Asia power sector outlook stable — Moody’s

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MOODY’S Investors Service has set a stable outlook for the Asian power sector next year, noting that the industry is supported by steady cash flows, a gradual pace of regulatory change, a gradual transition to a low-carbon economy and sufficient mitigants against capital market volatility.

The stable outlook covers the power sectors of China, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

But the Moody’s outlook for the South Korean and Japanese industries is negative, given the greater regulatory challenges faced by companies in these countries.

“We expect most rated power companies will report stable operating cash flow over the next 12-18 months, helped by stable or increasing dispatch volumes or timely cost pass-throughs amid a gradual pace of regulatory changes, thus supporting their credit quality,” said Mic Kang, a Moody’s vice-president and senior credit officer.

“However, regulatory challenges are starting to adversely affect the credit metrics of Korean and Japanese companies, because of prolonged delays in cost pass-throughs in Korea and growing competition amid market deregulation in Japan,” he added.

Moody’s issued a report on the outlook for the Asian power sector, “Power — Asia: 2019 outlook stable, with steady cash flow offset by regulatory challenges,” which is written by the Moody’s VP.

The report said that growing power demand or timely cost pass-throughs would mitigate the strain on cash flows from higher generation costs and higher capital spending for most rated power companies in Asia.

It added that regulation will remain broadly stable as most Asian governments implement regulatory changes gradually, supporting cash flow stability.

“Business conditions will be tougher in 2019 in certain countries, because of regulatory challenges and, to a lesser extent, trade protectionism potentially slowing demand growth. The main regulatory risk is timely cost pass-throughs in certain countries, particularly China (A1 stable), Indonesia (Baa2 stable) and Korea (Aa2 stable),” Moody’s said.

It added that there is uncertainty associated with the effects of deregulation in Japan (A1 stable). It expects power demand growth in China and Indonesia to continue to support cash flow stability or growth for most rated power companies.

“By contrast, Korea’s major power companies increasingly rely on debt to fund their capital spending, because of the continued low likelihood of timely cost pass-throughs amid strengthening safety requirements for nuclear operations and the Korean government’s energy policy to gradually move away from nuclear and coal. As such, their credit metrics are weakening,” Moody’s said.

Moody’s expects some power companies in Japan to find difficulty in strengthening their weak credit metrics amid increasing competition and weakening monopolistic market positions.

“Carbon transition risk will increase in Asia’s power sector. The cash flows of coal-driven power generation companies will weaken gradually as both generation from renewables and environmental compliance costs are rising,” it said.

But it said carbon transition risk would not emerge as a material credit risk during the next 12 to 18 months, “because renewable power growth is unlikely to outpace power demand growth in Asia, while the importance of the coal power as a major energy source will not decline materially over this time frame.”

Moody’s said it could change its outlook for the broad Asian power industry to negative if it expects cash flows will be lower than its projections because of materially weaker power-consumption growth or an inability to pass through increased costs in a timely manner; regulations change adversely; carbon transition risk emerges rapidly; and global capital market volatility weakens many rated power companies’ funding capacity. — Victor V. Saulon