utilities will continue to benefit from strong government support.
However, many thermal power generators will face medium- to long-term pressure, because of lower dispatch volumes as low marginal cost renewable energy production ramps up and/or increased investments to meet environmental regulations, which may not be fully compensated for through timely tariff adjustments in many countries. Sector reforms in China (Aa3 negative), Japan (A1 stable) and Korea (Aa2 stable) will have a manageable effect on the operations of power companies during the outlook period. But these reforms will create increasingly challenging business conditions over time, by growing competition and/or potentially reducing the likelihood of extraordinary government support for state-controlled companies.
Thirty nine (74%) of Moody’s-rated power companies in Asia Pacific demonstrate ratings with stable or positive outlooks, mainly reflecting broadly unchanged fundamental business conditions, financial profiles consistent with Moody’s rating expectations, and/or the positive outlook on a parent’s rating. The remaining 14 companies (26%) a majority of which are Chinese power companies and, to a lesser extent, Japan’s power utilities have ratings which carry negative outlooks or are on review for downgrade. The negative outlooks or ratings which are on review for downgrade in relation to China’s power companies are mainly due to the negative outlook on China’s Aa3 sovereign rating, and the companies’ weakening credit fundamentals.
Moody’s believes China’s coal-oriented power companies will face greater challenges than those in other regions. Moody’s assessment is based on the rapid pace of renewable development in the country which will increase energy supply and an increase in fuel costs, reflecting the recovery in thermal coal prices in the second half of 2016, amid potential delays in the companies’ ability to pass through such additional costs. The negative outlooks on the ratings of some Japanese power utilities mainly reflect uncertainty over the timing of restarts of nuclear reactors, given that a sustained recovery in their credit metrics to a large degree depends on their resuming operations. Meanwhile, Moody’s has changed the outlook for India’s (Baa3 positive) power sector to stable from negative, because the increased domestic production of coal will ease constraints on fuel supply, and the Indian government’s debt restructuring of the financially weak distribution utilities will likely improve their financial capacity to make timely payments to power generators.